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The New Markets Tax Credit – An Economic Vaccine for Low-Income Communities

This article has been published in the PLI Chronicle: Insights and Perspectives for the Legal Community, https://plus.pli.edu/Details/Details?fq=id:(336006-ATL6).

The New Markets Tax Credit (NMTC) program is a shining light for struggling communities, spurring economic development and producing job growth in low-income communities, many of which are areas that have been hit the hardest during the COVID-19 pandemic. Established by the Community Renewal and Tax Relief Act of 2000, the program has been extended several times since its establishment, with the longest extension in its history effective December 27, 2020 through the Consolidated Appropriations Act. This act included a five-year, $25 billion extension of the NMTC program as defined by section 45D of the Internal Revenue Code. NMTCs are a powerful economic aid that can help meet these demands and aid low-income communities as they navigate their way back to the “normalcy” of a post-pandemic world.

There is little doubt that despite the gains that have been made in recent months, and continue to be made, many areas of the country remain in an economic downturn as a result of the COVID-19 pandemic. While the pandemic has caused lasting impacts across socioeconomic lines, these economic tribulations are especially evident in low-income communities across the nation, many of which were already experiencing pre-pandemic struggles at higher rates than their more affluent counterparts. Recent studies have shown that the pandemic has only increased the socioeconomic divide as low-income areas suffer significantly higher levels of unemployment and poverty, higher job losses and less access to necessary goods and services including adequate healthcare, childcare and healthy food options.

Many of these issues have been alleviated in the past by NMTCs. When a borrower in a low-income community is able to effectively utilize NMTCs to finance or refinance a project, a ripple effect begins that ultimately leads to increased investment and revitalization throughout the surrounding areas and generally leads to a subsidy of 15-25% benefit to the project. By its very foundation, the NMTC exists to aid low-income communities and bring private investment into areas that need it most.

NMTCs can be effectively used to generate and retain jobs, as well as to fund, refinance and expand businesses and revitalize communities. NMTC lenders, known as Community Development Entities or CDEs, usually offer more flexible financing terms including non-traditional collateral, higher loan-to-value ratios and longer periods of interest-only financing. The interest rate savings, too, are significant as most CDE loans are somewhere around 1%. These more attractive financing terms may fill a gap that a project owner has been unable to fulfill through traditional commercial needs, or they may incentivize a developer to undertake a project in a distressed area that was otherwise not an attractive enough option to consider.

Notably, studies have shown that when a borrower in a low-income community is able to effectively make use of NMTCs to finance or refinance their project, the surrounding community often experiences ripple effects. These effects tend to become evident around the five-year post-project placed-in-service date and often lead to more investment and increased revitalization throughout the neighboring locales, resulting in more jobs and greater availability of necessary goods and services.

Another positive ripple effect is evident in looking at the number of incidental jobs created as a result of a project financed by NMTCs. To give a little bit of perspective on the power of the NMTC with regard to job creation, according to the CDFI Fund, the division of the U.S. Treasury that administers the program, more than 830,000 jobs have been “created or retained” as a result of the NMTC program since 2003. While projects directly financed with NMTCs are often large job creators in and of themselves, they also create incidental jobs—for instance, those in the construction industry. The pandemic cut construction jobs, specifically those in the non-residential sector, as the price of materials surged, and availability declined. NMTCs routinely create a multitude of full and part-time construction jobs, many of which are held by low-income workers. Although these jobs are not permanent, the establishment of construction jobs is no less significant in the post-pandemic period as workers look to return to the workforce.

While there can be little doubt as to the ability of NMTCs to create and retain jobs in economically distressed areas, NMTCs are also a valuable tool for rejuvenating areas that have become empty and blighted, much of which has increasingly occurred as a result of the pandemic. NMTCs can be used to finance a multitude of projects. From childcare and community facilities to hospitals and addiction treatment centers to manufacturing and retail, and even hospitality projects—a sector that has been hit especially hard—can benefit from NMTCs.

Many educators are referring to the months of distanced learning during the pandemic as lost months and are increasingly worried that students are facing years of delayed achievement. The pandemic forced most children out of in-person learning environments and into the uncharted waters of online distance learning. Charter schools have addressed similar issues following times of out of-school learning, including after Hurricane Katrina. Higher education has also felt the impact of the pandemic, with lower enrollment than usual and increasing financial burden. Colleges frequently benefit from NMTCs including Historically Black colleges and universities (HBCUs) that have used NMTCs to construct and develop facilities on or adjacent to HBCU campuses. NMTCs have long been used successfully to develop educational facilities and are regularly utilized to finance schools throughout the nation.

As children navigated the trials of distance learning, their parents became overnight educators while simultaneously facing furloughs and job losses or being required to continue to work in jobs deemed essential. Many of those essential workers come from lower-income families that were faced with the seemingly impossible task of either quitting their jobs or finding childcare in unfamiliar and uncertain conditions. NMTCs have been utilized effectively to develop and sustain community centers and childcare facilities in low-income areas that could potentially assist with childcare for essential workers.

The strain on healthcare facilities has been featured front and center—especially in low-income communities. Despite the obvious need for these establishments, both in urban and rural settings, many continue to face financial challenges and struggle to keep their doors open. NMTCs are an extremely effective method for financing the construction, equipping and development of healthcare facilities in low-income communities. From hospitals and clinics to medical office buildings, elderly care and addiction treatment facilities, healthcare remains one of the most popular project types among NMTC lenders year in and year out.

The stress on manufacturing facilities also became quickly evident as those producing paper goods, sanitizing products, pet products, baking ingredients and more, as well as facilities producing the packaging for such items and their respective supply chains, were pushed to maximum capacity. NMTCs have been consistently used by manufacturing facilities both for constructing and expanding facilities, as well as for the purchase and installation of equipment. Furthermore, manufacturing facilities continue to be favored by NMTC lenders, both as large job creators and in effort to retain manufacturing by American companies on U.S. soil. In a report published by the New Markets Tax Credit Coalition analyzing projects completed in 2019, manufacturing projects were more than two times more likely to be financed than any other type.

The hospitality and tourism sectors were initially hit harder than any other by the pandemic as travel came to a grinding halt. While there are undoubtedly signs of an increase in travel, it will take time for the losses experienced by those industries to be recouped. As a result, although hospitality projects are by no means the most popular choice for NMTC lenders, there may still be an opportunity for hospitality and NMTCs under the right circumstances due to the potential for a large number of jobs to be created.

Previous pandemics have shown us that the economic consequences are often not immediately apparent and that our economy and communities will likely feel the effects of the pandemic for decades to come. Therefore, we must leverage the tools that are available to us as we emerge from the pandemic, including NMTCs, which can be used to address deficiencies in a number of sectors. NMTCs are not simply a way to help communities return to the old normal, but a means of helping low-income communities march towards a better post-pandemic future.

For more information, check out Julia’s New Markets Tax Credits – An Economic Vaccine for Low-Income Communities, available from PLI Programs On Demand.

Julia Fendler is an attorney in the New Orleans office of Butler Snow LLP. Julia’s practice is focused on public finance. She was awarded the “Tax-Credits Attorney of the Year in Louisiana” by Corporate International Magazine.