Introduction
Thank you very much for that kind introduction, Peter. I am delighted to be here today for the National Housing & Rehabilitation Association's 2007 Summer Institute. My name is Kimberly Reed and I am the Director of the U.S. Department of the Treasury's Community Development Financial Institutions Fund, or the CDFI Fund.
With me here today is Rosa Martinez; she is the Program Advisor for the New Markets Tax Credit Program. Rosa has been a tremendous asset to the CDFI Fund and has been an integral part in making sure that the New Markets Tax Credit Program is successful. I would like to thank her for all of her hard work and commitment to the CDFI Fund.
The CDFI Fund's mission is to expand the capacity of financial institutions to provide credit, capital, and financial services to underserved populations and economically distressed communities in the United States. I always like to start out my speeches by stating our mission. It reminds me of the reason why the CDFI Fund and New Markets Tax Credit Program exist.
The New Markets Tax Credit Program has been an effective program in meeting the Fund's mission. It has also been a highly successful tool to facilitate the investment of private equity into low-income communities.
Through calendar year 2008, the CDFI Fund has the authority to issue $19.5 billion in New Markets Tax Credit to Community Development Entities (CDEs), including $1 billion for the rebuilding and reconstruction of the Hurricane Katrina Gulf Opportunity Zone (the GO Zone). In the first four allocation rounds, the Fund received 1,078 applications requesting over $107 billion in total allocation authority - almost nine times the amount available for the Fund to allocate.
To date, the CDFI Fund has made 233 awards to CDEs, totaling $12.1 billion in tax credits, including $600 million in awards for the GO Zone. We are pleased to see the rate at which investors have embraced the program and have infused capital into these low-income communities through investment in CDEs after receiving an award. Investors in CDEs have carefully viewed their investments in these CDEs, as they would with any other investments, and have made sure that they felt secure in their relationships with the CDEs and transactions that the CDEs engage in. As of this month, these New Markets Tax Credit allocatees have received over $7.9 billion in QEIs.
For a relatively new government program, the rate of investments for both QEIs in CDEs and allocatees' transactions has shown that the fundamental of the relationship between allocatees and investors is sound. Through 2005, allocatees have reported closing nearly $3 billion in transactions and, of those transactions; nearly $2 billion was closed in FY 2005 alone.
Fifth Round Impact
In this year's allocation round, the CDFI Fund will award $3.9 billion in tax credits, including $400 million for allocation in the GO Zone. This year we received 258 applications requesting nearly $28 billion in New Markets Tax Credit allocation authority. The total amount requested for this round, as in every other round, far outstrips what the CDFI Fund has available to award.
The highly competitive nature of this program continues to suggest that the New Markets Tax Credit Program is working in communities as an effective tool to attract investment into low-income areas. Applicants are steadily increasing their level of commitment to the communities they serve, and the CDFI Fund is ensuring that allocatees are required to fulfill these commitments through their allocation agreements.
We expect fifth round allocatees to respond to the program's competitiveness with higher cost efficiency in their transactions, as well as by increasing their impact in the communities in which they invest. After four rounds of the program, we are also looking to see that allocatees raise the bar in terms of: 1) the level of economic distress in the areas that they invest in; 2) the amount of QEI proceeds that they intend to invest in low-income communities; and 3) the innovativeness and flexibility of their products, compared with others in the marketplace.
There a strong indication that most New Markets Tax Credit transactions would not have occurred in the same form or fashion without the benefits of the New Markets Tax Credit because of the risks associated with these types of financing. According to a recent Government Accountability Office (GAO) report on the New Markets Tax Credit Program:
- An estimated eighty-eight percent (88%) of investors said that they would not have made the same investment without the New Markets Tax Credit.
- Of the investors who would not have made the same investment without the New Markets Tax Credit, seventy-five percent (75%) also indicated that in the absence of the New Markets Tax Credit, they would not have made a similar investment in the same community.
- Sixty-nine percent (69%) of the investors making investments in CDEs in 2006 had not previously made investments in those entities.
- An estimated 64 percent (64%) of New Markets Tax Credit investors reported that they increased the share of their investment budget for low-income communities because of the credit.
