As we noted in a past report, the NMTC was created in an effort to increase the amount of capital available to low-income communities, facilitate economic development in these communities, and encourage investment in high-risk areas. In order to achieve these goals, the program allows investors that provide eligible capital to low-income communities and businesses to reduce their tax liability by 39 percent of the amount of the investment over a 7-year period. The process of making an NMTC investment involves several steps and a number of stakeholders. Before applying for an NMTC allocation, the applicant must apply for and be certified as a CDE, which is an entity that manages investments for community development. Once an organization has been certified as a CDE by the CDFI Fund, it is then eligible to apply for an NMTC allocation. Both for-profit and nonprofit CDEs may apply for and receive NMTC allocations (once a CDE is awarded with an allocation, it is often referred to as an allocatee). However, only a for-profit CDE can offer NMTCs to investors. Therefore, when a nonprofit CDE receives an NMTC allocation, it must transfer the allocation to one or more for-profit subsidiary CDEs (referred to as suballocatees). NMTC applicants submit standardized application packages in which they respond to a series of questions about their track records, the amounts of NMTC allocation authority being requested, and their plans for using the tax credit authority. The CDFI Fund staff and a group of external reviewers who have experience in business, real estate, and community development finance then review the applications and score them based on the following four areas: (1) community impact, (2) business strategy, (3) capitalization strategy, and (4) management capacity. The applicants can receive a score of up to 25 points in each of the areas, and CDEs can obtain up to 10 additional “priority points” for demonstrating that they have track records of successfully investing in low-income communities and/or that they intend to invest in unrelated entities. After being reviewed and scored by three different reviewers (and, in some cases, a fourth reviewer if a scoring anomaly exists), the applicants are ranked and NMTC allocation awards are made in descending order of the highest aggregate scores to applicants that met minimum thresholds in each of the four areas. The CDFI Fund makes award determinations in this order until the allocation authority is exhausted. The CDFI Fund also provides a written debriefing to each CDE that does not receive an allocation in order to provide them with reasons their application did not receive an NMTC award and to provide the CDE with suggestions on how to be more competitive for NMTC awards when applying in future rounds. As figure 1 shows, after the allocations are made to the CDEs, investors make equity investments, by acquiring stock or a capital interest, in the CDEs to receive the right to claim tax credits on a portion of their investment. In turn, the CDE must invest “substantially all” of the proceeds into qualified low-income community investments (QLICI). Eligible investments include, but are not limited to, loans to or investments in businesses to be used for developing residential, commercial, industrial, and retail real estate projects; and purchasing loans from other CDEs. Once a qualifying investment has been made in a CDE and the CDE has invested the funds in an eligible low-income community, the investor can claim the tax credit over the course of 7 years. In addition, equity investors may receive returns on their investments in the form of dividends or other income that they receive from the CDE during the period in which they are eligible to claim the credit. The NMTC investor is still usually allowed to claim the NMTC for the full 7-year period even if the business that the CDE provides investment to defaults on its loans or files for bankruptcy. However, in the case of a business that receives NMTC funds going bankrupt, the ability of the investor to recover its initial equity investment in a CDE would depend on the assets and financial condition of the CDE as well as the original agreement that the CDE entered into with the investor. The NMTC is a nonrefundable tax credit, meaning that taxpayers do not receive payments for tax credits that exceed their total tax liability. In addition, taxpayers that are eligible to claim the tax credit may sell their investment, along with the right to claim any remaining tax credits, to another investor after the initial NMTC investment. For example, an investor may make an equity investment in a CDE that would allow it to claim the credit and then sell its equity share in the CDE to another investor, thereby transferring the right to claim the remaining credits to this investor. The original investor may choose to sell its equity share in a CDE, and consequently its right to claim the credit, because it does not have a tax liability for that year or other reasons, such as the timing of the original investment. Once