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June 17, 2002
New Markets Tax Credit Rewards Community Investment
    by William Baue

Over the next seven years, the U.S. Treasury Department will allocate $15 billion in tax credits to investors who support qualifying community investments.


Some investors have been reluctant to invest in low-income communities because of perceived risks and the sometimes lower rate of return. Also, many simply are not aware of the variety of opportunities available. In December 2000, Congress addressed all three of these issues when it created the New Market Tax Credit (NMTC) program. The NMTC compensates for the low return while simultaneously mitigating risk by certifying specific investments. Last week, the U.S. Treasury Department opened the first round of competition for businesses and nonprofits in low-income communities that want to be designated as Community Development Entities (CDEs) eligible for NMTC investment.

"The NMTC program is designed to stimulate private sector investment in the economic development of low-income communities, and we hope to see a real difference in the lives of the people in these communities," said Treasury Secretary Paul O'Neill.

On June 11, the Federal Register published the first "Notice of Allocation Availability," inviting nonprofits and businesses in low-income communities to apply for CDE certification. The Treasury Department's Community Development Financial Institutions (CDFI) Fund will allocate $15 billion over the next seven years to qualifying CDEs. The first allocation of $2.5 billion represents the combined allocations for 2001 and 2002, as the legislation permits. The remaining allocations will be made available as follows: $1.5 billion in 2003; $2 billion in each of 2004 and 2005; and $3.5 billion in each of 2006 and 2007.

The NMTC represents a win-win situation for investors and communities alike. Qualified Equity Investments earn investors tax credit equal to 39 percent of the investment, or approximately 30 percent of the investment amount in terms of net present value calculated at the time of the investment. Nonprofits and businesses, as well as commercial (but not residential) real estate projects, have until August 29 to apply for CDE status.

"The NMTC Program has the potential to make a significant impact in the targeted areas because of the wide variety of investments that can be made," said Tony T. Brown, Director of the CDFI Fund. "This program will catalyze new economic activity, ranging from loans to small businesses to the development of grocery stores, from charter schools to manufacturing plants. This flexible tool will enable urban and rural areas alike to attract private capital to expand their community development efforts."

The success of the NMTC program will rest on how attractive it makes community investing. Some community investment experts question whether the tax credits alone will provide enough incentive for investment. Community projects that can produce other economic benefits, such as cash flow or appreciation, may add enough value to entice investors.

 

 
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