[Federal Register Volume 67, Number 112 (Tuesday, June 11, 2002)]
[Notices]
[Pages 40112-40119]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-14570]



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Part IV





Department of the Treasury





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Community Development Financial Institutions Fund



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Allocation Availability Inviting Applications for the New Markets Tax 
Credit Program; Notice

  Federal Register / Vol. 67, No. 112 / Tuesday, June 11, 2002 / 
Notices  

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DEPARTMENT OF THE TREASURY

Community Development Financial Institutions Fund


Notice of Allocation Availability Inviting Applications for the 
New Markets Tax Credit Program

AGENCY: Community Development Financial Institutions Fund, Department 
of the Treasury.

ACTION: Notice of allocation availability (NOAA) inviting applications 
for the New Markets Tax Credit Program.

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SUMMARY: Title I, subtitle C, section 121 of the Community Renewal Tax 
Relief Act of 2000 (the Act), as enacted by section 1(a)(7) of the 
Consolidated Appropriations Act, 2001 (Public Law 106-554, December 21, 
2000), amended the Internal Revenue Code (IRC) by adding IRC section 
45D, New Markets Tax Credit. Section 45D requires the Secretary of the 
Treasury (Treasury) to establish a program that will provide an 
incentive to investors in the form of a tax credit over seven years, 
which is expected to stimulate the provision of private investment 
capital that, in turn, will facilitate economic and community 
development in low-income communities. Section 121(f) of the Act, among 
other things, requires the Secretary to issue guidance on how entities 
may apply to receive allocations of New Markets Tax Credits (NMTCs), 
the competitive procedure through which such allocations will be made, 
and the actions that will be taken to ensure that proper allocations 
are made to appropriate entities. The Secretary delegated such 
authority to the Under Secretary (Domestic Finance), who in turn 
delegated such authority to the Director of the Community Development 
Financial Institutions Fund (the Fund).
    On April 20, 2001, the Fund issued guidance (which was published in 
the Federal Register on May 1, 2001 at 66 FR 21846) (the General 
Guidance) that provided general information on: (i) how an entity may 
apply to become certified as a ``qualified community development 
entity'' (CDE); (ii) how a CDE may apply to receive an allocation of 
NMTCs; (iii) the competitive procedure through which such allocations 
will be made; and (iv) the actions that will be taken to ensure that 
proper allocations are made to appropriate entities. In addition, 
through the General Guidance, the Fund sought written comments from the 
public as to certain application and allocation issues.
    On December 20, 2001, the Fund issued additional guidance in the 
Federal Register (at 66 FR 65806) (CDE Certification Guidance) which 
(i) summarized written public comments submitted to the Fund pursuant 
to the General Guidance, with respect to the Fund's certification of 
entities as CDEs, and (ii) provided specific guidance on how an entity 
may apply to become certified as a CDE. On December 26, 2001, the 
Internal Revenue Service (IRS) published temporary regulations in the 
Federal Register (at 66 FR 66307) that provide guidance to taxpayers 
claiming NMTCs, including, but not limited to: (i) How the proceeds 
from Qualified Equity Investments must be used; (ii) what constitutes a 
Qualified Low-Income Community Investment; and (iii) what events will 
trigger a recapture of the NMTC.
    This document (i) summarizes many, but not all, of the written 
public comments submitted to the Fund pursuant to the General Guidance, 
specifically with respect to application and allocation issues, and 
(ii) provides, in accordance with IRC section 45D(f), specific guidance 
on how an entity may apply to receive an allocation of NMTCs, the 
competitive procedure through which such allocations will be made, and 
the actions that will be taken to ensure that proper allocations are 
made to appropriate entities. More detailed application content 
requirements are found in the application packet related to this NOAA. 
In the event of any inconsistency between the contents of the 
application packet or this NOAA and the Act or the IRS temporary 
regulations for the NMTC Program, the provisions of the Act and the 
temporary regulations shall govern.
    For calendar year 2002, the Fund expects to allocate to CDEs the 
authority to issue to their investors up to the aggregate amount of 
$2.5 billion in equity as to which NMTCs may be claimed (the authority 
will include the aggregated amounts of $1 billion for calendar year 
2001 and $1.5 billion for calendar year 2002, as permitted under IRC 
sections 45D(f)(1) and 45D(f)(3)). The Fund reserves the right to 
allocate said authority to any, all or none of the entities that submit 
an application in response to this NOAA, and in amounts determined by 
the Fund. This NOAA provides guidance for the application for and 
allocation of NMTCs for calendar year 2002. The Fund encourages all 
entities proposing to make Qualified Low-Income Community Investments, 
as hereinafter defined, to apply for an allocation of NMTCs.

