“Qualified Community Development Entity”Defined

Internal Revenue Code § 45D(c)(1)

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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 Low-Income 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 divisionof the Treasury as being a qualified CDE

What is a “Qualified Community Development Entity”?

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– 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.

Type of Entity

1) Internal Revenue Code §45D(c)(1)4

What constitutes a “primary mission” of serving or providing investment capital to Low-Income Communities or Low-

Income Persons?

– At least 60% of its activities are targeted to Low-Income Communities or Low-Income Persons

– At minimum, must demonstrate that 60% ofproducts and services are directed or provided to:

• To Low-Income Persons

• To individuals & businesses locatedin Low-Income Communities

• Organizations that serve Low-Income Personsor residents of Low-Income Communities

Primary Mission

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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

Primary Mission

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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

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• 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

Accountability of CDEs

– CDE certification application requires CDE to identify the service areas that it serves or intends to serve.

– Service area options: 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”

Small business owner whose business islocated 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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– 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

Accountability of CDEs

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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.

Accountability of CDEs

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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

Accountability of CDEs

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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.

Applying for CDE Status

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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

– 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).

Applying for CDE Status – Certification Application

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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 applyingfor 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

CDE Status

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New Markets Tax CreditsNew Markets Tax CreditsAnd HousingAnd 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 toFinance 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 LIHTCsNMTC Investor

CDE LIHTC Investor

Partnership One Partnership Two

Mixed Use Building

Owns Residential Condominium

Owns Commercial

Condominium

Loan or Equity

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 Sergio401 9th Street, NWSuite 900Washington, DC 20004202.585.8828ssergio@nixonpeabody.com