Washington – A new, independent report on the federal New Markets Tax Credit Program (NMTC Program) was released today by Summit Consulting LLC (Summit). The Compliance Review of New Markets Tax Credit Program report (the NMTC Report) was commissioned by the U.S. Treasury Department’s Community Development Financial Institutions Fund (CDFI Fund). It examines whether the recipients of New Markets Tax Credits (NMTCs) have complied with NMTC Program requirements, and whether the recipients’ NMTC investment activities have aligned with the objectives of the NMTC Program, among other questions.
“The report released today demonstrates that New Markets Tax Credits are being used as Congress intended: to attract private investment into projects in economically distressed communities,” said Annie Donovan, Director of the CDFI Fund. “It also documents the ways that Community Development Entities (CDEs) that utilize the program are meeting and generally exceeding NMTC Program requirements.”
In addition, the NMTC Report addresses questions and recommendations posed by the Government Accountability Office (GAO) regarding the distribution of benefits among the NMTC Program’s stakeholders, investors’ rates of return, and the role that other public investments play in NMTC investments. The NMTC Report has four main sections, each examining a different topic and presenting the results of Summit’s quantitative analysis and its key findings and recommendations. Among the report’s key findings for each of the four sections are:
- CDE Compliance with NMTC Allocation Agreements
- All projects reviewed by Summit comply with the corresponding Allocation Agreement.
- CDEs often go beyond compliance requirements, providing more flexible capital and investing in more highly distressed areas than the NMTC Program requires.
- Distribution of Overall NMTC Program Benefits
- The flexible financing provided by CDEs reduces the net cost of capital for borrowers.
- Fees and other charges do not appear to significantly affect the cost of capital for low-income community businesses.
- Investor returns appear to be driven more by a market for tax credits than by specific project risks, with median investor returns for the sample of 9.1 percent.
- Degree of Public Investment in NMTC Transactions
- In its evaluation of the depth of public investment in NMTC projects utilizing two methodologies it developed, Summit found that approximately two-thirds of the projects reviewed received public funding commensurate with financing gaps or industry benchmarks for capitalization rates.
- Summit’s analysis of the remaining one-third of the projects revealed that projects located in highly distressed areas may need more public funding to attract private investment, to enhance community benefits, or to support initial project operating costs.
- CDE Best Practices
- Many CDEs use a rigorous project selection process that includes a “but-for” analysis, community benefit considerations, and advisory board involvement.