DATES: Simultaneously with the publication of this NOAA, the Fund has 
made the calendar year 2002 NMTC Allocation Application available on 
its website at http://www.cdfifund.gov. The application is currently 
available in a read-only format. However, applicants are expected to 
submit completed applications electronically to the Fund using a web-
based application. The Fund anticipates that this web-based application 
will be available on the Fund's website commencing no later than July 
17, 2002. Applicants will need access to Internet Explorer 5.5 or 
higher or Netscape Navigator 6.0 or higher and at least a 56Kbps 
Internet connection in order to meet the electronic application 
submission requirements. Electronic applications must be submitted 
solely by using the format made available at the Fund's website for the 
NMTC Program. The deadline for receipt of electronic applications is 5 
p.m. ET on August 29, 2002. Applications received electronically after 
5 p.m. ET on August 29, 2002 will not be accepted for consideration. 
Additional deadlines relating to the submission of signature forms and 
general supporting documentation will be further detailed in the 
electronic application.
    The Fund expects applicants to submit NMTC allocation applications 
electronically. Submission of an electronic application will facilitate 
the processing and review of applications and the selection of 
allocatees; further, it will assist the Fund in the implementation of 
electronic reporting requirements for entities that receive NMTC 
allocations. If an applicant is unable to submit an electronic 
application, it must notify the Fund by 5 p.m. ET on August 9, 2002 for 
information on the procedures for submission of a paper application. 
The deadline for receipt of a paper application at the designated 
location is 5 p.m. ET on August 29, 2002. Paper applications received 
after that date and time will not be accepted for consideration and 
will be returned to the sender.
    For purposes of this NOAA, an application for an allocation of 
NMTCs will not be considered unless: (i) An applicant is certified as a 
CDE at the time the Fund receives its NMTC allocation application; or 
(ii) the Fund receives from an applicant an application for 
certification as a CDE no later than July 25, 2002. The Fund will not 
award allocations of NMTCs to applicants that are not certified as 
CDEs.

FOR FURTHER INFORMATION CONTACT: Applications and other information 
regarding the Fund and its programs

[[Page 40113]]

may be obtained from the Fund's website at http://www.cdfifund.gov. The 
Fund will post on its website answers to questions of general 
applicability regarding the NMTC Program. If you have any questions 
about the programmatic requirements or application procedures for this 
program, contact Linda Davenport, the Fund's NMTC Program Manager. The 
NMTC Program Manager may be reached by e-mail at 
[email protected], by telephone at (202) 622-7373, by facsimile 
at (202) 622-8911, or by mail at CDFI Fund, 601 13th Street, NW, Suite 
200 South, Washington, DC 20005. For questions regarding the tax 
aspects of the NMTC Program, contact Paul Handleman, Office of the 
Associate Chief Counsel (Passthroughs and Special Industries), IRS, by 
telephone at (202) 622-3040, by facsimile at (202) 622-4753, or by mail 
at 1111 Constitution Avenue, NW, Attn: CC:PSI:5, Washington, DC 20224. 
These are not toll free numbers. Applicants are strongly encouraged to 
review the IRS temporary regulations for the NMTC Program. The IRS 
temporary regulations, the General Guidance, and the CDE Certification 
Guidance are available on the Fund's website at http://www.cdfifund.gov.

SUPPLEMENTARY INFORMATION:

I. Definitions

    (a) Affiliate means any legal entity that Controls, is Controlled 
by, or is under common Control with an applicant.
    (b) Allocation Agreement means an agreement between the Fund and a 
CDE relating to a NMTC allocation under IRC section 45D(f)(2).
    (c) Community Development Entity or CDE: See Qualified Community 
Development Entity, below.
    (d) Community Development Financial Institution or CDFI means an 
entity that has been certified by the Fund as meeting the criteria set 
forth in section 103 of the Community Development Banking and Financial 
Institutions Act of 1994 (12 U.S.C. 4702). For further details, refer 
to the CDFI Program regulations set forth at 12 CFR 1805.201.
    (e) Control means (i) Ownership, control, or power to vote more 
than 50 percent of the outstanding shares of any class of voting 
securities of any entity, directly or indirectly or acting through one 
or more other persons; (ii) control in any manner over the election of 
a majority of the directors, trustees, or general partners (or 
individuals exercising similar functions) of any other entity; or (iii) 
the power to exercise, directly or indirectly, a controlling influence 
over the management policies or investment decisions of another entity, 
as determined by the Fund.
    (f) Controlling Entity means an entity that Controls an applicant.
    (g) Low-Income Community means, under IRC section 45D(e)(1), any 
population census tract if (A) the poverty rate for such tract is at 
least 20 percent, or (B)(i) in the case of a tract not located within a 
Metropolitan Area (as hereinafter defined), the median family income 
for such tract does not exceed 80 percent of statewide median family 
income, or (ii) in the case of a tract located within a Metropolitan 
Area, the median family income for such tract does not exceed 80 
percent of the greater of statewide median family income or the 
Metropolitan Area median family income. With respect to IRC section 
45D(e)(1)(B), possession-wide median family income shall be used (in 
lieu of statewide income) in assessing the status of census tracts 
located within a possession of the United States. Upon application by 
an entity for certification as a CDE, the Fund may designate under IRC 
section 45D(e)(2) an area within a census tract as a Low-Income 
Community if (A) the boundary of the area is continuous; (B) the area 
would otherwise meet the definition of a Low-Income Community under IRC 
section 45D(e)(1) if it were a census tract; and (C) there is 
inadequate access to investment capital in the area (as demonstrated by 
studies, surveys, or other analyses provided by the applicant). Under 
IRC section 45D(e)(3), in the case of an area that is not tracted for 
population census tracts, the equivalent county divisions (as defined 
by the Bureau of the Census for purposes of determining poverty areas) 
shall be used for purposes of defining poverty rates and median family 
incomes.
    (h) Low-Income Persons means individuals having an income of not 
more than (A) for non-Metropolitan Areas, 80 percent of the statewide 
median family income; and (B) for Metropolitan Areas, the greater of 
(i) 80 percent of the statewide median family income or (ii) 80 percent 
of the Metropolitan Area median family income.
    (i) Metropolitan Area means an area designated as such by the 
Office of Management and Budget pursuant to 44 U.S.C. 3504(e) and 31 
U.S.C. 1104(d) and Executive Order 10253 (3 CFR 1949-1953 Comp., p. 
758), as amended.
    (j) Qualified Community Development Entity or CDE means, under IRC 
section 45D(c)(1), any domestic corporation or partnership if (A) the 
primary mission of the entity is serving, or providing investment 
capital for, Low-Income Communities or Low-Income Persons; (B) the 
entity maintains accountability to residents of Low-Income Communities 
through their representation on any governing board of the entity or on 
any advisory board to the entity; and (C) the entity is certified by 
the Fund as a CDE. Specialized Small Business Investment Companies 
(SSBICs), as hereinafter defined, and CDFIs will be deemed to be CDEs 
in the manner set forth in the CDE Certification Guidance.
    (k) Qualified Equity Investment means, under IRC section 45D(b)(1), 
any equity investment in a CDE if (A) such investment is acquired by 
the investor at its original issue (directly or through an underwriter) 
solely in exchange for cash; (B) substantially all of such cash is used 
by the CDE to make Qualified Low-Income Community Investments; and (C) 
the investment is designated by the CDE as a Qualified Equity 
Investment. Qualified Equity Investment also includes an equity 
investment purchased from a prior holder, to the extent provided in IRC 
section 45D(b)(4). Qualified Equity Investment does not include any 
equity investment issued by a CDE more than five years after the date 
the CDE receives a NMTC allocation. Under IRC 45D(b)(6), ``equity 
investment'' means (A) any stock (other than nonqualified preferred 
stock as defined in IRC section 351(g)(2)) in an entity that is a 
corporation and (B) any capital interest in an entity that is a 
partnership.
    (l) Qualified Low-Income Community Investment means, under IRC 
section 45D(d)(1), (A) any capital or equity investment in, or loan to, 
any qualified active low-income community business (as defined in IRC 
section 45D(d)(2)); (B) the purchase from a CDE of any loan made by 
such entity that is a Qualified Low-Income Community Investment; (C) 
financial counseling and other services to businesses located in, and 
residents of, Low-Income Communities; and (D) any equity investment in, 
or loan to, any CDE.
    (m) Specialized Small Business Investment Company or SSBIC is 
defined in IRC section 1044(c)(3).
    (n) Subsidiary means a legal entity that is owned or Controlled 
directly or indirectly by an applicant.
    (o) Unrelated: means for purposes of IRC section 45D(f)(2), those 
persons who are not related within the meaning of IRC section 267(b) or 
IRC section 707(b)(1).

