The NMTC Allocation Application

WHITE PAPER

Prepared by:

Reznick Group New Markets Tax Credit Practice

May 25, 2011

Introduction
The New Markets Tax Credit (NMTC) application process is arduous and competitive; demand far outstrips supply. In 2010, for example, Community Development Entities (CDEs) filed 250 applications requesting $23.5 billion in tax credits against a pool of $5 billion in credits available for allocation. Clearly, then, it is essential for CDEs to have a thorough understanding of the application process and the criteria on which the applications are scored and to commit the appropriate time and resources to preparing their application.

Eligibility
In order to be eligible to submit an NMTC allocation application, you must either be certified as a CDE or have submitted an application for CDE certification to the Community Development Financial Institutions (CDFI) Fund by a specified date. For information on applying for CDE certification, see Applying for CDE Certification. Existing CDEs that have already received NMTC allocations must have met certain benchmarks for Qualified Equity Investment (QEI) placement of those previously awarded allocations. This information will be included in the Notice of Allocation Availability (NOAA) that sets the terms and requirements for each years application process. There are also several other criteria related to the utilization of other federal subsidy programs.

The Allocation Application

The main part of the NMTC allocation application consists of four sections. All four sections are important, but the first twoBusiness Strategy and Community Impactcarry particular weight in the scoring process. Business Strategy Central to the CDEs business strategy is the design of its financial products. They are, after all, the conduit through which the targeted low-income community will be helped. To pass muster in the evaluations process, they must be more user friendlye.g., have lower loan-to-value ratios, softer underwriting and collateral requirements and lower interest ratesthan what is already available to enterprises in the community. But that is just the start. The products must be truly innovative and structured to reinforce desired decision-making and policy goals. This might be accomplished, for example, by discounting the interest rate paid on a loan if the recipients venture creates a certain number of jobs over a certain period of time, or by setting aside a certain percentage of interest paid to fund needed community programs. In addition to the products it will develop for the benefit of the community, the CDE must also set forth investment goals that will cover its costs plus provide an attractive return for investors. The Fund must regard these goals as achievable given the products it is proposing, and in light of the decade of data that it now has regarding the financial performance of CDEs and their underlying NMTC investments.

Finally, when putting together the business strategy, it is important to keep in mind the overall policy objectives of the programto make capital available under favorable terms for investment in underserved communities. This is the criterion by which the Fund is judged when it is reviewed by the Government Accountability Office. Keep the Funds own goals and perspectives in mind in developing your business strategy. Community Impact The application must clearly demonstratewith well-supported, credible projections on job creation, increases in property tax assessments, catalytic impact and so onhow the proposed investments will directly affect the surrounding community. In addition, it must be clear how low-income community (LIC) representatives will be involved in the development and implementation of the CDEs business plan. But not all community impact is equal. It is important to demonstrate not only that the CDEs proposed projects will positively affect the community, but that it will do so in ways that address particular pain points. If the CDE hopes to invest in building a hospital, for example, it should demonstrate that the targeted area is significantly undeserved by its current medical facilities. In the current economic environment, applications that demonstrate significant job creation in distressed areasaccompanied by training and retention programshave a clear advantage. And while the majority of allocations go to CDEs serving urban areas, applications that will benefit rural and nonmetropolitan areas are also sought after, as they broaden the programs reach. Management Capacity An applications strategy and impact may be compelling, but those plans wont count for much unless the right team is behind them. The Management Capacity section outlines the bench strength of the entire teamnot merely the CDEs management, but its lawyers, accountants and other advisors, as well as its board of directors. A winning team will demonstrate a solid track record in asset management, deployment and raising of capital at market rates, risk management and compliance, without any capability gaps in these critical functions. Further, that track record must be at the scale of the requested allocation. In discussing the CDE board, it is particularly important to demonstrate the bona fides of the low-income community representatives on the board. They, after all, form the critical link between the CDE and the community it seeks to serve. They must have the credibility, authority, networks and experience in the community to be the eyes and ears of the CDE. Capitalization Strategy Finally, the application must demonstrate an ability to raise private capital through a past track record and commitments and/or letters of interest that have been secured for the proposed allocation. It is also important to demonstrate how the bulk of the benefit generated by the NMTC will go not to the investors or the CDE but rather to the end users within the community. This includes ensuring that the proposed fee structure for the CDE is reasonable and within market rates.

