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Three Keys to Assisting QALICBs in New Markets Tax Credit Transactions

Published by Amanda Read on Thursday, June 13, 2024 - 1:37PM

The ultimate recipient of new markets tax credit (NMTC) financing is generally the party with the least experience in the tax incentive world. 

Qualified active low-income community businesses (QALICBs) receive NMTC financing, but other stakeholders need to be intentional about how they work with businesses to ensure success. That’s according to panelists during the "Taking Care of (QALIC)Business" session that I hosted last week during the Novogradac 2024 Spring New Markets Tax Credit Conference in Washington, D.C.

"You have to understand in our economy, small business is the economic driver," said Darryl Jacobs, partner at Ginsberg Jacobs LLC. "Small business provides real revenue and keeps people employed and puts food on their table. If we dismiss and ignore it and don’t keep focus on it like new markets tax credit does, the average lifestyle of average America is going to go down."

Kermit Billups, executive vice president at Greenline Ventures, compared financing provided by the NMTC with that from venture capital.

"Venture capital money pushes businesses for extreme growth," said Billups. "They’ll invest in 100 businesses and it doesn’t matter if the vast majority fail because they’re pushing for that one big success. The new markets tax credit provides low-income businesses with patient capital for more measured, strategic growth that ultimately results in greater business stability and better job creation."

David Clower, president and CEO of the National Trust Community Investment Corporation, said NMTC financing is crucial.

"The New Markets Tax Credit program does seem like the idea solution for small business," Clower said. "You may be able to approve funding that a traditional bank can’t provide."

Panelists offered three recommended practices for community development entities (CDEs) and other NMTC stakeholders working with QALICBs on NMTC transactions.

1. Expect a Challenge

Panelists agreed with one premise: Helping a QALICB through an NMTC transaction is difficult, particularly if it’s the first such transaction for the business (which is true for the majority of NMTC transactions).

"Small business lending with new markets tax credits is very, very hard," said Billups. "You’re dealing with less-sophisticated business owners who also lack the financial resources to fund the pre-closing NMTC process.

"That means very few of these NMTC deals are plug-and-play. Instead, they require education, assistance in getting approvals from existing business lenders, working through business qualification issues and other challenges."

Those challenges can be expanded when dealing with a nonprofit organization but can be mitigated by focusing on the ultimate benefit, according to Courtney Tawresey, shareholder at Polsinelli.

"We need to recognize that these resources are needed," Tawresey said. "For nonprofits, their resources are often stretched thin and whoever is working on this will be diligent to get this done. But you can’t throw a new markets tax credit closing on a person who is already working 40 to 50 hours a week and expect them to get the material in a timely and efficient way."

So, part of the work is education.

2. Education is Crucial

Jacobs reminded conference attendees that most QALICBs come to the table with little knowledge of how the incentive works.

"Often, the average QALICB doing its first new markets deal doesn’t have a concept of what’s really happening with the program," Jacobs said. "They just think, ‘they’re going to give me money.’ It doesn’t work that way–these are complex transactions with a lot of moving parts."

Jacobs said he recommends coaching a QALICB early. And "early" means before even approaching a CDE seeking allocation.

"As a QALICB, you need to get out in front of it, which means getting your professionals in line ahead of time," he said. "Get your attorneys to look at the deal ahead of time, get accountants involved, have a budget and show your capital stack. Investors and CDEs are not giving you money if you don’t have a capital stack lined up."

Jacobs echoed Tawresey’s thoughts on the added challenge for nonprofits, pointing out the increased number of people requiring NMTC education when the QALICB is a nonprofit.

"They tend to be leanly staffed with a lot of demands," Jacobs said of nonprofits. "They’ll have disparate boards of directors from various walks of life and it’s not the same as closing with a corporation that has a few people. If you’re an NMTC consultant, you have to help a group of people understand the risks, how it works, get professionals involved, work on planning and maybe support the organization."

Another issue is that the QALICB may want to work with familiar colleagues, rather than organizations with deep experience in the NMTC space.

"Many times, the QALICB will want to use the bank down the street that they already have a relationship with," Tawresey said. "That adds another party that has to get up to speed."

One way to smooth the path is to bring in a consultant. The right consultant.

3. Consider Value of Consultant

"A consultant can take the pressure off some existing people," said Jacobs. "Don’t underestimate the value of a good consultant, particularly in a lean business or a nonprofit."

Clower highlighted how a good consultant can benefit the QALICB.

"They can provide the ability to anticipate issues, thinking through the structure with respect to the CDE and all the investors," said Clower.

Clower cited challenges faced by consultants.

"It’s really a specialized herding-cats kind of job," he said. "Many of us have been on calls where we’re talking with 15 or 20 people and their clocks are ticking. I’ve been on a couple of closing calls where costs were spiraling because we didn’t have someone taking charge and leading people safely down the path. On the other hand, we have some consultants that are super smart, super knowledgeable, they know what’s going on, what works, what doesn’t work. Those consultants are worth their weight in gold."

Clower said QALICBs should be diligent when hiring a consultant.

"You have to be really cautious about making sure in hiring a consultant," he said. "Make sure that you ask the right questions, check on past transactions and make sure the financial benefit is going to be there."

Conclusion: Worth the Work

The participants agreed that NMTC funding can play a critical role in helping businesses reach their goals and provide benefits to low-income communities. With the right approach, a fair amount of education and the possible addition of a consultant to smooth the way, the benefits can far outweigh the costs and the QALICB can find success.

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