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II. Background

    By providing an incentive in the form of a tax credit over seven 
years, NMTCs are intended to stimulate the provision of $15 billion of 
private investment capital in CDEs that, in turn, will make investments 
in eligible businesses in low-income urban and rural communities, thus 
facilitating economic and community development. The goal is to address 
limitations of financial markets by facilitating the flow of equity 
capital into areas not being adequately served by conventional lenders 
and investors. This can be achieved by deploying investments in 
products or services that: (a) Service creditworthy borrowers or 
investees not served by conventional sources of capital; (b) provide a 
catalyst for large-scale, self-generating flows of investments (for 
example, the increased provision of critical public services); or (c) 
serve borrowers or investees who may present greater risks than would 
be assumed by conventional providers of capital in order to generate 
benefits distributed broadly throughout the community.
    Through the NMTC Program, an entity may apply to the Fund to be 
certified as a CDE. Nonprofit entities and for-profit entities may be 
certified as CDEs by the Fund. Both for-profit and non-profit entities 
may apply to the Fund for an allocation of NMTCs, but only CDEs that 
are for-profit entities are eligible to issue Qualified Equity 
Investments with respect to which investors will be entitled to claim 
NMTCs. A taxpayer that makes a Qualified Equity Investment in a CDE 
that has received a NMTC allocation from the Fund may claim a five 
percent tax credit on the investment amount as of the date on which the 
investment is initially made and on each of the next two anniversary 
dates and a six percent tax credit for each of the next four 
anniversary dates.
    In this NOAA, the Fund addresses specifically how an entity may 
apply to receive an allocation of NMTCs, the competitive procedure 
through which such allocations will be made, and the actions that will 
be taken to ensure that proper allocations are made to appropriate 
entities. Applicants should consult the temporary regulations issued by 
the IRS for the NMTC Program to obtain guidance on tax issues related 
to the NMTC Program.

III. Comments Submitted by the Public on the General Guidance

    On April 20, 2001, the Fund issued the General Guidance which 
described certain aspects of the NMTC Program. The Fund received 
numerous comments from organizations and individuals. The Fund reviewed 
and considered all of the comments and in the CDE Certification 
Guidance published in the Federal Register on December 20, 2001, the 
Fund responded to the significant and most frequently commented upon 
issues related to CDE certification. In this NOAA, the Fund responds to 
the significant and most frequently commented upon issues related to 
other application and allocation issues presented in the General 
Guidance.