The Evaluation Process

NMTC allocation applications pass through three rounds of review. In the first round, the application is evaluated independently by three third-party reviewers who have been contracted by the CDFI Fund. Each reviewer evaluates each of the four sections of the applicationBusiness Strategy, Community Impact, Management Capacity and Capitalization Strategyon a 25-point scale, for a base total of 100 points. In addition, five bonus points are available if the plan includes investing in unrelated entities, and five bonus points are available if the CDE has a track record of serving disadvantaged businesses or communities. This gives a total of 110 possible points from each of three reviewers. The reviewers will also recommend an allocation amount, which may be equal to or less than the amount requested, or that no allocation be awarded. To progress to the next round of review, the application must be deemed highly qualified, with both a total score and individual section scores that meet or exceed predetermined thresholds. The applications are then ranked in descending order of their combined scores for the Business Strategy and Community Impact sectionsgiving those sections particular weight. The ranked applications then move to the second round, in which they are reviewed by a panel of CDFI Fund staff. The panel reviews the scores, comments and allocation recommendations made by the firstround reviewers, and also reviews a variety of compliance, eligibility and regulatory matters tied to each application. The panel then makes its own allocation recommendation. The applications then move to the final round, which is conducted by the Funds designated Selecting Official, who reviews the comments, scores and recommendations from the first two rounds and determines a final award amount. This does not end the process, however; there is no guarantee that the recommended award amount will be granted. After all the applications have been reviewed and a recommended award amount assigned to them, the awards are granted in descending order of the application score until the annual allocation for the NMTC Program is exhausted. The awards are publicly announced at a later date; unsuccessful applicants are provided with a debriefing letter reporting their scores in each section for future reference if they elect to re-apply at a later date.

The Application Workplan

Successful NMTC applications are highly varied in their specifics, but they are all the product of extensive planning and a rigorous workplan. The following checklist should serve as a template: Review last years application and, when it is released, the current NOAA and allocation application. The NOAA gives the application specifics and deadlines for each annual application period. However, the NOAA is released only about 60 days before the application is due, which many

applicants will find is not enough time. So use the application from a previous year as a framework to get started.

Assess the strength of the management team. The track record of the CDE management team not just as individuals but as a groupis an important factor in an applications success. A less experienced team can align itself under a more experienced controlling entity, which becomes the official applicant and effectively acts as the guarantor of the CDEs performance. A clear-eyed assessment by an experienced third party can be particularly helpful here in determining if a controlling entity is needed. Collect the historical data to be included in the application. The application asks for information that many applicants dont commonly keep, such as the percentage of loans made in low-income areas. Even applicants with thorough recordkeeping will find that they will have a lot of work to do. Assemble the board and external advisors. In doing so, be sure to address any capability gaps that exist in the management team. Develop your business strategy, including truly innovative products that will fill a demonstrable need with your target audience. Input from your community representatives, combined with good market intelligence, is essential. Develop your pipeline in both directions. The successful application needs to have investor commitments and/or letters of interest in hand, as well as potential loans and investments (supported by data showing job creation potential, projected community impact, etc.) Assign one team member to quarterback the application process. The entire application process requires a couple of hundred hours and will undoubtedly be a team effort. One person needs to go back though the document to ensure that it flows smoothly and speaks with one voice. Establish a timeline with benchmarks at various key points within the application process. The timeline should include the gathering of all submission exhibits such as investor letters and organizational flow charts. Aim to have the completed application ready to submit one week before the deadline. Enlist an outside reader. Have someone with an understanding of the NMTC program, but who is not involved in the preparing of the application, look at the finished application with a fresh set of eyes and make recommendations. Designate an IT-savvy person to be responsible for the electronic submission of the application. The actual submission of the application is more complicated than many people expect. And remember that the Funds technical support shuts down 48 hours before the final deadline. Take a well-deserved vacation and try to forget about the awards until they are announced.

How Reznick Group Can Help

Reznick Group has been active in the New Markets Tax Credit Program since its inception in 2001. As a result, we have unparalleled experience in providing assurance, tax, compliance, transactional and consulting services for CDEs. We have assisted with the preparation of many successful allocation applications for CDEs across the United States. Our services include: Assisting in the development of your business strategy, investment goals and products Providing insight and counsel on the scoring and evaluation process Assistance in developing your investment pipeline Assistance in ascertaining investor commitments and/or letters of interest Evaluating community impacts Evaluating CDE management teams and boards Assisting in compiling required records and attachments and in development and/or review of the overall application package submission.

For more information, please contact Gary Perlow, New Markets Tax Credit Leader, at gary.perlow@reznickgroup.com.

This publication contains only general information and is not intended by Reznick Group to be a rendering of accounting, business, financial, investment, legal, tax or any other professional advice or services. This publication is not a substitute for any professional advice or services.