Transcript “Qualified Community Development Entity” Defined Internal Revenue Code § 45D(c)(1) What is a “Qualified Community Development Entity”? Any domestic corporation or partnership which.

“Qualified Community Development Entity”
Defined
Internal Revenue Code § 45D(c)(1)
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What is a “Qualified Community Development Entity”?
Any domestic corporation or partnership which must do
the following:
– (1) Have a primary mission of serving, or providing
investment capital for, Low-Income Communities or LowIncome Persons;
– (2) Maintain accountability to residents of Low-Income
Communities through their representation on any governing
board or advisory board of the entity; and
– (3) Must be certified by the CDFI Fund division
of the Treasury as being a qualified CDE
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Type of Entity
– CDEs can be corporations, partnerships or LLCs taxed as a
corporation or partnership for federal income tax purposes1
– CDE cannot be a single member LLC disregarded for federal
income tax purposes
– CDEs can be nonprofit or for-profit entities.
– However, only for-profit entities can issue “qualified equity
investments” to investors.
– Therefore, if an allocatee wishes to sub-allocate a portion of
its NMTC allocation to a subsidiary, that subsidiary must be a
for-profit.
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Internal Revenue Code §45D(c)(1)
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Primary Mission
What constitutes a “primary mission” of serving or providing
investment capital to Low-Income Communities or LowIncome Persons?
– At least 60% of its activities are targeted to Low-Income
Communities or Low-Income Persons
– At minimum, must demonstrate that 60% of
products and services are directed or provided to:
• To Low-Income Persons
• To individuals & businesses located
in Low-Income Communities
• Organizations that serve Low-Income Persons
or residents of Low-Income Communities
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Primary Mission
Examples of activities:
• Investing in, lending to, or providing technical assistance to
businesses that are located in Low-Income Communities
and/or owned by Low-Income Persons
• Lending to Low-Income Persons or residents of Low-Income
Communities
• Investing in or providing loans to support commercial
properties that are located in Low-Income Communities
• Investing in, lending to or providing technical assistance to
organizations (e.g. CDEs or CDFIs) engaged in activities that
promote community development
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“Low-Income Community” Defined
• Under Internal Revenue Code Section 45D(e)(1), LIC means any
population census tract if:
• The poverty rate for such tract is at least 20%, or
• In the case of a tract not located in a metro area, the median family
income does not exceed 80% of the statewide median family
income, or
• In the case of a tract located in a metro area, the median family
income does not exceed 80% of the greater of the statewide median
family income or the metro area median family income.
• A census tract with a population of less than 2,000 is a LIC if it is
within an empowerment zone under IRC 1391 and is contiguous to a
LIC.
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“Low-Income Person” Defined
• Individuals having an income, adjusted for family size, not
more than:
• for non-Metropolitan Area, 80% of statewide median
family income, or
• For Metropolitan Area, greater of (i) 80% of statewide
family median income or (ii) 80% of Metropolitan Area
median family income
• “Metropolitan Area” – any area designated as such by
Office of Management and Budget
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Accountability of CDEs
– CDE certification application requires CDE to identify
the service areas that it serves or intends to serve.
– Service area options:
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Local service area
Multiple local service areas
Statewide service area
Multi-state service area
National service area
- Applicant must demonstrate that it maintains
accountability to residents of Low-Income
Communities in those areas
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Accountability of CDEs
What constitutes accountability of the CDE?
– At least 20% of its governing or advisory board(s) should be
representative of Low-Income Communities within the selected
service area
– To meet this test, the representative must:
 Reside in a Low-Income Community within
selected service area.
 Otherwise represent interests of residents
of a Low-Income Community
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Accountability of CDEs
– “Otherwise represent interests of Low-Income
Community”
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Small business owner whose business is
located in the community
Employee or board officer of community-based or charitable
organization providing more than 50% of its services to LICs
Religious leader with congregation based in LIC
Employee of governmental agency that principally serves LICs
Elected official constituency primarily LICs or residents of LICs
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Accountability of CDEs
– If using advisory board – must demonstrate that the
view points of the advisory board(s) are given
sufficient consideration and attention by the CDE
management
– CDFI Fund has increased emphasis on role of the
advisory board
– CDFI Fund encourages selection of residents of
LICs to serve as members
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Accountability of CDEs
Multiple local service, state, multi-state, national areas:
• Must demonstrate that at least 20% of governing or advisory
board is representative of a cross section of the Low-Income
Communities in the service areas
• Select member of an organization that serves a cross section
of LICs
• Be sure that organization’s service area is broad enough to
meet service area that your CDE intends to serve.