A. Business Strategy

    Several commenters recommended that in evaluating applicants for 
NMTCs, the Fund should consider an applicant's ability to create 
products and services that it can successfully market to eligible 
investees under the NMTC Program. Specifically, the commenters 
suggested that the Fund consider the following items when evaluating an 
applicant's business investment strategy: (1) An applicant's experience 
in accurately assessing the demand for, and marketing of, its proposed 
investment products and services; (2) an applicant's experience in 
making investments in the proposed Low-Income Community in which it 
will deploy investments related to the NMTC Program, including how an 
applicant's prior investment activities will complement its proposed 
activities; and (3) the extent to which an applicant has already 
established a pipeline of identified or potential investees.
    IRC section 45D(f)(2) provides Treasury with the authority to 
determine how entities shall apply for an allocation of NMTCs. The Fund 
agrees that an applicant's business investment strategy is a critical 
component of the evaluation criteria for NMTC allocations and has 
determined that it will evaluate an applicant's business investment 
strategy for making Qualified Low-Income Community Investments. In 
assessing an applicant's business investment strategy, the Fund will 
consider, among other things: (1) An applicant's proposed products, 
services, and investment criteria; (2) an applicant's (or its 
Controlling Entity's) prior performance in deploying investments or 
providing services; (3) an applicant's (or its Controlling Entity's) 
prior performance in providing capital or technical assistance to 
disadvantaged businesses or communities; (4) the quality and projected 
level of an applicant's pipeline of potential investments; and (5) the 
extent to which an applicant intends to make Qualified Low-Income 
Community Investments in one or more businesses in which persons 
unrelated to the entity hold a majority equity interest. As described 
further under paragraph E below, applicants may receive priority points 
for each of items number 3 and 5 above.
    Several commenters also recommended that in evaluating the track 
record of an applicant's prior investment activities, the Fund should 
consider: (1) The track record of an applicant's Affiliates in making 
investments in Low-Income Communities; (2) the type, volume, overall 
performance and impact of prior investments; (3) the historical 
financial performance of an applicant; and (4) quantitative as well as 
qualitative indicators.
    In evaluating the track record of an applicant's investment 
activities, the Fund has determined that it will consider whether an 
applicant, and/or its Controlling Entity, has a track record of making 
successful investments that are similar to the investments an applicant 
contemplates making with the proceeds of Qualified Equity Investments. 
The Fund will require information on an applicant's and, if applicable, 
its Controlling Entity's investment portfolio, and the status and 
overall performance of the reported investment activities, including 
those investments which have been targeted to disadvantaged communities 
or businesses.

B. Capitalization Strategy

    Two commenters suggested that the Fund not require applicants to 
indicate at the time of application the specific commitments of 
investors to whom an applicant plans to offer NMTCs. Another commenter 
recommended that the Fund focus on an applicant's track record for 
raising capital from the private sector. The Fund has considered these 
comments and has determined that information on an applicant's track 
record (or that of its Controlling Entity) of obtaining investors in 
the past and its present investor commitments as of the date of 
application submission are essential for purposes of evaluating 
allocation applications. An applicant's track record of raising capital 
from investors as well as the status of any current investor 
commitments provides the Fund with valuable information on whether an 
applicant can successfully raise capital in exchange for any NMTC 
allocations it receives. Therefore, the Fund will require, at the time 
of application, that applicants indicate their (or their Controlling 
Entity's) prior performance with raising capital from investors as well 
as the nature of investor commitments for NMTCs to date.

[[Page 40115]]

    One commenter suggested that the Fund require that applicants 
provide an outline of their strategies for raising capital related to 
the NMTC Program. The Fund agrees with this comment and will require 
that all applicants submit a description of their strategy to raise 
capital from potential NMTC investors. The Fund will also request 
information on the experience of an applicant's staff, board members, 
and consultants with raising capital from investors, with or without 
the use of tax credit incentives, and how these individuals will be 
involved in the implementation of an applicant's capitalization 
strategy. Applicants will also be required to explain how an allocation 
of NMTCs fits into an applicant's entire capitalization plan. The Fund 
will also consider the extent to which an applicant intends to invest 
the proceeds from the aggregate amount of its Qualified Equity 
Investments at a level that exceeds the requirements of IRC section 
45D(b)(1)(B).

C. Management Capacity

    Several commenters suggested that in evaluating an applicant's 
business strategy and capitalization strategy, the Fund should consider 
the experience of an applicant's management team, board of directors, 
and advisory board. The Fund agrees with this comment and will assess 
an applicant's management capacity by considering, among other things, 
the qualifications of an applicant's principals, its board members, its 
management team, and other essential staff and contractors, with 
specific focus on: Experience in deploying capital or technical 
assistance, including activities similar to those described in an 
applicant's business strategy; experience in raising capital; asset 
management and risk management experience; and experience with 
fulfilling compliance requirements of other governmental programs, 
including other tax programs. The Fund will also consider the extent to 
which an applicant has protocols in place to ensure ongoing compliance 
with NMTC program requirements.

D. Community Impact

    Numerous commenters suggested that the Fund consider the level of 
community development impact demonstrated in an applicant's past and 
proposed investment activities. The commenters recommended that the 
Fund consider a number of community development impact criteria, 
including, but not limited to: Income levels of people served by prior 
investments; the location of prior investments; social impact criteria 
used in the underwriting process; benefits to the local labor market 
and business owners; creation and retention of new jobs; effects on 
hourly wages and tax base of residents in the community; prevention of 
residential displacement; improvements to the provision of services to 
community residents; coordination with local government economic 
development plans; improvements in availability of affordable housing; 
reuse of blighted structures; impact of investments on historic 
properties; and the extent to which an applicant has sought the input 
of community members in the eligible Low-Income Community related to an 
applicant's proposed investment strategy.
    The Fund has considered these comments and will be evaluating the 
effect of the NMTC Program in many of the areas outlined above as part 
of the Fund's compliance and monitoring and evaluation processes. The 
Fund has also included in the allocation application a section which 
asks that applicants provide information on the role that community 
representatives and residents will play in the design, implementation 
or monitoring of the applicant's investment strategy for the use of a 
potential allocation of NMTCs. In addition, the allocation application 
requires applicants to provide information pertaining to the extent to 
which its products and services will benefit Low-Income Communities 
through the coordination or use of NMTCs in concert with existing 
Federal, state or local government or community economic development 
plans or programs which focus on Low-Income Communities (e.g., 
Empowerment Zones, Enterprise Communities, and Renewal Communities).

