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California School Fiscal Services

Providing comprehensive business office and consulting services to K-12 traditional schools and charters

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New Market Tax Credit: Author: Matt Tinsley

Posted on June 22, 2014 at 9:40 AM Comments comments (635)

If you ever hear the words “New Markets Tax Credit” (NMTC) you should run; this from the guy who thought that the CBO boot camp could have been a little longer and more intense. The good news is that because it is restricted to non-public entities you will most likely never have to deal with it. I am going to try and describe it, and where you might run across it, but this might be all you need to know: during this process I was on a conference call with lawyers from six different firms discussing whether we needed to hire another firm. Yeah. Let that sink in.

 

The NMTC process is a Federal Treasury Department program that provides investors with tax credits in return for them investing in capital projects with non-public entities in high need areas. Each qualifying project needs three main players: the “investor” - someone with a big enough tax bill that they are interested in the tax credits (this is usually a bank); the “allocatee” – this is an organization that has been granted authorization by the Treasury Department to broker this process and has a pool of potential credits to spread around various projects; and the “project sponsor” – the organization with the capital project they are trying to raise funds for. This capital project can be almost anything, so long as it is non-public, and has an economic benefit to the high need area. A supermarket, a hotel, a forest, in my case it was a preschool.

 

The investor and the sponsor pool their funds into an investment fund, the investment fund creates (“purchases”) a development entity, the development entity makes a loan to a subsidiary of the sponsor, who uses the loan to build the capital project. The project sponsor makes rent payments to its subsidiary for its use of the capital project, which uses them to make loan payments to the development entity, which is mostly owned by the sponsor. The act of making the loan to the investment vehicle creates tax credits for the investor, which - provided the capital project fulfills NMTC compliance criteria – can use those tax credits for the next seven years to offset their tax liability. At the end of the seven year compliance period the sponsor buys the investor’s stake in the investment fund, closes the development entity and cancels the loan, leaving the facility clear of obligations. Simple*. (* Not simple. This takes an army of lawyers, requires creating several new legal entities from scratch, costs hundreds of thousands of dollar in legal and other fees, and winds up costing the Federal Government far more in foregone taxes than it provides to the community in subsidized capital projects in high need areas).

 

Why am I telling you this (apart from a need to share my pain)? You work for public agencies that are ineligible for this source of funds. It is, however, a growing source of capital funds for charter schools and charter management organizations that need facilities, often in high need areas, and who are eligible to participate in this process. These transactions will show up on their books, they will create strange looking obligations, and will you cause you to wonder about the relationship between the charter management organization and property developer that they always seem to work with. This may turn into an oversight question for some of you and there are already articles on the Internet describing charter schools use of NMTC funds in unflattering terms. I should also say it was an absolute godsend for my preschool project – providing more than $3 million dollars in funds and making it possible to build a place that will changes the lives of the children and families that enroll there. But I will never do it again.