Struggling Communities Benefit from NMTC Program; Investors Benefit from Tax Credits

Last month, the City of Detroit demolished the 10,000^th vacant home in Mayor Mike Duggan's massive plan to eliminate blight in the city. Detroit was hit hard by the recession of 2008 and the corresponding drop in residential property values. As home values declined, homeowners couldn’t afford their mortgage payments and went into foreclosure. Currently, Detroit lists almost 140,000 homes in the foreclosure process with more foreclosures on the way.

The Detroit News recently reported on a woman who purchased her home in 2002 and owes $82,000 on her mortgage. She is now making monthly payments of $900 on a home valued at $5,000.

Making matters worse, most foreclosed homes are never reoccupied. Instead, vandals steal windows, doors, bathroom and kitchen fixtures, stripping the homes of anything worth selling. Vandalism drives property values down further and makes daily life difficult. Homeowners still living in affected neighborhoods don’t keep anything of value in their homes because burglaries are so common.

Detroit’s answer has been to demolish 10,000 of the almost 84,000 homes on its “blighted homes” list. Almost 76 percent of those homes are foreclosures.

The city is trying to reverse is the effect of plummeting property values on the city and its population. Declining property values alone cost Detroiters an estimated $1.3 billion in personal wealth in 2012 and the city’s population fell by nearly 240,000 residents from 2000 to 2010, to about 700,000.

Although Detroit is a prime example of cities under extreme stress because of changes in the economy, large cities are not the only communities facing serious decline. Vacant properties, outdated facilities and inadequate access to education and healthcare are apparent in many rural communities throughout the country. The result of the decline is that many residents have left rural communities in search of a better life.

As people leave, these communities are left to devise creative ways to increase capital investment and development. If they are successful, distressed communities are able to attract the funds needed for upgrades and maintenance to properties and facilities, provide education and healthcare services, create more jobs, and enhance the tax base.

The New Markets Tax Credit Program is an incentive that attempts to attract the investment necessary to help these struggling economies. The NMTC was authorized by the Community Renewal Relief Act of 2000 as a bi-partisan effort to stimulate investment and economic growth in low-income urban neighborhoods and rural communities. From 2003 to 2014, $38 billion in direct NMTC investments were made in businesses, and these NMTC investments leveraged nearly $75 billion in total capital investment to businesses and revitalization projects. According to the NMTC Coalition, the NMTC generated 750,000 jobs between 2003 and 2012.

The NMTC allows investors to take a tax credit against their federal income tax for the funds that are invested. The total credit realized is equal to 39 percent of the original investment amount and is claimed over seven years – 5 percent annually for the first three years and 6 percent in years four through seven. As it stands today, the NMTC is set to expire on December 31, 2019.

With the NMTC program, the Community Development Financial Institutions Fund allocates the tax credit to the Community Development Entities through an application process. CDEs are financial intermediaries through which private capital is contributed by investors and then flows to a qualified business. CDEs offer tax credits to investors in exchange for equity in the CDE. Because of the capital contributed, the CDE can offer the qualified business funds at a better rate and terms than they will receive at a traditional financial institution. The CDE uses its local knowledge and expertise to decide what businesses should receive the investments. 

The NMTC program has increased in popularity for investors who are looking to contribute to the restoration of a diminishing community, encourage a positive change and earn impressive returns. The NMTC program doesn’t allow the investor to have rights in operational activities. The NMTC program, however, does allow an investor to have limited liability.

A company that has extra cash on hand, is interested in lowering its federal tax liability, and wants to make an investment to help the community should consider investing in the NMTC program. Certain states have these programs in place with state tax credits available. Please consult your tax adviser if you would like to explore the NMTC program further.

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