investors begin claiming the credit on their tax returns, three things can trigger a recapture event (meaning that the investor will no longer be able to claim the credit because the investment no longer qualifies for NMTCs). The NMTCs can be subject to a recapture if the CDE (1) ceases to be certified as a CDE, (2) does not satisfy the “substantially all” requirement, or (3) redeems the investment. In general, a recapture event means that the investors that originally purchased the equity investment and subsequent holders of the investment are required to increase their income tax liability by the credits previously claimed plus interest for each resulting underpayment of tax. Two recent legislative changes have increased the number of areas where NMTC investments can be made. First, the American Jobs Creation Act of 2004 added “targeted populations” to the eligibility criteria for NMTC investments. Second, Congress also expanded the NMTC program in 2005, providing an additional $1 billion of allocation authority to be made available to CDEs with a significant mission of recovery and redevelopment of low-income communities in the Gulf Opportunity Zone (GO Zone), which are specified areas in Louisiana, Mississippi, and Alabama that were affected by Hurricane Katrina during 2005. In general, targeted populations were introduced to give CDEs flexibility in making investments serving individuals and groups that reside or work in communities that might not otherwise fall under the NMTC program’s geographically based definition of a low-income community. Currently, regulations defining targeted populations have not been finalized. However, the CDFI Fund and IRS have provided guidance for what qualifies as a targeted population. These guidelines specify that the targeted populations, which are individuals or an identifiable group of individuals, must meet tests to qualify as low-income communities and the businesses or entities receiving the investments must also meet certain criteria. In IRS’s recently provided guidance, the definition of GO Zone targeted populations is similar to the definition for low-income targeted populations with some differences. In cases where a business is located within the GO Zone, it does not mean that it automatically qualifies for NMTC investment dollars. First, the GO Zone targeted population need not qualify as low-income individuals as defined above, but rather the population must consist of individuals who lack access to loans or equity investments because they were displaced from their principal residence or lost their principal source of employment because of Hurricane Katrina. Second, the NMTC investment must serve targeted populations in census tracts within the GO Zone that meet certain requirements, including that they contain one or more areas designated by the Federal Emergency Management Agency (FEMA) as flooded or having sustained extensive or catastrophic damage as a result of Hurricane Katrina. Figure 2 illustrates the effect that recent legislative changes have had on the census tracts that are eligible to receive NMTC investments. As the figure shows, geographically, a large portion of the country qualifies for NMTC investment, and there are eligible areas in every state. The figure also shows the area of the GO Zone where NMTC investments can be made in both eligible low-income communities and specified targeted populations as a result of additional allocation authority made available for areas affected by Hurricane Katrina. Congress initially provided a schedule for allocating annual NMTC authority to CDEs for calendar years 2001 through 2007. However, as we also reported in 2004, the CDFI Fund did not make any NMTC allocations to CDEs until 2003 because it needed to complete various start-up tasks for the new program, such as establishing the rules for using allocations. Because the initial allocations were not made until 2003, the CDFI Fund combined the allocation amounts available for 2001 and 2002 and awarded those NMTC allocations in 2003. The allocation amounts designated for 2003 and 2004 were then combined and awarded in 2004. Table 1 shows the current schedule for allocation rounds. Since 2004, allocation awards have been made to CDEs annually. As of January 2007, there have been four completed rounds of NMTC allocations, and the CDFI Fund is receiving applications for the 2007 round of NMTC allocation awards, which will be announced in September 2007. The 2007 allocation awards were originally scheduled to be the last authorized round of NMTC allocation awards. However, in December 2006, Congress passed and the President signed the Tax Relief and Health Care Act of 2006, which extends the NMTC for an additional year (through the end of 2008) with an additional $3.5 billion of NMTC allocation authority. Regulations are also required to be drafted to ensure that nonmetropolitan areas receive a proportional allocation of qualified equity investments. The CDFI Fund has completed four rounds of NMTC allocations, which CDEs are using to attract investment.