The lack of capital for building or renovating school facilities in low-income communities is a common problem. Fortunately, options exist to ensure that high-quality public charter schools can secure financing to meet the needs of their students. One such initiative is the New Markets Tax Credit Program (NMTC).
If you have a project scheduled to begin construction in the next 12 months, now is the time to talk to possible NMTC partners! While the ins-and-outs of accessing that program can be confusing, Capital Impact Partners has put together an informational overview for members of the Texas Charter Schools Association (TCSA). In addition to the overview below, we recently hosted a NMTC Program 101 webinar. Watch it here.
How do New Markets Tax Credits Work?
1) Each year, the federal government holds a highly competitive application process to award tax credits to Community Development Entities (CDEs) like Capital Impact Partners. The next round of awards is expected in winter 2017-18.
2) These CDEs serve as financial intermediaries through which private capital flows from an investor to a project in a low-income community, like a charter school. In return for funding a charter school project, the investor receives a tax credit equal to 39 percent of the cost of the investment.
3) As a borrower, you stand to receive a number of benefits from a NMTC transaction:
a. Favorable blended interest rate
b. Potential for high loan-to-value (90 percent+)
c. Minimized debt service
d. Seven years of interest-only payments
e. Potential for substantial debt forgiveness (20-25 percent of the total project cost)
NMTC transactions have a few other guiding principles with loan amounts of at least $5 million and a term that lasts seven years. Once that initial term is over, the facility will need to refinance. Due to the complex nature of the transaction, the borrower should expect higher than usual legal costs, though these are usually absorbed by the funding in the transaction and not paid out-of-pocket.
A NMTC Program report that provides further details, diagrams and examples can be downloaded here.
What Projects Qualify for NMTC Financing?
The simplest way to qualify for the NMTC Program financing is if your school facility exists in a census tract where the poverty rate in the surrounding community is at least 30 percent and/or the median income is below 60 percent of area or statewide median income. A CDE would be happy to research your proposed school site to see if it meets qualitications criteria.
Capital Impact and Texas Charter Schools
Capital Impact Partners is a national Community Development Financial Institution. A key part of its mission is to partner with a broad range of organizations to finance facilities that increase access to critical social services in low- to-moderate income communities.
Capital Impact Partners sees Texas as an important state to focus its attention and has placed loan officers in Austin to better serve local communities through the region. Capital Impact Partners recently closed a NMTC transaction with Montessori For All to build a new charter school facility. By taking advantage of the NMTC program, Montessori For All secured $14.5 million in NMTC financing, representing more than 100 percent of the appraised value of the property. Montessori For All will pay interest only on the debt at below market rates during the initial seven-year period. At the end of that period, almost $5 million of that financing will be forgiven.
"New Markets Tax Credits allowed us to build the school facility we need to best educate our students. We were able to borrower low cost debt, letting us spend more of our funds in the classroom. The New Markets process was tough, but we could not have done it without Capital Impact Partners. Their dedication and commitment to our project made all the difference. We're thankful for their partnership in getting our school built!"
– Sarah Kirby Tepera, Chief Operating Officer of Montessori For All
Our goal is to ensure that public charter schools in Texas receive the financing they need for their projects. If you have any questions, you can contact Will Robison, Senior Loan Officer, at 512-369-3597 or wrobison@capitalimpact.org.
