Make Your NMTCs Work for You: How A Support System Prevents Recapture Risk

Whether you’re working on your first New Markets Tax Credits (NMTC) application or you’re a seasoned pro at drafting applications, the process of applying for NMTCs is complex.

Once a deal has closed, NMTCs require some atypical accounting processes—all specific to the program and its regulations. In some cases, if a borrower’s accountant is not familiar with NMTCs, this can result in confusion and additional time and expense.

Ensuring accurate financial reporting for NMTC transactions is important for Investors, CDEs, and QALICBs/borrowers. Mischaracterizations could lead to a recapture risk—or the potential for investors to lose the tax credits received and owe interest or penalties if certain compliance requirements are not met.

Building an effective support system mitigates recapture risk and supports your transactions over the seven-year compliance period.

Understanding the Complex NMTC Reporting Requirements 

All Community Development Entities (CDEs) are required to file an annual report on every one of their NMTC-funded projects with the Community Development Financial Institutions (CDFI) Fund. Throughout the seven-year compliance period for NMTCs, CDEs must supply information on each project annually.

Creating Systems to Access the Necessary Data 

Accessing this data often requires a complex collaboration between the CDE and the borrower on each project.

Because the annual reporting questions are highly detailed, most CDEs have developed, or use consultants who have developed, robust systems to collect project, note/investment, and impact data and to report on each NMTC-funded project. Community developers or borrowers may not have the right processes in place to track the data needed.

The information we see most often includes the number of jobs created and retained at a facility; the number of construction jobs created; whether or not the jobs pay a living wage; the income levels of the people the facility serves; the number of homes created or people served, and so on.

Compliance CDEs Require From QALICBs/Borrowers

• Compliance Certificates 

CDEs often require the borrower to provide a compliance certificate on either a quarterly or a semiannual basis. Typically, this is a certification that the Borrower has complied with NMTC/loan requirements.

• Community Benefits Reports

This is required annually and provides data regarding community outcomes the borrower projected that it would meet, such as the number of homes developed and number sold affordably to low-income households, the number of permanent and construction jobs, and information relating to job quality, other outcomes relevant to the particular project.

• Financial Statements 

CDEs and investors also require the borrower to submit quarterly or semiannual financial statements.

Supporting Borrowers with the NMTC Process 

In most consultant-QALICB/borrower relationships in NMTC transactions, the consultant facilitates the closing of the deal, which can include sourcing CDEs, investors, and source lenders.

However, once the deal officially closes, the consultant is gone and many borrowers face confusion with the ongoing reporting requirements over the 7-year compliance period.

Because of this, borrowers can benefit directly and significantly from partnering with consultants who provide assistance from pre-closing through the entire compliance period and the wind-up/exit. This way, the borrowers receive ongoing support and guidance as needed throughout the process.

As a team that works with borrowers from pre-closing, during the 7-year compliance period, and through the exit, here are some of our recommendations for a seamless consultant partnership:

• Review the loan documents with your consultants before closing. This ensures that any operational process requirements align with the processes you already have in place.
• Outline and implement new processes. To meet the loan requirements, work with your consultant to determine if your organization needs to implement any new processes to report any impact factors or data.
• Obtain a recapture risk guarantee. This is key for the borrower, investor, and CDE alike.
• Educate new team members. Over the course of seven years, many nonprofits experience staffing changes. Make sure that your consultants are available to provide ongoing education on NMTC accounting or reporting duties.
• Educate your auditors. Make sure your consultants meet with your auditors, preferably before closing the transaction, to ensure that they do not unintentionally violate NMTC rules and regulations when finalizing your audits.

Work with Smith NMTC

Using our expertise with the NMTC program, Smith NMTC partners with CDEs and nonprofit developers to increase access to affordable for-sale housing and community facilities that improve and stabilize low-income communities and provide opportunities for wealth and asset building and other opportunities to low-income people.

Since our founding in 2007, we’ve structured and facilitated more than 70 transactions in 33 states using more than $675 million in NMTCs. For our CDE clients, we provide NMTC application strategy and development, manage all closings, source investors, structure transactions, and guarantee the recapture risk.

We take pride in supporting our nonprofit CDE clients and developers through the 7-year compliance period and managing all CDE accounting, compliance, and reporting.

To learn more about how we can support your organization with NMTCs, click here.