E. Statutory Priorities

    IRC section 45D(f)(2) requires that, in making allocations of 
NMTCs, the Fund must give a priority to any entity with a record of 
having successfully provided capital or technical assistance to 
disadvantaged businesses or communities; or to any entity which intends 
to meet the requirement of IRC section 45D(b)(1)(B) by making Qualified 
Low-Income Community Investments in one or more businesses in which 
persons unrelated to the entity hold a majority equity interest.
    One commenter suggested that the priorities should be implemented 
by assigning additional points for each category. A few commenters 
recommended that applicants meeting the requirements of both or either 
priority be awarded NMTC allocations before all other applicants. 
Several commenters suggested that more weight should be given to the 
investment in unrelated entities priority over the investment track 
record priority. One commenter suggested that more weight should be 
given to those applicants with a track record of providing investments 
in Low-Income Communities. Another commenter also suggested that in 
evaluating newly formed entities that are CDEs, the record of the 
entity that controls the newly formed entity should be considered for 
purposes of determining priority treatment. Several commenters proposed 
that the Fund provide a priority to CDEs that commit to using NMTC 
allocations to attract most of their investments from unrelated 
sources. Another commenter suggested that a preference be given to 
those applicants with a demonstrated track record of successful 
compliance with other tax credit programs. Other commenters also 
recommended that the Fund give priority treatment in its allocation of 
NMTCs to SSBICs, New Markets Venture Capital (NMVC) Companies 
designated by the Small Business Administration, community development 
banks and bank holding companies.
    A few commenters also proposed that the Fund give priority 
treatment for certain types of investment activities by CDEs, such as 
for: Business start-up or expansion costs; businesses located in 
historic commercial districts; rehabilitation projects; venture capital 
investments; and businesses that provide new services to underserved 
markets. One commenter also suggested that a priority should be given 
to CDEs that intend to make equity investments as opposed to loans to 
businesses in Low-Income Communities.
    The Fund has considered these comments and will provide up to five 
(5) priority points to any applicant that meets either of the two 
statutory priority categories (for a total of up to ten (10) additional 
priority points). Applicants may obtain points in either, or both, 
categories. When evaluating the record of an applicant that is newly 
formed to determine its success in providing capital or technical 
assistance to disadvantaged businesses or communities, the Fund will 
also consider the track record of an applicant's Controlling Entity of 
providing such capital or technical assistance.
    The Fund will not provide an automatic priority of NMTC allocations 
to applicants that are SSBICs, NMVC Companies, or community development 
banks or bank holding companies since such an organizational form or 
status is not uniquely qualified to fulfill the purposes of the NMTC 
Program.

[[Page 40116]]

Although the Fund will consider the nature of an applicant's proposed 
investment activities for purposes of evaluating the applicant's 
investment strategy, the Fund will not give separate preference or 
priority treatment to specific categories or types of investments by 
applicants. Similarly, the Fund will consider an applicant's track 
record with respect to compliance with other governmental programs in 
the course of its review of an application, but will not give separate 
preference or priority treatment to organizations based upon this 
analysis. The Fund has also decided not to give a priority to 
applicants that intend to use an allocation of NMTCs to attract 
investments from unrelated sources.

F. Insured Depository Institutions' Use of NMTCs With the Bank 
Enterprise Award Program

    Several commenters suggested that the Fund allow applicants to 
benefit from both the NMTC Program and the Bank Enterprise Award (BEA) 
Program, a community development incentive program administered by the 
Fund, for making the same investments. Since the NMTC Program does not 
intend to provide the same set of investors with more than one direct 
benefit for the same financial investment in a CDE, the Fund will not 
allow an insured depository institution investor (and its Affiliates 
and Subsidiaries) to receive NMTCs in addition to a BEA Program award 
for the same investment in a CDE. Likewise, the Fund will not allow an 
insured depository institution investor (and its Affiliates and 
Subsidiaries) to receive a BEA Program award in addition to NMTCs for 
the same investment in a CDE.

G. Coordination of the NMTC Program and the Community Reinvestment Act

    A few commenters recommended that the Fund coordinate the NMTC 
Program with the requirements of the Community Reinvestment Act (CRA) 
so that insured depository institutions receive CRA credit for making 
Qualified Equity Investments in CDEs for purposes of the NMTC Program. 
The extent to which NMTC related investments made by an insured 
depository institution could also count towards such institution's CRA 
requirements will depend on the statutory and regulatory provisions of 
CRA and the appropriate Federal banking agencies.

H. Limits on Annual Allocations

    Several commenters recommended that the Fund not set any specific 
limits on the NMTC allocation amount that will be available to any one 
applicant. Instead, the commenters suggested that the Fund should focus 
on ensuring that CDEs receiving NMTC allocations are diverse in terms 
of geography, entity type, size, and type of business investees. 
Conversely, some commenters proposed that the Fund limit an allocation 
award to a single CDE and its Affiliates to no more than 10 percent of 
the total amount of NMTCs available per year. Other commenters 
suggested that limits on allocation awards be based on an applicant's 
track record of total investments or level of proposed investment 
activities. The Fund has not decided at this time on a maximum 
allocation amount per applicant. In making final allocation decisions 
the Fund reserves the right to set such a maximum award amount if the 
Fund deems it appropriate.

