Part 4: Structuring A Deal: New Market Tax Credits (NMTC)

Introduction: We’ve embarked on a big project - the Center for Social Innovation - and have been learning lots along the way.  We’ve decided to share our experience here in the hopes that our lessons will be of some benefit to others. Please reach out if you are thinking about a similar project for your community and we’d be happy to chat - hello@socialinnovationaustin.org

Read Part 3: Tenant Improvements

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From speaking with some non-profit folks in Austin who had built their own facilities, we learned of a program that incentivized new private sector investment in economically distressed communities. New Market Tax Credits (NMTC) were created by the Community Renewal Tax Relief Act of 2000 (the Act).  The Act authorized the sale of tax credits to tax credit investors (typically banks) who purchase the credits for somewhere around eighty-five cents on the dollar. The purchaser can use the credits to offset their taxable income (avoid paying taxes on a $1 of income by buying a credit at a 15% discount)  and the proceeds from the purchase of the credits are awarded to qualifying projects that fit the impact-oriented development criteria of the program.

The real thrust of the program is that it exists to spur new investment.  As such, the program is only appropriate for projects that would not be possible without the additional equity provided by the program.  Springdale General fit squarely within the New Market Tax Credit requirements. It was located in the right area, served the right tenants and with the help of NMTC’s would achieve a core goal of the program - providing affordable office space to non-profit and creative communities while improving a brownfield site and creating jobs.  

We decided to pursue a New Market Tax Credit award and hired a consultant to shepherd us through what was a time consuming and complex transaction.  I would advise against pursuing NMTC’s without a consultant with a successful track record.  The likelihood of success would be extraordinarily low and you would waste a huge number of hours along the way.  

What followed was roughly 6 months of multiple conference calls a week with a team of highly specialized lawyers and accountants from all over the country that we would never meet. This process is not for the faint of heart or the disorganized. A strong legal and financial background is helpful as well.  The final outcome is the creation of a series of entities that facilitates the payment of the proceeds from the sale of the tax credits to the project in the form of a debt instrument. This structure will ultimately be collapsed (i.e. these entities and debt obligations will wind-up) at the end of the 7 year compliance period.

And of course the practical impact is that the project receives what amounts to an interest-only loan that is forgiven at the end of its seven year term.  

This short post can only scratch the surface of the New Market Tax Credits and the nearly infinite permutations the deal structure can accommodate.  If you have a project that you think might be a fit, please reach out, we’d be happy to help: hello@socialinnovationaustin.org.

Matt McDonnell is a Partner at Notley Ventures, a micro private equity firm focused on the intersection of profit and social impact. He previously served as COO of Famigo, an early childhood EdTech company, and a sailing instructor at Outward Bound. He holds an MBA from the College of Charleston, a JD from the University of Texas School of Law, and has been a contributor to Ed Surge and Venture Beat.