The Pros and Cons of the New Market Tax Credit for Foreclosures

Resource Government
September 19, 2012 — 1,683 views  
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Enacted by Congress and the President in 2000, the New Markets Tax
Credit Program, also known as the NMTC Program, was put into play to help
communities boost business and investment in traditionally low income areas.
The program works by attracting private-side investment in low income
communities and then matching the amount at least partially with a related tax
credit. This credit can be used against the investor’s federal tax return filed
for the tax year the investment occurred. The investment can’t be in just any
form, however. The investor has to put financial resources into the given
low-income community through Community Development Entities, also known as
CDEs.

The related tax credit when claimed on a tax return will be equal to 39 percent
of the total original principal invested into an eligible community. This
credit is then claimed over a period of seven tax years in varying percentages
that aggregate to the 39 percent when finished. Further, the investment money
put into a CDE cannot be taken out until the seven years have expired. This
ensures that the investment is long-term, and the investor does not abandon the
affected community in a moment’s notice.

Those entities looking to utilize and be recipients of CDE funds also have to
meet specific requirements. So cities and municipalities desiring to use CDE
resources for taking over foreclosures that may be causing blight to an area
need to make sure they meet specific federal requirements, including:

• Have a branch of the local government that can act as a government-owned
corporation.
• Operate that corporation as a domestic entity at the time of application.
• Be able to show the primary goal and focus of the corporation is to serve
low-income areas or find investment for improving low income communities.
• Maintain transparency and accountability to the affected low income community
through hearings and progress reporting.

Use of the New Market Tax Credit, however, is not easy. A number of
municipalities have tried, running into the following obstacles:

• Investors are not necessarily willing to put their money into non-traditional
investments such as foreclosure purchases due to the high level of risk
involved.
• The entrance and exit path in foreclosures is not clear, also contributing to
concerns about risk.
• The resulting tax credits are usually not enough to make investment in
foreclosure capture and resale profitable.
• The banks are the major players in making related deals happen, and the
current 2012 environment does not see a viable strong support from the banking
industry. As lenders, they are already overwhelmed with foreclosures on their
own books.
• Tight credit is making any kind of financing transaction difficult in
general, especially those having to do with residential real estate.

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