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New Markets Tax Credits Overview Wisconsin Housing and Economic Development Authority Greater Wisconsin Opportunity Fund
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New Markets Tax CreditsOverview
Wisconsin Housing and Economic Development Authority
Greater Wisconsin Opportunity Fund
New Markets Tax Credits Overview
The NMTC is allocated in an annual competition by the Community Development Financial Institution Fund (CDFI Fund, US Treasury). Only about 25% of applicants win an allocation of tax credits.
In 2014, WHEDA through the Greater Wisconsin Opportunities Fund (“GWOF”) was awarded a $50 million allocation of New Markets Tax Credit (NMTC). Previously, WHEDA has been awarded seven allocations totaling $500 million.
New Markets Tax Credits Overview The NMTC is a Federal Investment Tax Credit claimed
over 7 years starting on the date when the equity investment is made in the Community Development Entity (“CDE”) and each subsequent anniversary.
A project usually receives a subordinate seven year interest only loan that is mostly converted to equity at the end of the seven year tax credit period. (( This loan is for approximately 20% of the total qualifying costs of a project. ))
A project may also receive a lower interest rate for the term of the loan.
New Markets Tax Credits Overview
For example, a $5 million project could receive a $1+million interest only loan with most of the $1+ million converted into equity, through a “put,” at the end of the seven year tax credit period.
Or the interest rate on the total financing is “bought down” to a below-market rate—usually around 2% below-market.
New Markets Tax Credits Overview NMTC projects must also be located in low income
census tracts.
NOTE: CDFIFund.gov or novoco.com --- qualifying census
tracts or Google “New Market Tax Credit Mapping Tool
Make certain that information is current (2010 census updated to 2015)
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New Markets Tax Credits Overview
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New Markets Tax Credits Overview
Novogradac
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New Markets Tax Credits Overview
Cohn Reznick
New Markets Tax Credits Detail
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New Markets Tax Credits Overview
New Markets Tax Credits Overview
New Markets Tax Credits Overview
New Markets Tax Credits Overview
New Markets Tax Credits Overview
NMTC projects cannot be “sin businesses”, farms, undeveloped real estate or residential housing beyond 20% of the total investment.
For compliance reasons, NMTC Financing almost always are loans to finance hard assets such are buildings and equipment.
NMTCs can be combined with Low Income Housing Tax Credits for mixed-use properties by “condoizing” commercial real estate part.
New Markets Tax Credits Overview
NMTCs can be used for mixed used developments that include rental housing as long as no more than 80% of the gross income comes from the housing. At least 20% must come from
commercial/retail or other source. Usually will require master lease arrangement
to avoid recapture event if non-housing tenant leaves or cannot pay lease.
New Markets Tax Credits Detail
New Markets Tax Credits DetailExample of Net Tax Credit Equity Generated: Sample project with $5 million of qualifying
expenses. Nominal value of the tax credit equals 39% of
$5 million which equals $1.95 million. If the tax credits are purchased at 78 cents to
the tax credit dollar the tax credits would generate $1,521,000 (.78x$1.95mm) of gross equity. Assume $271,000 of total transaction costs. This leaves $1.3 million of net equity (put/call).
New Markets Tax Credits DetailSeven Year Federal Business Investment Tax credit Tax credit allocation is equal to qualifying
expenses—essentially spending on tangible assets by a business located in a qualifying low income community.
The tax credits are sold at a discount to a tax credit investor.
The tax credits currently sell around 78 cents to the tax credit dollar.
New Markets Tax Credits DetailSeven Year Federal Business Investment Tax credit.
Nominal value of the tax credit equals 39% of total qualifying expenses provided over seven years 5% of the qualifying expenses the first three
years (15%) Followed by 6% of the qualifying expenses over
the next four years (24%).
Tax Credit Investor Economic InvestorInvestment Fund, LLC
GWOF SubsidiaryCommunity Dev. Entity
Sinking Fund
$2.5 MM $7.5 MM
Interest payments and principal at end of tax credit period
$10 MM
$3.9 MM over Six years and a day
A Note:$7.5 MM loan
GWOF NMTC: Leverage Model Example
B Note: $2.5 MM equity equivalent loan:
(all or part is transferred through put option after seven years)
Greater Wisconsin Opportunity Fund Example NMTC Leverage
New Markets Tax Credits
Further Information: United States Department of the Treasury CDFI Fund – New Market Tax Credit Program https://www.cdfifund.gov/programs-
training/Programs/new-markets-tax-credit/Pages/default.aspx http://www.mycdfi.cdfifund.gov/what_we
_do/programs_id.asp?programID=5
Contact Information
Mike PowersBusiness and Community EngagementWisconsin Housing and Economic Development Authority201 West Washington Avenue, Suite 700, PO Box 1728Madison, Wisconsin 53701-1728Desk and Mobile (608)514-2858 [email protected]