IV. Eligibility

    IRC section 45D specifies the eligibility requirements that each 
applicant must meet in order to be eligible to apply for an allocation 
of NMTCs. For purposes of this NOAA, an application for an allocation 
of NMTCs will not be considered unless: (i) An applicant is certified 
as a CDE at the time the Fund receives its NMTC allocation application; 
or (ii) the Fund receives from an applicant an application for 
certification as a CDE no later than July 25, 2002. The Fund will not 
provide allocations of NMTCs to applicants that are not certified as 
CDEs.
    Both for-profit and non-profit CDEs may apply to the Fund for an 
allocation of NMTCs, but only a for-profit CDE is permitted to provide 
NMTCs to its investors. A non-profit applicant wishing to apply for 
NMTC allocations will need to demonstrate, prior to entering into an 
Allocation Agreement with the Fund, that: (1) It controls one or more 
Subsidiaries that are for-profit entities; and (2) it intends to 
transfer all allocations of NMTCs it receives to those Subsidiary 
entities. The transferee must be certified as a CDE and such transfer 
must be pre-approved by the Fund and incorporated into the Allocation 
Agreement, in its sole discretion. A for-profit applicant that receives 
a NMTC allocation may transfer such NMTC allocation to its for-profit 
Subsidiary or Subsidiaries, provided that said transferees have been 
certified as CDEs and such transfer is pre-approved by the Fund and 
incorporated into the Allocation Agreement, in its sole discretion.
    An applicant wishing to transfer allocations to a Subsidiary or 
Subsidiaries is not required to establish these organizations prior to 
submitting an application for an allocation of NMTCs to the Fund. 
Rather, the Fund will require an applicant to indicate, in its 
application for NMTCs, whether it intends to transfer any of its 
allocations to a Subsidiary entity and its timeline for doing so. As 
stated above, in no circumstance will the Fund authorize such a 
transfer until such time as the Fund has certified the Subsidiary 
entity as a CDE. An applicant and its Subsidiaries may collectively 
submit only one application for allocations per year under the NMTC 
Program.
    An applicant whose business structure consists of an entity with a 
series of funds may apply for CDE certification and an allocation of 
NMTCs as a single entity, or as multiple entities. If such an applicant 
represents that it is properly classified for Federal income tax 
purposes as a single partnership or corporation, it may apply for CDE 
certification as a single entity. If an applicant represents that it is 
properly classified for Federal income tax purposes as multiple 
partnerships or corporations, then it may submit a single application 
on behalf of the entire series of funds, and each fund must be 
separately certified as a CDE. Applicants should note, however, that 
receipt of CDE certification as a single entity or as multiple entities 
is not a determination that an applicant and its related funds are 
properly classified as a single entity or as multiple entities for 
Federal income tax purposes. Regardless of whether the series of funds 
applies as a single partnership or corporation or as multiple 
partnerships or corporations, an applicant may not transfer any NMTC 
allocations it receives to one or more of its funds unless the transfer 
is pre-approved by the Fund and incorporated into the Allocation 
Agreement, in its sole discretion.
    An insured depository institution investor (and its Affiliates and 
Subsidiaries) may not receive NMTCs in addition to a BEA Program award 
for the same investment in a CDE. Likewise, an insured depository 
institution investor (and its Affiliates and Subsidiaries) may not 
receive a BEA Program award in addition to NMTCs for the same 
investment in a CDE.

V. Application Packet

    An applicant under this NOAA must submit the materials described in 
the application packet, which is available at the Fund's website at 
http://www.cdfifund.gov.

VI. Evaluation

    All applications for allocations of NMTCs will be reviewed for 
eligibility

[[Page 40117]]

