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New Markets Tax Credit - Port of Hueneme

Port of Hueneme New Markets Tax Credit project

New Markets Tax Credit

The federal New Markets Tax Credit program is a prime example of a national program with local impact.  Established in 2000 by Congress to spur new or increased investments into operating businesses and real estate projects located in low-income communities, the program attracts investment in low-income communities by allowing individual and corporate investors to receive a tax credit against their federal income tax liability.

Investors receive the credit in exchange for making equity investments in Community Development Entities, the investment vehicle for new markets tax credits, which in turn loan or invest funds in or to Qualified Active Low Income Community Businesses on favorable terms.

Generally, the credit totals 39 percent of the community development entities’ original investment amount in a Qualified Active Low Income Community Business and is claimed over a period of seven years — five percent for each of the first three years, and six percent for each of the remaining four years.

The impact of the tax credits is visible in several prominent and award winning projects throughout the country.

To be eligible for a tax credit investment from a community developed entity, a project or business must first be located in a federal census tract designated as a low-income community. Other than that, there are few types of projects that are not eligible for the tax credit investments, the most notable exception being residential rental property. Other ineligible uses include golf course and country club facilities, massage/suntan parlors; liquor stores, gambling facilities and certain farming activities.

While most kinds of operating businesses and real estate projects are eligible for the credit so long as they are located in low-income communities, there is stiff competition for new market tax credit investments from the community development entities.  The entities receive authority to make tax credit investments from the federal CDFI Fund (www.cdfifund.gov) through a competitive allocation process in which the community development entities must demonstrate to the CDFI Fund that the types of investments it will make further the goals of the credit.  Thus, the entities select projects and businesses for investment based upon the likelihood that the investments will yield permanent jobs, access to goods and services, new construction and improved options for area residents.

The creditworthiness, developer’s ability to complete a project and the long-term financial viability of the project are therefore primary considerations of the entities. To increase the likelihood of a successful project, business owners and developers navigating the world of new market tax credits should consider discussing their projects with a financial consultant before seeking investments from community development entities.

Case studies:

José Ometeotl leads the Willdan New Markets Tax Credit team and specializes in local economic development, with a focus on financial engineering.