How can Tribal organizations benefit from the new markets tax credit?

While Tribal organizations are sovereign entities that don’t have federal tax liability and can’t directly use NMTCs, they can still benefit from the NMTC financing structure. An NMTC investor, such as a bank, with federal tax liability, receives the credits generated from the structure by making qualified investments in an NMTC-eligible community, business, or enterprise. 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 Tribe or Tribal 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 the more common and often preferred vehicle. The QALICB can then use the loan proceeds to complete the project, install equipment, or for working capital. Ultimately, however, while the lower interest rate can be impactful, it’s the ultimate net benefit realized at unwind that’s so powerful. This net benefit generally ranges between 15%–20% of project costs. The net benefit is realized at the end of the NMTC compliance period when the transaction is unwound, and the remaining investor equity is retained by the project. Thus, a $10 million project might effectively cost the Tribe between $8 million and $8.5 million as a result of the NMTC financing structure.

What types of Tribal projects can benefit from NMTC financing?

Almost any type of Tribal project can use NMTC financing as long as NMTC proceeds aren’t allocated for an impermissible purpose, such as gaming or golf courses. Projects involving cannabis, while not technically listed as a prohibited use, are also not allowed. NMTC financing is competitive. The more compelling the goals and the more services provided to the low-income community, the more likely it will attract financing. Also, CDEs and investors place greater emphasis on projects that focus on diversity, equity, and inclusion (DEI) in the community. This focus makes Tribal or Native American-owned projects attractive to many CDEs, as many projects not only benefit Tribal members directly, but do so in a meaningful and culturally relevant way.

Are there community development entities that focus on Tribes or Tribal-owned organizations?

Every CDE makes representations to the Community Development Financial Institutions (CDFI) Fund regarding how and where they’ll deploy their allocation. Some CDEs focus only on specific asset types or entities, while others have a broader focus. Importantly, some CDEs specifically focus solely on serving Tribes or Tribal organizations and others focus at least a portion of their allocation on Tribal communities. Even if a CDE doesn’t have a specific Tribal focus, many CDEs support projects benefiting Tribes or Tribal members because of the impact of the project. Careful consideration of the mission and goals of your project, its locations, and the expected impacts on the community will often reveal several CDEs that might be interested in bringing NMTC allocation to your project.

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

Yes, these projects can still attract NMTC financing. The most common way a not-for-profit organization qualifies for NMTC financing is based on its location in a severely distressed census tract. 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. This is commonly referred to as a targeted populations test. 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 traditionally caused some CDEs to shy away from transactions using the targeted populations test. There have, however, been discussions within the NMTC industry regarding the need for more CDEs to embrace targeted populations transactions. Given the impact many Tribal projects have in their communities, these projects might make a compelling enough case to attract NMTC financing using the targeted populations test.

Can NMTC financing help Tribal organizations acquire working capital after a natural disaster?

Yes. It’s possible to look at the operations of a Tribal organization to determine if NMTC financing might be available for working capital. 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, so some CDEs are more hesitant to enter these transactions than others. While these transactions are gaining acceptance, there are pre- and post-closing compliance considerations unique to each transaction.

Would a Tribal-owned project in a distressed census tract have trouble attracting NMTC financing?

NMTC financing isn’t an as-of-right set-up. 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’s committed to a project might not receive allocation and therefore 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’s important to tell your story in a compelling way in hopes of garnering interest from multiple CDEs.

Is it possible to use NMTC financing if the project received federal grant funding?

It’s possible for a project that received grant funding or other public funds to explore NMTC financing. Any amounts received from the granting authority generally can’t be utilized for NMTC financing, but if the grant funding pays for only a portion of the project costs, NMTC financing may be an option to help finance the remaining project costs. A careful examination of the funding sources and restrictions on those public funds is generally required.

Can NMTC financing be utilized for projects on trust lands?

Yes. Some CDEs will only provide allocation to projects located on trust lands. As with any transaction involving trust lands, careful structuring and planning are required to ensure compliance with any requirements for transactions on trust lands are met.

