“Qualified Community Development Entity” Defined Internal Revenue Code § 45D(c)(1)

2. “Qualified Community Development Entity” Defined Internal Revenue Code § 45D(c)(1)

3. 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 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

4. 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. • Internal Revenue Code §45D(c)(1)

5. Primary Mission • 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

6. 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 thatpromote community development

7. “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.

8. “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

9. 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

10. 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 withinselected service area. • Otherwise represent interests of residentsof a Low-Income Community

11. 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

12. 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

13. 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.

14. 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

15. 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.

16. 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

17. 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).

18. 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 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

19. New Markets Tax Credits And Housing

20. 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.

21. 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

22. (1) “Mixed-Use” Developments • QALICBs must be engaged in the active conduct of a qualified business. • Rentalof 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.”

23. “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

24. 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

25. Condo Structure: NMTCs and LIHTCs NMTC Investor CDE LIHTC Investor Loan or Equity Partnership Two Partnership One Owns Commercial Condominium Owns Residential Condominium Mixed Use Building

26. 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

27. (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.

28. Other Possibilities • Live/Work space • NMTCs finance commercial portion of apartment

29. Scott Sergio 401 9th Street, NW Suite 900 Washington, DC 20004 202.585.8828 ssergio@nixonpeabody.com More Information?