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Friday, May 28, 2010

New Market Tax Credits

New Market Tax Credits can be used to fund start up businesses and for the expansion of existing businesses.  In a nutshell, this applies to commercial projects.  The business must allocate 60% of their service to low income populations or be located in a neighborhood where 20% of the population is low income.  This can be done anywhere in the USA.  The key is to start up a business that will have sufficient cash flow to provide returns quickly so that it will be attractive to institutional investors. 

I am currently working on some projects that have the criteria that I believe will attract institutional investors.  One of the things that makes the cash flow businesses attractive is that qualified investors are interested in putting cash into these businesses, 1031 exchange investors are interested in cash flow type businesses and therefore, I believe institutional investors are looking at a project or start up that has sufficient cash opportunities at the on set. 

There are some things about these opportunities that are unique.  One of the things that I see as unique is that the company's stock is purchased and a loan is made which is collateralized by the stock which is very good for a start up operation.  As a result of institutional involvement, a transaction done in this way has little chance of securities violations occuring when capitalizing a project via a stock sale.  Nobody will say that is what is happening, but a stock sale is what is ultimately happening in this transaction.  

The organization steers clear of any securities violations and they have a solid investor in place which could provide a feeling of comfort for investors that don't know too much about how you are going to run your organization because it simply lacks financial performance history which is normal for a start up organization. 

The deal structure is something that will certainly attract money using the NMTC vehicle.  This vehicle is utilized for both profit and non profit organizations looking to capitalize their companies. The non profit organization has some additional compliance areas, but it is all worth while at the end of the day. 

I will be providing more information on the NMTC as time goes on and transactions pile up, but I believe we will all begin to see the benefits of the NMTC as new business pop up and begin to employ the unemployed in the marketplace so that production is stable.