New Markets Tax Credit
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The New Markets Tax Credit is a great investment tool used to spur development in lower-income neighborhoods. Here is information on how it works from the City of Seattle's Office of Economic Development:
The federal New Markets Tax Credit (NMTC) program provides a 39% credit against federal income taxes for business and real estate investments located in low-income areas. The tax credit is claimed over a seven year period. NMTCs can only be distributed by certain entities that have obtained tax credits through a competitive application process with the federal Treasury Department. The City of Seattle’s Office of Economic Development (OED) created the Seattle Investment Fund LLC (SIF) to participate in the NMTC program.
SIF will distribute NMTCs to private investors who provide low-cost financing for business and real estate projects located in eligible census tracts. The following are examples of the types of projects financed with NMTCs:
· Business owner-occupied property undergoing expansion and/or large equipment purchase
· Commercial real estate development that includes space for neighborhood retail businesses and/or office space
· Mixed-use projects with at least 20% of the project revenue coming from non-residential sources
· Community facilities
· Geographic Eligibility
o Minimum eligibility: NMTC projects must be located in census tracts meeting minimum criteria set by the federal government regarding poverty and resident income data.
o Areas of deeper economic distress: beyond minimum eligibility, SIF will give strong preference to projects located in areas of deeper economic distress regarding poverty, resident income and unemployment data. SIF has made a commitment to the federal government to allocate the bulk of its NMTC allocation in such deeper distress areas.
· Project Readiness
o The Investment Committee will not consider proposed projects until SIF has obtained letters of interest from the lenders/NMTC investors needed to finance the transaction.
o Evidence is submitted to confirm that the project's proposed use of NMTC proceeds is feasible and that the project can be completed within the proposed timeline.
· Project Type and Size
o Real estate or business projects with at least 20% non-residential income.
o Projects with a development cost in the neighborhood of $10 million.
· Public Benefits:
Priority will be given to projects that achieve one or more of the following economic development benefits:
o Create or retain permanent jobs;
o Increase the availability of goods and services needed by the neighborhood;
o Serve as an anchor for future economic development in the immediate neighborhood;
o Enhance the local tax base through increased sales and/or property taxes from future project operations;
o Include energy efficient building or process improvements; and/or
o Increase the amount of affordable housing (i.e. housing serving households at 50% - 80% of median income) available for nearby residents
Financial Benefits to Projects
· Interest-only loans for seven years
· Up to 18% of NMTC financing is permanent equity that does not need to be repaid
· Hypothetical example of how NMTCs benefit a $10 million project
o SIF distributes NMTCs for an eligible project
o Project uses NMTCs to attract $10 million in private financing, including $8.2 million in loans and $1.8 million in permanent equity from NMTC investors
o $1.8 million permanent equity does not need to be repaid