The New Markets Tax Credit program was originated by Congress in 2000 as a way to promote economic development in low-income communities. The program provides tax incentives to investors who make equity investments in rural and urban low-income communities. Since 2004, the Wisconsin Community Development Legacy Fund has received four allocations of New Markets Tax Credits totaling $405 million.
The Wisconsin Community Development Legacy Fund (WCDLF), a nonprofit organization made up of WHEDA®, Legacy Bancorp and Impact 7, is a Community Development Entity (CDE) responsible for allocating New Markets in Wisconsin. CDEs use local knowledge and expertise to decide what businesses to invest in or lend to with the New Markets funds.
How can a business benefit from using them?
- By raising capital that can be used to grow a business before a return on the funds is due to the investor. Strong equity capital relieves some short-term cash flow pressures, allowing the business to expand.
- About 10% or more of the project cost can be covered with tax credit equity gained from selling the tax credits. In most cases, the equity does not need to be paid back. If a project requires $10 million in financing, and it receives a $10 million allocation of New Markets, the deal receives a net equity infusion of $1 million. The project will now require only $9 million in traditional. financing.
- Participation loans can be done with banks at interest rates 1.5 to 2% below prevailing market rates.
- Equity capital can make a business more creditworthy, which can lower costs of financing and better enable the leveraging of additional financing sources. Equity capital also helps a firm absorb unforeseen setbacks and temporary economic downturns.