CIIS FY 2005 Data
Through the CDFI Fund's data collection system (known as the Community Impact Investment System - or CIIS), we have quantitative evidence of how the CDFI Program and the New Markets Tax Credit Program are expanding the nation's economy and directly impacting the economic health of low-income communities. CIIS is a sophisticated web-based system that allows for the collection of institution and transaction level data from CDFI Program awardees and New Markets Tax Credit Program allocatees.
The data includes the purpose of the loan or investment, project address, borrower socio-economic characteristics, loan and investment terms, repayment status, and community development impacts. This data allows the CDFI Fund to measure the impact at the census tract level and to map CDFI and CDE activity in specific geographic locations.
In examining the most recent data through the FY 2005 reporting period, CDEs disbursed nearly $3 billion to 686 different Qualified Active Low-Income Community Businesses (QALICBs) - including both real estate projects and operating businesses in low-income communities.
- 548 projects (79.88% of total) were located in metropolitan areas. These projects received $2,666,427,613 in New Markets Tax Credit financing (89.62% of total).
- 138 projects (20.12% of total) were located in non-metropolitan areas. These projects received $308,766,617 in New Markets Tax Credit financing (10.38% of total).
- The principal use of funds in 338 projects (49.27% of total) was to support real estate development/acquisition/rehabilitation. These projects received $1,962,343,995 in New Markets Tax Credit financing (65.96% of total).
- The principal use of funds in 348 projects (50.73% of total) was to support general business operations (e.g., working capital loans, equipment loans). These projects received $1,012,860,236 in New Markets Tax Credit financing (34.04% of total).
An examination of the data through FY 2005 for investments in housing units for sale, and housing units for rent, we found the following:
- In FY 2004, through the New Markets Tax Credit Program, there were 285 housing units for sale and 800 housing units for rent.
- Through FY 2005, there were 1,131 housing units for sale and 2,384 housing units for rent.
When we examine CDEs investments in housing, we do not focus on trends of for-sale housing vs. rental units; instead, our focus on whether the investment would have taken place in absence of the program and whether the project is mixed-income and/or is affordable to the residents of the community.
Smart investments made by CDEs ensure that the tax credits are used to benefit communities and individuals that are most in need, which serves both the program and investors well.
Regulations
One of areas where some people feel sufficient investment through the New Markets Tax Credit Program is not taking place is in rural areas, or non-metropolitan counties. In the 2005 CIIS data collection, CDEs making investments in rural or non-metropolitan counties reported using allocation authority to invest in twenty percent (20%) of the total reported transactions.
As many of you are aware, as part of the Tax Relief and Health Care Act of 2006, the Secretary of the Treasury was required to ensure that, for purposes of the New Markets Tax Credit Program, non-metropolitan counties receive a proportional allocation of Qualified Equity Investments (QEIs). The CDFI Fund published in the Federal Register a notice soliciting public comments that will help the CDFI Fund in developing a policy to implement the statutory provision.
The CDFI Fund specifically asked commentators to consider, among other things: 1) how the CDFI Fund should define the term proportional"; 2) whether the desired outcome should be to provide allocation awards to applicants headquartered in non-metropolitan areas, or to applicants that intend to conduct their activities in non-metropolitan areas (without regard to where such applicants are headquartered); 3) whether the CDFI Fund needs to implement changes to its review process to achieve desired outcomes; and 4) appropriate compliance mechanisms to ensure that desired outcomes are achieved.
We have received a substantial number of comments from the public and are reviewing them now. These comments will help us to develop the sixth round application for the program. It is too early for me to discuss the details of the comments or how we plan to interpret them in the next round. We anticipate including our decision of how to implement this provision by stating the requirements directly into the sixth round application.
Fifth Round Awards
Before we move into to discussing the sixth round of allocation of tax credits, I would briefly like to discuss the upcoming fifth round of New Markets Tax Credit award announcements. We are anticipating announcing the fifth round of awards in October of 2007.
After CDEs are notified that they have been selected for an award, they will, as in past years, be anxious to receive their allocation agreements. We anticipate making the allocation agreements available to allocatees before the end of the year. As many of you are aware, each allocation agreement is customized to each allocatee: the agreement holds the allocatee to the projects and type of investments that it stated in its application.
I want to make sure that you are aware, that even before each allocatee receives its allocation agreement, fifth round allocatees are allowed to solicit investors in anticipation of the signing of the agreement. This time period allows for allocatees and their attorneys to work through any of the detailed requirements of their agreements.