Will a waiver of sovereign immunity be required?

Each Tribal nation has its own laws regarding the process and requirements for waiving sovereign immunity; however, consistent with other financing structures, investors and CDEs will require a waiver of sovereign immunity to ensure the various documents are enforceable in the jurisdiction governing the transaction. There have been efforts on the part of some investors and CDEs to agree to the jurisdiction and venue of the Tribal courts, but the ability to do so depends on facts and circumstances.

Will it be necessary to create new legal entities to accomplish the NMTC financing?

For the NMTC financing structure to be respected for federal income tax purposes, there must be a separation of ownership between the leverage lender and the QALICB or project entity. There are various ways in which this separation of ownership can be created, and many Tribes have their own laws or regulations for establishing Tribal corporations. One area, however, that’s particularly nuanced for transactions involving Tribal ownership, is that federal tax law doesn’t clearly recognize a sufficient separation of ownership between the Tribe and a Tribal corporation. As a result, it’s common for a Tribe to set up a separate state-law or not-for-profit legal entity to act as either the leverage lender or QALICB. Other legal structures may be available, and a careful consideration of a particular Tribe’s laws and regulations and the facts of a transaction is required.

How difficult are the NMTC’s seven-year compliance and reporting obligations?

An NMTC project must maintain compliance with all NMTC regulations for the entire seven-year recapture period. Some Tribes are initially hesitant to enter transactions that require compliance for seven years. While this hesitation is understandable, the requirement exists because the tax credits generated from NMTC financing are subject to recapture during this period. Moreover, the objective of the NMTC program is to drive investments in traditionally underserved communities, and the compliance period serves as a mechanism to ensure these investments remain in the community in which they were deployed. As a result, most NMTC compliance requirements focus on ensuring this objective is met, and the requirements are typically easily met by the Tribe. For example, one requirement is the project must remain in the low-income community during the compliance period. Obviously, if a building is built on Tribal land with the intent of providing services to Tribal members, it’s unlikely the Tribe is going to move the building and services off the reservation, further from the individuals served. Other compliance requirements are similarly within the control of the Tribe. Additionally, the Tribe must provide community impact data to the CDEs during the compliance period. This data is utilized to measure the impacts of the NMTC program. This impact data is captured within the community benefits agreement that’s negotiated during the closing process. Only data that’s pertinent to the project and the NMTC program is required to be captured. All-in-all, the compliance and reporting obligations, while important, aren’t onerous and are far outweighed by the potential benefit of the financing to the community and to the Tribe.

Article

How Tribes and Tribal organizations can utilize the new markets tax credit

July 30, 2023 · Authored by Anita Shah

The New Markets Tax Credit (NMTC) can be a powerful financing tool for Tribes and Tribal organizations to fill financing needs and provide more impact in the communities they serve.

NMTCs provide flexible financing based on various qualifying factors. There are opportunities for Tribes and Tribal organizations to use the proceeds of NMTC financing to help finance activities that will directly benefit various Tribal enterprises or endeavors.

Projects located in a qualifying low-income community or that provide a direct benefit to low-income persons can qualify, and NMTC financing can be utilized in a variety of ways, including business or service expansion or relocation, equipment financing, or even working capital.

Explore how Tribal organizations can use the NMTC, as well as key considerations:

How can Tribal organizations benefit from the NMTC?
What types of Tribal projects can benefit from NMTC financing?
Are there community development entities (CDEs) that focus on Tribes or Tribal-owned organizations?
Can a Tribal-owned project attract NMTC financing if it isn’t located in a qualifying or severely distressed census tract?
Can NMTC financing help Tribal organizations acquire working capital after a natural disaster?
Would a Tribal-owned project in a distressed census tract have trouble attracting NMTC financing?
Is it possible to use NMTC financing if the project received federal grant funding?
Can NMTC financing be utilized for projects on trust lands?
Will a waiver of sovereign immunity be required?

Related sections

Tribal & Gaming

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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.