Monday, April 2, 2012

Community Development Entities

     What Is a CDE?:  The investment vehicle for the NMTC is a Community Development Entity (CDE). An organization must be certified by the CDFI Fund as a CDE to be eligible for NMTCs. Two important considerations for certification are that the organization must have a track record and demonstrate accountability to the community. After receiving certification, a CDE may then apply for credits through an annual competition conducted by the CDFI Fund. CDEs successful in receiving an allocation must have a strong business plan, good management, proven track record of working with investors and proposed projects that will have a substantial impact in low-income communities. In March 2003, the CDFI Fund made its first allocation of $2.5 billion in NMTCs to a total of 66 CDEs. Over 300 Community Development Entities (CDEs) applied in the first round, requesting $26 billion in credits.

     How CDEs Work:  Typically, tax credits and incentives come after a company has had significant up-front cash outlays. While tax credits and incentives are valuable offsets against total project costs, what if you could reduce total project costs overall? By reducing the cost of debt interest, thereby limiting cash outflows for the project itself, a project is more likely to survive the first few years.

     Capital market rates are computed on a project-by-project basis utilizing multiple factors, including but not limited to credit score, type of financing, and location of the project. The NMTC is designed to provide eligible lenders an incentive to offset the cost of doing business in low-income communities (LICs).

     Since its inception in December 2000, the U.S. Congress has promoted the NMTC as an economic development catalyst for LICs across the country. It is designed to provide a federal tax credit to investors of CDEs, which in turn utilize investor funds to make below-market financing available in LICs.

     To offset the reduced return rate and risk factors associated with these projects, eligible CDE investors receive a 39 percent tax credit over a seven-year allowance period. Thus, the credit subsidizes the investor’s risk and provides a significant return for pursuing LIC projects.

     Requirements For CDE Certification:  To become certified as a CDE, an organization must submit a CDE Certification Application to the Fund for review. The application must demonstrate that the applicant meets each of the following requirements to become certified:

     1) Be a legal entity at the time of application;
     2) Have a primary mission of serving LICs; and

     3) Maintain accountability to the residents of is targeted LIC.


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