Sixth Round Application
After the fifth round of allocations has been completed, CDEs will begin asking for general guidance on when the CDFI Fund will conduct the sixth round of NMTC Program. CDEs and the public can look to this year's calendar as a general guideline on what they can expect for the next round. The CDFI Fund anticipates publishing the sixth round Notice of Allocation Availability in the Federal Register in December of 2007. CDEs that apply under the sixth round can expect to be required to have their applications in to the CDFI Fund in February 2008, or 75 to 90 days after the notice is published in the Federal Register.
You can rely on this information as general guidance, but you should monitor the CDFI Fund's website for concrete, specific information on program deadlines and requirements. There is the possibility that, if there is a significant amount of detailed analysis and updates to the sixth round application due to the new investment requirements for non-metropolitan counties, some of these timelines may need to be pushed back.
In addition to the important deadlines for the next application round, there are a few items regarding the application that I would like to remind potential applicants. The first reminder is to make sure that you begin the process of preparing and submitting your application well before the application due. Please do not start preparing or submitting your application the day it is due. You would be surprised how many CDEs wait until that deadline in order to submit their applications.
Another item to remember is to make sure that all of the required information submitted in the on-line application is complete. If you have filled out one of our applications on-line, you will notice that we provide the applicant with a status indicator for each one of the required sections. Please make sure that each section is marked as completed before you submit your final application.
I hope this helps you when you are moving towards submitting your application. Organizations put a lot of time and effort into their applications and it does not serve you well when you are unable to compete in a round due to preventable errors.
Outreach/Resources
In effort to help applicants with their sixth round applications, as well as CDEs interested in the New Markets Tax Credit Program, the CDFI Fund plans on continuing its outreach sessions in the coming year. We hope that these sessions are beneficial to you and your organizations. I specifically plan to initiate outreach efforts into rural America and areas that are not currently served by CDFIs. Our goal this year is to not only reach the same number of cities and states as last year, but also to expand our reach by utilizing new tools to target our efforts.
In addition to our outreach sessions, we would like to point out another tool available to you all. On our website is our QEI Report. The QEI Report identifies, among other things, each entity that has received allocations of New Markets Tax Credits; the total allocation amount received by each entity; the dollar amount of allocation authority that has been issued to investors; the amount remaining to be issued to investors; and the predominant markets to be served by each entity.
Users may download this Report and use either the Find toolbar or the Search PDF window to locate a word, series of words, or partial word in the PDF document -- bearing in mind that it is case sensitive. Users may also find it useful to cross reference this Report with the Fund's reports on states served by allocatees for each round of the New Markets Tax Credit Program. These reports are available in the "New Markets Tax Credit Program" section of the Fund's website.
The states served reports allow users to quickly identify allocatees serving particular geographic areas of interest that users could then look up in the QEI Issuance Report that lists allocatees in alphabetical order. The Fund, on a monthly basis, will update the Report based on information reported by allocatees. Annually, after the Fund completes its competitive review process and successful applicants are selected, the Fund will add those organizations selected to receive allocations of New Markets Tax Credits to the Report.
Reauthorization
The last item I would like to briefly discuss with you is the status of the reauthorization of New Markets Tax Credit Program. Originally the program was authorized through the Community Renewal Tax Relief Act of 2000, which included $15 billion in allocation authority for seven years. Through the Hurricane Katrina Gulf Opportunity (GO) Zone Act of 2005, an additional $1 billion in allocation authority was directed to the rebuilding and renewal of the GO Zone, for a total of $16 billion in allocation authority.
The program would have expired in 2007 under the original bill, but the program was reauthorized for one year, through the end of 2008, as part of the Tax Relief and Health Care Act of 2006. The provision allowed for an additional $3.5 billion in tax allocations through the program.
Legislation has been proposed in both the House and the Senate to provide five more years of allocation authority, at $3.5 billion per year. No action has been taken on this legislation in Congress.
Thank you for inviting me here to speak to you today about the New Markets Tax Credit Program. I know that is a lot of information but I hope that this information was helpful to you, and I want thank you all for your support of the New Markets Tax Credit Program and thank you for your commitment to providing affordable housing.
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