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While the New Markets Tax Credit program (NMTC) is an extremely creative, impactful, and transformative program, it can be very complex.
Our team wanted to give you a better idea of what this process looks like and what steps borrowers need to go through to be considered for NMTC financing.
We also sat down with Bill Owens, VP and Credit Banker at Border Bank, to get an idea of what this process looks like in the role of a leverage lender.
Let’s break it down…
Breaking Down the NMTC Process
Dakota Business Lending
NMTC is a highly competitive program, and Community Development Entities (CDEs, like Dakota Business Lending) must go through a significant application process to receive a NMTC allocation.
Once a CDE has been selected, they are awarded NMTC allocation depending on their request, availability of funds, and number of recipients, and can begin monetizing these tax credits to finance projects in their pipeline.
To date, DBL has received two NMTC allocations totaling $60M.
Here’s how a business or project can go about receiving a NMTC allocation…
Step 1: Reach Out
NMTC financing is allocated to businesses on DBL’s project pipeline. Given that the New Markets Tax Credit program is highly competitive, this pipeline is continuously being revised given their priority at the time of availability.
If you have a project that you would like considered for NMTC financing, it is important that you reach out to DBL early when a project is in the early or preliminary stages so that their team can add it to the pipeline for consideration.
Step 2: Apply
Once your project has been added to the pipeline, borrowers will complete an intake form. This document helps provide DBL with essential details about the project that will help them evaluate its eligibility and level of priority.
It is important to be as detailed and thorough as possible, even if the project is still in the early stages.
Step 3: Project Selection and Availability
After receiving your intake form, DBL’s NMTC Governing and Advisory Boards will evaluate the project to determine whether it will qualify as a NMTC project and be added to the pipeline listing of eligible projects.
This stage is highly competitive given DBL’s current NMTC allocation availability and will be based on a variety of factors including community impact requirements, demand, priority, and eligibility.
Step 4: Financial Structuring
If your project has been selected to receive NMTC funding, DBL will work with you, your bank, and any other parties involved to create a financial stack.
The NMTC program can be used in conjunction with other local or state financing programs as part of a custom and unique financing package and may involve several other entities or partners.
Step 5: Investor Participation
DBL will monetize the NMTC allocation by selling the tax credit to investors. This investment can be made by larger corporate banks or any local community banks. The cash from these sales will come back on a 16-17% basis, which DBL will use to fill the financing gap for your project.
The Role of Leverage Lenders
Bill Owens, Border Bank
There are two areas of lending that are involved in a NMTC project:
- Investors – those who invest in the tax credits (as mentioned in Step 5 above)
- Leverage lenders – those who provide an actual loan for the project
Leverage lenders provide a foundational piece to the financing structure, and can be a bank, affiliated business, or other type of lending partner.
Roles and Responsibilities
The leverage lender grants a loan for a portion of the project, while an investor provides additional funds in exchange for credit on their income taxes. Both the leverage loan and the investor’s NMTC funds flow through DBL to the borrower in two separate loans. After a 7-year term, the investor’s loan is forgiven, which is one of the main benefits to the borrower…free money!
“The NMTC program is an excellent way for businesses to access capital and funding otherwise not available, and for the local bank or financing partner to stay involved in the project. The leverage lender is just one piece of the puzzle, but it is a foundational piece as it built upon by others.”
The responsibilities of a leverage lender are similar to those in any other traditional financing project and include standard items such as underwriting, servicing, and other parts of the loan process.
Common Challenges and Complexities
The NMTC program can be a big learning curve for all involved and often has more specific limitations than traditional financing. The financing packages are also typically more complex and include participation from several other organizations and entities.
Luckily, the DBL has an experienced team behind them that can guide the borrower, investor, leverage lender, and any other organizations involved throughout the process.
“There is a big learning curve that comes with the NMTC program, and it can have additional levels of complexity in the financing package. Communication, planning, and organization are big because there’s a lot of moving parts and many entities involved. The staff at DBL have a great team and are very knowledgeable partners who make the process smooth and efficient.”
From One Leverage Lender to Another…
If you are a financing entity who is considering becoming involved in a NMTC project as a leverage lender, I have just one piece of advice: reach out to DBL early and often.
“Reach out to the DBL team to talk through your options. Your project may be too big for your organization independently, but DBL can lay out what you can do, how you can be involved, and how you can stay in contact with your borrower…whether through NMTC or another financing program.”
“I’ve been really impressed by their knowledge so far – they are true experts in the program and financing partners looking out for the best interests of small businesses.”
For more information about the NMTC program, visit our webpage.
