Does My Company Qualify for New Markets Tax Credits?

Any company preparing for expansion must develop the right financing strategy. If your company is considering expansion in a low-income area, New Markets Tax Credits (NMTCs) may be a helpful tool. NMTC financing offers lower interest rates and more flexible terms than conventional financing and can help small companies expand while simultaneously supporting economic development in low-income communities. How do you know if your organization qualifies?

The NMTC program seeks to leverage financing that may not be possible in a conventional setting to support development in areas that need it most. Using this census tool (https://www.cohnreznick.com/nmtc-map), you can search your address and find out if your location qualifies based on the below criteria.

The following qualifications are required for an NMTC investment:

  • The project and intended use of the funds must be located in a community where the poverty rate is at least 20%, or 
  • The median family income of the census tract is at or below 80% of the area median family income

Designed to spur economic development in low-income communities, the following additional criteria, while not required, are optimal for this type of investment. This list of qualifications includes characteristics of “severely distressed” areas of need, where the project would be located in an area with:

  • The poverty rate is greater than 30% 
  • Median family income at or below 60% of the area median family income or
  • Unemployment at least 1.5 times the national average

Other options include:

  • Brownfield site
  • Hope VI Redevelopment plan
  • Native American or Alaskan American area
  • Federally designated medically underserved area (if investment supports health services)
  • Non-metro census tracts
  • Food desserts
Census Tract NMTC Qualification

Figure 1. Sample Qualified location. Based on the mapping tool mentioned above, this location has a poverty rate of 36.9%, which makes this location a severely distressed area.

Rural Development Partners is a CDE that provides NMTCinvestments to “Qualified active low-income community businesses”(QALICBs). QALICB classification is necessary to receive NMTC financing. If your business is in need of investment and your organization is located in a census tract that meets the above criteria, we may be able to support you (you could be qualified). Qualification doesn’t only include criteria for the low-income community; your business must also meet the following criteria:

  • 50% or more of total gross income is from the active conduct of a qualified business in a low-income community
  • 40% or more of the tangible property is located in a low-income community
  • 40% or more of the services provided by the business’ employees are performed in a low-income community; and 
  • less than 5% of the average aggregate unadjusted basis of the property is attributed to
    • collectables (art and antiques)
    • non-qualified financial property

The types of projects that can leverage NMTCs are quite diverse. The program is intended to be flexible to accommodate the needs of investments in low-income communities, and therefore, the program can support many different kinds of projects. NMTCs can be used to support any of the following types of growth opportunities such as:

  • Financing equipment needs
  • Supporting operational needs 
  • Purchasing real estate
  • Real estate financing can purchase or rehabilitate retail, manufacturing, agriculture, community facilities (e.g., health services, museums, or charter schools), rental or for-sale housing, or combinations of these

Ineligible business activity includes residential rental property where minimal improvements are made, golf courses, race tracks, gambling facilities, certain farming businesses, and liquor stores.

Based on a study done by the Urban Institute that analyzed NMTCs from 2003-2015, the following industries were most common:

  • Manufacturing/industrial
  • Mixed-use buildings
  • Health care
  • Office buildings
  • Schools
NMTC Facility Expansion _ Humboldt _ Bongards

Figure 2. RDP’s investment in Bongards’ facility in Humboldt, TN facilitated a 55,000 square foot plant expansion and the purchase of state-of-the-art cheese processing equipment.

At Rural Development Partners, we focus on investing in high-quality job creation opportunities (real estate and equipment purchasing that facilitates expansion and job creation) as well as projects that are related to increasing access to healthy food

SafeRack NMTC Equipment Expansion Rural Development Partners Low-income rural community

Figure 3. Through NMTCs, financed a 100,000 square foot expansion of SafeRack’s existing plant in Andrews, SC, facilitating key investments in training and the purchase of over $8.6MM in new equipment.

Annette Stevenson, Partner and CPA at Novogradac & Company LLP, has helped hundreds of companies qualify and close NMTC transactions. One of the more challenging factors that prevent qualification includes a final test: are less than 5% of company assets non-qualified financial property (such as excess cash reserves and other investments).

“One thing we do on the front end of any deal is to take a look at the balance sheet and understand what kind of assets are held,” says Stevenson. “Business owners are often surprised by the types of assets that may constitute non-qualified financial property and cause qualification issues. The program is designed to support businesses truly in need of capital, which is one of the reasons for the rule. However, assets you wouldn’t expect to cause concern can be problematic.”

If your company meets any of the above criteria and you are interested in expanding with this financing tool, let Rural Development Partners help you. There are a multitude of benefits to NMTC financing, but perhaps the most important are:

  • 50% below market rate interest
  • No Origination Fees
  • 7-year interest-only period
  • Combined A & B notes allow LTV of up to 97% on real estate and 85% on accounts receivable, inventory, and equipment 
  • Amortization of 30 years when lending to businesses and 40 years for real estate assets held by a special-purpose entity (SPE) that leases to an operating business. 
  • Flexible borrower credit standards, such as early-stage rural businesses or businesses with operating history with losses
  • Non-traditional forms of collateral accepted (i.e. timber cutting rights)
  • DSCR as low as 1.00x
  • A & B Note Subordination, except to direct equity

These are just some of the benefits of NMTC financing, which conventional means do not provide. Contact us for more information and we can help you determine if your project qualifies. 

Check out some other blog posts with further information.