In December 2014, the Community Development Financial Institutions (CDFI) Fund released an updated NMTC Compliance Frequently Asked Question (FAQ) document. The questions in the new document address a range of issues including Treasury Directive (TD) 9600, the definition of a non-real estate versus real estate-qualified active low-income community business (QALICB), and what to do when a subsidiary community development entity’s (CDE) compliance period has ended. The previous version of the document was released in September 2011 – and therefore, the NMTC community was eager for an update. Accordingly, of the 71 total questions, 27 have been added this year, or significantly modified since the previous version. The following highlights some key developments contained within the new document.
Dissolving Subsidiaries, Controlling Entities, and Real Estate QALICBs
What is an allocatee to do once a transaction is unwound and the subsidiary CDE is no longer needed? CohnReznick receives this question often from clients. The new FAQ provides a process for allocatees to dissolve subsidiaries that have come to the end of their compliance period. Until an electronic portal is established in Community Investment Impact System (CIIS), the CDFI Fund requests that the following information be submitted via email to [email protected]:
Allocatee name
Allocation control number
Sub-CDE name and certification number
Date of dissolution
Controlling Entities is another issue discussed in the new FAQ document. In particular, the change affects allocatees designating Controlling Entities in their allocation applications. Previously, allocatees were not prohibited from changing controlling entities. Beginning with the Calendar Year 2013 award round, the entity that is designated as the Controlling Entity in the allocatee’s NMTC Allocation Application must continue in that capacity throughout the term of the Allocation Agreement. This requirement does not apply in situations where there is a merger, acquisition, bankruptcy or similar legal action. Change in the Controlling Entity is a material event that must be reported to the CDFI Fund.
Another common question CohnReznick receives relates to the characterization of Real Estate QALICBs versus Non-Real Estate QALICBs. The CDFI Fund clarifies these definitions in the latest version of the FAQ. A Real Estate QALICB is defined as any QALICB whose predominant business activity (i.e., activity that generates more than 50% of the business’ gross income) includes the development, management, or leasing of real estate. The CDFI Fund defines a Non-Real Estate QALICB as any QALICB that does not satisfy the definition of a Real Estate QALICB. Previously, a special purpose entity (SPE) that leased property back to an operating business could be defined as a Real Estate or Non-Real Estate QALICB. To align with TD 9600, the CDFI Fund revised this definition. SPEs that are controlled by or under common control with a Non-Real Estate QALICB that were set up specifically to lease the property back to the Non-Real Estate QALICB, as principal user of the property, must be classified as a Real Estate QALICB.
The new FAQ also provides guidance on how to calculate and document compliance with the Targeted Distressed requirement when the QALICBs’ assets are located in multiple census tracts. The new FAQ provides some guidance on how to calculate and document compliance in this situation. A loan or investment in a QALICB with locations/assets across multiple census tracts will be considered a qualified low-income community investment (QLICI) into a specific Targeted Distressed Community based on the following elements:
a. At least 50% of the total gross income is from the active conduct of a qualified business in the eligible Targeted Distressed Community; and
b. At least 40% of the use of tangible property of the business is within the eligible Targeted Distressed Community; and
c. At least 40% of the services performed by the business’ employees are performed in the eligible Targeted Distressed Community
Alternatively, the item A requirement is considered met if the items B or C requirements are met at 50%. In instances where the QALICB has no employees, the CDE will satisfy the item C requirement by meeting the item B requirement at 85%.
What Does CohnReznick Think?
While the above captures several of the most noteworthy updates made to the previous New Markets Tax Credits Frequently Asked Questions document, CohnReznick recommends reviewing the new document in its entirety and contacting your CohnReznick advisor to address any concerns and questions regarding NMTC compliance.
Contact
For more information, please contact David Norton, a CohnReznick partner, at [email protected] or 401-895-7827, or Jennifer Noppenberger, a senior associate, [email protected] or 410-783-7404.