and completeness. If determined to be eligible and complete, the Fund 
will conduct the substantive review of each application in accordance 
with the criteria and procedures described in this NOAA and the 
allocation application.
    In the first part of the substantive review, each Fund reviewer 
will evaluate the following application elements:
    1. Business Strategy (25-point maximum plus up to 5 points for each 
of the two statutory priority items). In assessing an applicant's 
business strategy, reviewers will consider, among other things: an 
applicant's products, services and investment criteria; the prior 
performance of the applicant or its Controlling Entity, particularly as 
it relates to making similar kinds of investments as those it proposes 
to make with the proceeds from Qualified Equity Investments; an 
applicant's prior performance in providing capital or technical 
assistance to disadvantaged businesses or communities; the projected 
level of an applicant's pipeline of potential investments; and the 
extent to which an applicant intends to make Qualified Low-Income 
Community Investments in one or more businesses in which persons 
unrelated to the entity hold a majority equity interest.
    In evaluating the business strategy criterion an applicant will 
generally score well to the extent that it will deploy debt or 
investment capital in products or services which: (a) Are designed to 
meet the needs of underserved markets; (b) are flexible or non-
traditional in form; and (c) focus on customers or partners that 
typically lack access to conventional sources of capital. An applicant 
will also score well to the extent that it: (1) Has a track record of 
successfully providing products and services similar to those it 
intends to use with the proceeds of Qualified Equity Investments, 
generally and in Low-Income Communities in particular; (2) has 
identified, or has a process for identifying, potential transactions; 
and (3) intends to invest in unrelated businesses.
    In addition, as provided by IRC section 45D(f)(2), the Fund will 
give up to five (5) additional points to any applicant that has a 
record of having successfully provided capital or technical assistance 
to disadvantaged businesses or communities; and five (5) additional 
points to any applicant that intends to satisfy the requirement of IRC 
section 45D(b)(1)(B) by making Qualified Low-Income Community 
Investments in one or more businesses in which persons unrelated to an 
applicant (within the meaning of IRC section 267(b) or IRC section 
707(b)(1)) hold the majority equity interest. Applicants may earn 
points in either or both categories. Thus, applicants that meet the 
requirements of both priority categories can receive up to a total of 
ten (10) additional points. A record of having successfully provided 
capital or technical assistance to disadvantaged businesses or 
communities may be demonstrated either by the past actions of an 
applicant itself or by an entity Controlling an applicant (e.g., where 
a new CDE is established by a nonprofit corporation with a history of 
providing assistance to disadvantaged communities). An applicant that 
receives additional points for intending to make investments in 
unrelated businesses and obtains an allocation of NMTCs must meet the 
requirements of IRC section 45D(b)(1)(B) by investing substantially all 
of the proceeds from the aggregate amount of its Qualified Equity 
Investments in unrelated businesses.
    2. Capitalization Strategy (25-point maximum). In assessing an 
applicant's capitalization strategy, reviewers will consider, among 
other things: the extent to which an applicant has secured investments, 
commitments to invest, or indications of interest in investments from 
investors, commensurate with its requested amount of tax credit 
allocations; an applicant's strategy for identifying additional 
investors, if necessary, including an applicant's (or its Controlling 
Entity's) prior performance with raising equity from investors; the 
extent to which an applicant intends to invest the proceeds from the 
aggregate amount of its Qualified Equity Investments at a level that 
exceeds the requirements of IRC section 45D(b)(1)(B), including the 
extent to which an applicant has identified the financial resources 
outside of the NMTC investments necessary to support its operations or 
finance its activities; and an applicant's timeline for utilizing an 
NMTC allocation.
    An applicant will generally score well under this section to the 
extent that: (a) It has secured investor commitments, or has a 
reasonable strategy for obtaining such commitments; (b) its request for 
allocations is commensurate with both the level of Qualified Equity 
Investments it is likely to raise and its expected investment strategy 
to deploy funds raised with NMTCs; (c) it is likely to leverage other 
sources of funding in addition to NMTC investor dollars; and (d) it 
intends to invest the proceeds from the aggregate amount of its 
Qualified Equity Investments at a level that exceeds the requirements 
of IRC section 45D(b)(1)(B).
    3. Management Capacity (25-point maximum). In assessing an 
applicant's management capacity, reviewers will consider, among other 
things, the qualifications of an applicant's principals, its board 
members, its management team, and other essential staff or contractors, 
with specific focus on: experience in deploying capital or technical 
assistance, including activities similar to those described in an 
applicant's business strategy; experience in raising capital; asset 
management and risk management experience; and experience with 
fulfilling compliance requirements of other governmental programs, 
including other tax programs. Reviewers will also consider the extent 
to which an applicant has protocols in place to ensure ongoing 
compliance with NMTC program requirements.
    An applicant will generally score well under this section to the 
extent that its management team or other essential personnel have 
experience in: (a) Deploying capital or technical assistance in Low-
Income Communities, particularly those likely to be served by the 
applicant with the proceeds of Qualified Equity Investments; (b) 
raising capital, particularly from for-profit investors; (c) asset and 
risk management; and (d) fulfilling government compliance requirements, 
particularly tax program compliance. An applicant will also score well 
to the extent to which it has policies and systems in place to ensure 
ongoing compliance with NMTC Program requirements.
    4. Community Impact (25-point maximum). In assessing the impact on 
communities expected to result from an applicant's proposed 
investments, reviewers will consider, among other things: the level of 
involvement of community representatives and residents in the design, 
implementation or monitoring of an applicant's business plan and 
strategy; whether an applicant is working in economically distressed 
markets; the degree to which an applicant will target its investments 
to localities with plans in place to enhance community development 
impact; and coordination with Federal, state or local government or 
community economic development plans (e.g., Empowerment Zones, 
Enterprise Communities, and Renewal Communities).
    An applicant will generally score well under this section to the 
extent that: (a) Its Low-Income Community representatives play an 
active role in designing or implementing its business plan; (b) it is 
working in particularly economically distressed or otherwise

[[Page 40118]]

underserved communities; (c) it is working in concert with Federal, 
state or local government or community economic development plans; (d) 
it shows demonstrable community development and economic impacts that 
would not be achieved without NMTCs; and (e) it can indicate why the 
same result could not be achieved at a lower cost using other sources, 
including federal programs.
    Fund reviewers will evaluate and score each application. The Fund 
will consider the applicant's total score from each reviewer and will 
award allocations to the most highly qualified applicants; provided, 
however, that (1) the Fund has not decided at this time on a maximum 
allocation amount per applicant and the Fund, in its sole discretion, 
reserves the right to set such a maximum award amount if the Fund deems 
it appropriate; and (2) the Fund reserves the right to reject an 
application that receives scores that are exceptionally weak in any one 
or more of the four application evaluation criteria outlined above and 
detailed more fully in the application materials.
    As a part of the substantive review process, applicants may receive 
a telephone interview by Fund reviewer(s) for the purpose of obtaining, 
clarifying or confirming application information. At this point in the 
process, an applicant may be required to submit additional information 
about its application in order to assist the Fund with its final 
evaluation process. The selecting official(s) will make a final 
allocation determination based on an applicant's file, including 
without limitation, the reviewers' scores and the amount of allocation 
authority available. In the case of an applicant (and any of its 
Affiliates) that has previously received financial or technical 
assistance from the Fund under the CDFI Program, the Fund will consider 
an applicant's and its Affiliates' level of success in meeting their 
performance goals, financial soundness covenants (if applicable), and 
other requirements contained in their existing assistance agreement(s) 
with the Fund. The Fund reserves the right to reject any NMTC 
allocation application in the case of a previous Fund awardee, if such 
awardee or its Affiliates have failed to comply with the terms and 
conditions of their previous or existing assistance or award 
agreement(s) with the Fund. The Fund's allocation award decisions are 
final.
    In the case of CDEs regulated by the Federal government, the Fund's 
selecting official(s) reserve(s) the right to take into consideration 
the views of the appropriate Federal banking and other regulatory 
agencies. In the case of applicants that are also SSBICs or NMVC 
Companies, the Fund reserves the right to consult with the SBA.
    The Fund reserves the right to change these evaluation procedures, 
if the Fund deems it appropriate.

