FINANCE¦ NMTCs aren’t just viable for project developers. Both May and Kingsley imply that the tax credit is almost free money. The credits are administered through the U.S. Department of the Treasury every year. The agency accepts applications from community development entities (CDEs). CDEs are essentially brokers or middlemen who take in and review applications from project developers, and allocate the amount of funding the project proposal should be given by the treasury. But it’s all based on the project’s ability to create jobs in a given census track. After an application is approved by the treasury for a given amount, the CDE then finds a private investor, such as a wealthy person, corporation, or hospital. The private partner is then awarded the amount of funding approved for the developer in the form of tax credits that can replace the taxes of the private partner dollar-for-dollar. In addition, the private partner provides a matching fund to the project developer totaling the amount of tax credits allotted to the project developer. For project developers, the tax credits behave like free money for several reasons. The money is given as a subordinated loan that doesn’t require the developer to relinquish any ownership stake in the project, or any resulting profits from that project. After seven years, the loan is forgiven. “The developer doesn’t have to pay back the principal amount of the loan,” May says. “They only have to pay interest.” He explains it as a subordinated, forgivable, nondilutive piece of debt subsidized by the federal government that replaces equity that would otherwise have to be raised by a project developer. “It is essentially not free money, but it is nearly free.”
The tax credit is best suited for companies that have seed money available, or have received angel funding or an A round of funding, May says. And, aside from the complexities of setting up the tax credit in a way that reduces risk for all parties involved, May says this tax option could be very important to an energy crop developer or a biomass company. “Let’s say they are struggling to raise equity, not because the money isn’t there, but because the economics of their project are such that the returns aren’t high enough to interest the equity investor,” he says. “One way to alleviate that is to take a portion of the capital costs of the project and pay for it with the New Market Tax Credit, which essentially is nearly free money. That boosts the economics of the project, meaning it requires less debt or less equity, or provides a higher return to equity, however you want to look at it.” May offers yet another perspective. “If I say to you, ‘let’s go build a project and we can get $5-10 million in free money from the government,’ you are going to say, ‘we are off to a good start.’” Parties interested in the NMTC can get help from firms like Stern Brothers and Co. and Innovative Natural Resource Solutions to find out how to utilize the tax credit. For the risk tool, contact Kingsley or Strauss. And don’t panic. People like Strauss, May and Kingsley will be around to find ways to make projects happen in the absence of federal funding programs. Author: Luke Geiver Associate Editor, Biomass Power & Thermal lgeiver@bbiinternational.com (701) 738-4944
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MAY 2012 | BIOMASS POWER & THERMAL 31