How can not-for-profit organizations benefit from the new markets tax credit?

While not-for-profit organizations have no federal tax liability and can’t directly use NMTCs, they could still benefit from the NMTC financing structure. An NMTC investor with federal tax liability can receive the credits generated from the structure by making qualified investments in an NMTC-eligible community. The invested equity flows through the NMTC structure and ultimately to a qualified low-income community business (QALICB) or project, which is generally a subsidiary or a business segment of the not-for-profit organization. The QALICB can receive the benefit of the NMTC structure in the form of either equity or low-interest rate loans, with low-interest rate loans being a commonly preferred vehicle. The not-for-profit organization can then use the loan proceeds to complete their project, install equipment or for working capital.

What types of not-for-profit organizations can use NMTC financing?

Not-for-profit organizations can use NMTC financing as long as NMTC proceeds aren’t allocated for an impermissible purpose such as gaming or golf courses. NMTC financing is competitive. The more compelling the mission of the not-for-profit organization and the more services provided to the low-income community, the more likely it is to attract financing. Also, CDEs and investors are placing greater emphasis on projects that focus on diversity, equity, and inclusion of the community. Entity types that receive NMTC funding Following are some broad categories of entities that have received NMTC financing: Food banks and pantries Domestic violence shelters Homeless shelters and homeless service providers Daycare and early learning centers Museums Arts and entertainment providers Youth and family services providers Health services providers Recreation providers Addiction providers Not-for-profit incubator spaces Adult education providers Workforce training providers Private and public kindergarten, elementary, middle, and high schools Higher education institutions Federally qualified health centers (FQHCs) Community health centers Community centers This list is in no way exhaustive. The common thread is that each entity type provides meaningful benefit to the low-income communities they serve.

Are there community development entities (CDEs) that focus on not-for-profit organizations?

Every CDE makes representations to the Community Development Financial Institutions (CDFI) Fund regarding how and where they will deploy their allocation. Some CDEs focus only on specific asset types or entities, while others have a broader focus. A CDE that primarily invests in manufacturing businesses in rural locations might not be a good fit for a not-for-profit organization serving the homeless in a city, but many CDEs are supportive of various types of not-for-profit organizations because of their impactful work. Careful consideration of the mission and goals of your organization, its locations, the type of project, and the expected impacts in the community will often reveal several CDEs that might be interested in bringing NMTC allocation to your project.

Can a not-for-profit project attract NMTC financing if it isn’t located in a qualifying or severely distressed census tract?

Yes. The most common way not-for-profit organizations qualify for NMTC financing is based on location. A project, however, can qualify and attract NMTC financing by servicing targeted populations that are owned by, employ, or derive income from transactions with persons considered low income. Qualifying for NMTC financing using the targeted populations test does add an additional layer of complexity to an already complex financing structure and requires additional compliance certifications throughout the compliance period. This added complexity has traditionally caused some CDEs to shy away from transactions using the targeted populations test. There has, however, been discussions within the NMTC industry regarding the need for more CDEs to embrace targeted populations transactions. Given the impact that many not-for-profit organizations have in their communities, these organizations might make a compelling enough case to attract NMTC financing using the targeted populations test.

My not-for-profit organization tells a compelling story and is located in a severely distressed census tract. It shouldn’t have any trouble attracting NMTC financing, correct?

NMTC financing isn’t “as of right.” Even compelling projects don’t always obtain NMTC financing. Attracting allocation can sometimes come down to being in the right place at the right time. Sometimes, a project simply isn’t ready when a CDE has allocation or, conversely, a CDE that is committed to a project might not receive allocation and be unable to bring allocation to a project. Obtaining NMTC financing is a competitive process with a limited amount of allocation authority available every year, so it is important to tell your story in a compelling way in hopes of garnering interest from multiple CDEs.

My not-for-profit organization needs working capital because of the COVID-19 pandemic or some other compelling reason. Can NMTC financing help?

Yes. It’s possible to look at the operations of the not-for-profit organization to determine if NMTC financing might be available. The same minimum size of NMTC financing is applicable and the NMTC proceeds will need to be used within 12 months of closing, but working capital can be a permissible use of the proceeds. Using NMTC proceeds for working capital, however, hasn’t been a traditional use of NMTC financing. While it’s gaining acceptance in the NMTC industry, there are pre- and post-closing compliance considerations.

Article

How not-for-profit organizations can use the new markets tax credit

March 21, 2023 · Authored by Kinman Tong

The New Markets Tax Credit (NMTC) can be a powerful financing tool for not-for-profit organizations to fill financing needs and provide more impact in the communities they serve.

NMTCs provide businesses and organizations across the United States with flexible financing based on various qualifying factors. There are opportunities for not-for-profit organizations in particular to use the proceeds of NMTC financing to help finance an expansion or relocation, provide equipment financing, or provide working capital.

Passed in 2000 as part of the Community Renewal Tax Relief Act, the NMTC provides a 39% federal tax credit to investors who invest in traditionally underserved, low-income communities. These investments then flow to the low-income community through the NMTC.

Explore the basics of the NMTC with our FAQ. You can see how the NMTC can be used by not-for-profit organizations in the following sections:

How can not-for-profit organizations benefit from the new markets tax credit?
What types of not-for-profit organizations can use NMTC financing?
Are there community development entities (CDEs) that focus on not-for-profit organizations?
Can a not-for-profit project attract NMTC financing if it isn’t located in a qualifying or severely distressed census tract?
My not-for-profit organization tells a compelling story and is located in a severely distressed census tract. It shouldn’t have any trouble attracting NMTC financing, correct?
My not-for-profit organization needs working capital because of the COVID-19 pandemic or some other compelling reason. Can NMTC financing help?

Kinman Tong

Principal

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The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.