VII. Use of 1990 Census Data

    The Fund recognizes that since the 2000 U.S. census data may not be 
available in sufficient detail prior to the time that an applicant 
submits its allocation application to the Fund, some applicants may 
obtain investor commitments for potential NMTC investments in Low-
Income Communities using 1990 census data. The Fund has decided that an 
applicant may use 1990 census data for any proposed Qualified Low-
Income Community Investment: (i) That is closed (meaning all parties 
are legally committed to funding the investment) by the applicant by 
December 31, 2002; or (ii) that is specifically identified in its 
allocation application and is closed by the applicant by December 31, 
2003. If an applicant uses 1990 census data for a Qualified Low-Income 
Community Investment, it must use 1990 census data for the entire 
period of the specified investment. Other than in such cases as 
outlined above, all Qualified Low-Income Community Investments must be 
made using 2000 census data.

VIII. Allocation Agreement

    Each applicant that is selected to receive a NMTC allocation must 
enter into an Allocation Agreement with the Fund. The Allocation 
Agreement will set forth certain required terms and conditions of the 
NMTC allocation which may include, but not be limited to, the 
following: (i) The amount of the awarded NMTC allocation; (ii) the 
approved uses of the awarded NMTC allocation (e.g., loans or equity 
investments to Qualified Active Low-Income Businesses or loan or equity 
investments to other CDEs); (iii) the approved service area(s) in which 
the proceeds of Qualified Equity Investments may be used; (iv) the 
CDE's schedule for obtaining Qualified Equity Investments from 
investors; and (v) reporting requirements for all CDEs receiving NMTC 
allocations. If a CDE has represented in its NMTC allocation 
application that it intends to invest substantially all of the proceeds 
from its investors in businesses in which persons unrelated to the CDE 
hold a majority equity interest, the Allocation Agreement will contain 
a covenant whereby said CDE agrees that it will invest substantially 
all of said proceeds in businesses in which persons unrelated to the 
CDE hold a majority equity interest.
    In addition to entering into an Allocation Agreement, each 
applicant selected to receive a NMTC allocation must furnish to the 
Fund an opinion from its legal counsel, the content of which will be 
further specified in the Allocation Agreement, to include, among other 
matters, an opinion that an applicant: (i) is duly formed and in good 
standing in the jurisdiction in which it was formed and/or operates; 
(ii) has the authority to enter into the Allocation Agreement and 
undertake the activities that are specified therein; (iii) has no 
pending or threatened litigation that would materially affect its 
ability to enter into and carry out the activities specified in the 
Allocation Agreement; and (iv) is not in default of its articles of 
incorporation, bylaws or other organizational documents, or any 
agreements with the Federal government.

IX. Monitoring

    The Fund will collect information, on at least an annual basis, 
from all CDEs that are awarded NMTC allocations and/or are recipients 
of Qualified Low-Income Community Investments, including such audited 
financial statements and opinions of counsel as the Fund deems 
necessary or desirable, in its sole discretion. The Fund will use such 
information to monitor each CDE's compliance with the Fund's 
requirements for certification as a CDE and to monitor compliance with 
the provisions of its Allocation Agreement, which will include, among 
other information, whether the CDE has used substantially all of the 
proceeds of each Qualified Equity Investment raised through its NMTC 
allocation to make Qualified Low-Income Community Investments. The Fund 
may provide such information to the IRS in a manner consistent with IRC 
section 6103. The Fund will use such information to assess the impact 
of the NMTC Program in Low-Income Communities. The Allocation Agreement 
shall further describe the CDE's reporting requirements.
    The Fund reserves the right, in accordance with applicable Federal 
law and if authorized, to charge allocation reservation and/or 
compliance monitoring fees to all entities receiving NMTC allocations. 
Prior to imposing any such fee, the Fund will publish additional 
information concerning the nature and amount of the fee.

X. Information Sessions

    In connection with this NOAA, the Fund will conduct Information 
Sessions

[[Page 40119]]

to disseminate information to organizations contemplating applying for, 
and other organizations interested in learning about, the NMTC Program. 
The Fund will provide additional information on the dates and locations 
of the Information Sessions on the Fund's website at http://www.cdfifund.gov.

    Authority: Consolidated Appropriations Act of 2001, Pub. L. 106-
554; 31 U.S.C. 321.

    Dated: June 5, 2002.
Tony T. Brown,
Director, Community Development Financial Institutions Fund.
[FR Doc. 02-14570 Filed 6-10-02; 8:45 am]
BILLING CODE 4810-70-P