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Accountability of CDEs
Annual certification is required
– Application requires Accountability Chart for each
board of each entity seeking CDE status:
• Each board member is named
• Do they represent Low-Income Communities? If so,
how?
• Is address in a qualified census tract?
Accountability Matrix can be downloaded from
www.cdfifund.gov
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Applying for CDE Status
CDE Certification Application and CDE
Certification Q&A
– Available at CDFI Fund website.
– Contains instructions for information to be submitted and
forms to be completed as well as the primary mission and
accountability requirements to be met.
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Applying for CDE Status – Certification Application
– Part 1: Applicant CDE Information.
– Entity filing for certification must be in existence prior to applying and
may include subsidiaries.
– Submit formation documents and EIN for the parent and all
subsidiaries.
– Submit organizational documents to establish primary mission of
serving Low-Income Communities or Low-Income Persons
Applying for CDE Status – Certification Application
– Part 2: Service Area and Accountability Form.
Identify service area
Submit members of governing or advisory board to establish
accountability to LICs in the service area
– Part 3: Low Income Community Representative Form.
Information establishing that board is representative of LICs.
– Part 4: Authorized Representative Certification Form
(certifying that applicant will meet the primary mission and
accountability requirements discussed above).
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CDE Status
Notice of CDE Certification.
– CDE certification lasts for the life of the organization unless it is
revoked or terminated by the CDFI Fund.
– To maintain CDE certification, CDE must certify annually that the
CDE has continued to meet the CDE certification requirements.
– CDE status is beneficial even if not applying
for NMTC allocation (if acting as in intermediary CDE):
• CDEs who receive an allocation can invest in other CDEs in
the form of equity, loans and purchase of qualified loans from
other CDEs
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New Markets Tax Credits
And Housing
Common Misunderstandings About
New Markets Tax Credits
• Commercial real estate development is the best use of
NMTCs.
• NMTCs cannot be used to finance multifamily
housing.
• NMTCs and LIHTCs are mutually exclusive tax
credits.
• Using NMTCs in for-sale housing projects is a
prescription for recapture.
Two Potential Ways to
Finance Housing with NMTCs
1) “Mixed-use” developments
– 20% or more commercial revenue
– Potentially in combination with LIHTC via condominium
structure
2) For-sale housing
(1) “Mixed-Use” Developments
• QALICBs must be engaged in the active conduct of a
qualified business.
• Rental of real estate qualifies only if the property is not
depreciable as residential real estate and there are substantial
improvements on the property.
• Residential real estate is defined in section 168(e)(2)(A) of
the Code as “any building or structure if 80 percent or more
of the gross rental income from such building or structure is
rental income from dwelling units.”
“Mixed-Use” (cont’d)
• Mixed-Use project must have less than 80% of
income from rental housing plus 20% or more of
income from:
– Office space
– Retail
– Other commercial space
Can Mixed Use Projects Combine
NMTCs and LIHTCs?
• On the surface, not allowed
– CDE’s loan/investment will not be a
QLICI to the extent it finances building’s
eligible basis under Section 42(d)
• Solutions
– Use condominium structure
– Finance non eligible basis items
Condo Structure: NMTCs and LIHTCs
NMTC Investor
LIHTC Investor
CDE
Loan or
Equity
Partnership Two
Partnership One
Owns
Commercial
Condominium
Owns Residential
Condominium
Mixed Use Building
NMTCs and LIHTC: Eligible Basis
• NMTCs cannot finance
eligible basis items
• Can finance
– Land
– Infrastructure/sitework
– Commercial portion of building
• Importance of tracing funds,
no cross-collateralizing, no
cross-defaults
(2) NMTCs and For-Sale Housing
• QALICBs can include developers of
for-sale housing
• No requirements for low-income
residents
• Concerns include reinvestment risk
• Better suited for phased projects
where sales proceeds can be
recycled into subsequent phase of
development.
Other Possibilities
• Live/Work space
– NMTCs finance commercial portion of apartment
More Information?
Scott Sergio
401 9th Street, NW
Suite 900
Washington, DC 20004
202.585.8828
[email protected]