Its time to apply for New Markets tax credits

July 16, 2012
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While the future of the New Markets Tax Credit program may still have a question mark next to it, one thing is for sure: Businesses and developers that want to be considered for the federal tax incentive program need to prepare now.

The NMTC program provides a credit that reduces federal income taxes for those making investments in businesses located or operating in low-income communities or those that provide goods and services to low-income targeted populations. The program is designed to jumpstart economic activity in low-income areas by encouraging investment in existing businesses and restaurants, prospective real estate projects, community facilities and other initiatives.

West Michigan has benefited greatly from NMTC dollars since the program was launched in 2000 as part of the Community Renewal Tax Relief Act. Projects in the Grand Rapids area have included the Heart of the City Health Center, Grand Rapids Community Foundation and Bicycle Factory.

In the 2011 funding cycle, approximately $3.5 billion was allocated for New Market Tax Credits — a relatively small federal initiative when compared with the program that provides low-income housing credits, but the community impacts from the NMTC program are sizable.

The NMTC program has yet to be renewed for 2012, which leaves many businesses and developers scratching their heads. Is the program likely to be renewed? Will Congress fund the program before the fall elections? Should we start on the application process now?

Many experts in the industry believe that the program, which enjoys a fair measure of bipartisan support, will be renewed, although not before the November elections. But businesses and developers that decide to wait until the ink is dry on any appropriation in the Congressional lame-duck session risk missing out on the tax credits.

Don’t let limbo stop you
The NMTC program itself is fairly complex — and very competitive. It is jointly administered by the IRS and the Community Development Financial Institutions Fund. The CDFI Fund holds the NMTC purse strings. Rather than handing out grants directly to individual projects, the CDFI Fund works through a “middle man” of sorts: Community Development Entities.

Each year, about 400 for-profit and nonprofit organizations focused on serving low-income communities apply for authority to issue NMTC allocations. Michigan has been home to several CDEs over the years, including the popular and successful Michigan Magnet Fund, a nonprofit corporation affiliated with the state government. Another 15 to 20 national CDEs have identified Michigan as one of the states where they are most likely to fund projects.

Each year, many projects apply to CDEs for New Markets tax credit allocations. The basic application process is not complicated but does require that the business or development be located or operating in a low-income area as defined by census tracts.

CDEs typically select a business or project for funding based primarily on the expected overall community impact. A business owner or developer seeking funding from the NMTC program needs to have a good story to tell about the community impact of the business or development project to distinguish the business or project from the myriad of projects seeking funding.

The last NMTC program cycle ended in December 2011, with awards made in February of this year. In a “normal” year, we would already know the timing and deadlines for the next round of allocation awards, but since the program has not yet been renewed by Congress, those details remain unknown.

The CDFI Fund is already seeking applications from CDEs for the next round of allocation awards. The Michigan Magnet Fund and other CDEs are betting that the NMTC program will be renewed — and are encouraging developers and businesses to get their projects onto CDE pipeline lists as soon as possible. If Congress renews the program this fall, the CDFI Fund plans to announce allocation authority awards to CDEs in early January 2013, and CDEs will begin selecting projects shortly after that for funding in 2013.

So if you are thinking about seeking funding from the New Markets Tax Credit program, don’t wait until the program is formally renewed. Act now.

Cameron S. DeLong is a partner at Warner Norcross & Judd LLP who concentrates his practice in economic incentives, mergers and acquisitions, and international business. He can be reached at cdelong@wnj.com

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