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United States Government Accountability Office: 
GAO: 

Report to the Ranking Member, Committee on Homeland Security and 
Governmental Affairs, U.S. Senate: 

July 2014: 

New Markets Tax Credit: 

Better Controls and Data Are Needed to Ensure Effectiveness: 

GAO-14-500: 

GAO Highlights: 

Highlights of GAO-14-500, a report to the Ranking Member, Committee on 
Homeland Security and Governmental Affairs, U.S. Senate. 

Why GAO Did This Study: 

In recent years, private investors have claimed more than $1 billion 
in NMTCs annually. The credits are combined with private loans and 
other public funds to support investments in low-income communities. 
GAO was asked to review the financial structure of NMTCs. 

This report assesses: (1) the complexity and transparency of NMTC 
financial structures and controls over the size of federal subsidies; 
(2) what is known about the types and amounts of fees and other costs 
of the financial structures; (3) what is known about the equity 
remaining in low-income community businesses after the 7-year credit 
period; and (4) what is known about NMTC project failure rates. GAO 
reviewed Treasury NMTC data and surveyed CDEs that allocated credits 
to 305 projects in 2010-2012. 

What GAO Found: 

The financial structures of New Markets Tax Credit (NMTC) investments 
have become more complex and less transparent over time. The increased 
complexity is due, in part, to combining the NMTC with other federal, 
state, and local government funds. Based on GAO's survey of Community 
Development Entities (CDEs) an estimated 62 percent of NMTC projects 
received other federal, state, or local government assistance from 
2010 to 2012. While combining public financing from multiple sources 
can fund projects that otherwise would not be viable, it also raises 
questions about whether the subsidies are unnecessarily duplicative 
because they are receiving funds from multiple federal sources. In 
addition, in some cases the complexity of the structures may be 
masking rates of return for NMTC investors that are above market 
rates. For example, a study done for the Department of the Treasury 
(Treasury) found an investor apparently earning a 24 percent rate of 
return, which is significantly above market rates of return. In that 
case, the investor leveraged the NMTCs by using other public funds to 
increase the base for claiming the NMTC. Treasury and the Internal 
Revenue Service issued guidance about allowable financial structures 
in the early years of the NMTC program, but the guidance has not been 
updated to reflect the subsequent growth in complexity, such as the 
use of other public money to leverage the NMTC. Treasury also does not 
have controls to limit the risk of unnecessary duplication in 
government subsidies or above market rates of returns. Without such 
guidance and controls the impact of the NMTC program on low-income 
communities could be diluted. 

The costs of complex NMTC financial structures may not be fully 
reflected in fees charged by CDEs, and they could be reflected in 
other costs such as higher interest rates. Treasury has taken steps to 
ensure businesses are better informed about fees and other costs, but 
is not collecting these additional data itself. Without these data, 
Treasury is limited in its ability to analyze NMTC program benefits.
GAO also found that the data on equity remaining in businesses after 
the 7-year credit period were unreliable because, in part, 
instructions on what to report are unclear. As a result, at this time 
it is not possible to determine how much equity remains in low-income 
community businesses after 7 years. 

Similarly, data on NMTC project failure rates were unavailable. GAO 
reviewed data of performance on loans from CDEs to low-income 
community businesses as an indicator of whether the businesses will be 
viable over the long term. However, data on loan performance were also 
incomplete because some reporting of this information by CDEs is 
optional. As a result, it is not possible to determine, at this time, 
the NMTC project failure rate with certainty. 

What GAO Recommends: 

Treasury should issue further guidance on how other government 
programs can be combined with NMTCs; ensure adequate controls to limit 
the risks of unnecessary duplication and above-market rates of return; 
and ensure that more complete and accurate data are collected on fees 
and costs, the equity remaining in the business after 7 years, and 
loan performance. 

Treasury agreed with GAO's recommendations to improve data collection 
on equity remaining and loan performance. Treasury said that a 
recently formed working group, that includes representatives from the 
Community Development Financial Institutions Fund and the Internal 
Revenue Service, is considering GAO's other recommendations. 

View [hyperlink, http://www.gao.gov/products/GAO-14-500]. For more 
information, contact James R. White at (202) 512-9110 or 
whitej@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

The Financial Structures of NMTC Investments Have Become More Complex 
and Less Transparent While Treasury Guidance Covers Only the Simpler 
Structures: 

Fees and Retentions Reduce the Available NMTC Equity but Lack of 
Transparency Makes the Size of the Reduction Uncertain: 

Data on NMTC Equity Remaining in the Low-Income Community Businesses 
Are Not Sufficiently Complete or Accurate: 

CDFI Fund Data on Distressed Projects Are Not Sufficiently Reliable: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Other Federal Funding Used in New Markets Tax Credit 
Projects: 

Appendix III: Regression Analysis of Total Fees and Retentions 
Associated with Characteristics of the Project Using CDFI Fund Data, 
2011-2012: 

Appendix IV: Comments from the Department of the Treasury: 

Appendix V: GAO Contact and Staff Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: Estimated Percentage of Projects Receiving Other Federal 
Funding (Projects Originating in 2010-2012): 

Table 2: New Markets Tax Credit (NMTC) Investment Retained and Fees 
Charged by Community Development Entities (CDEs), 2011-2012: 

Table 3: Project Characteristics Associated with Fees and Retentions 
Charged by Community Development Entities (CDEs), 2011-2012: 

Table 4: Other Federal Tax Credits Used in a Sample of New Markets Tax 
Credit (NMTC) Projects, 2010-2012: 

Table 5: Tax Exempt Bond Financing Used in a Sample of New Markets Tax 
Credit (NMTC) Projects, 2010-2012: 

Table 6: Grants or Direct Payments Used in a Sample of New Markets Tax 
Credit (NMTC) Projects, 2010-2012: 

Table 7: Direct Loans or Guaranteed Loans Used in a Sample of New 
Markets Tax Credit (NMTC) Projects, 2010-2012: 

Figures: 

Figure 1: Simplified Example of a New Markets Tax Credit (NMTC) Basic 
Model: 

Figure 2: Simplified Example of New Markets Tax Credit (NMTC) 
Investment Leveraged with Private Funds: 

Figure 3: Simplified Example of a New Markets Tax Credit (NMTC) 
Investment Combined with (but Not Leveraged by) Other Public Funds: 

Figure 4: Simplified Example of New Markets Tax Credit (NMTC) 
Investment Leveraged with Both Private and Public Funds: 

Figure 5: Number of Projects by Total Retentions and Fees Charged as a 
Percentage of Total New Markets Tax Credit (NMTC) Investment, 2011-
2012: 

Figure 6: Data Quality for Amounts of Equity Projected to Remain in 
the Low-Income Community Businesses, 2011-2012: 

Abbreviations: 

CDE: Community Development Entity: 

CDFI: Community Development Financial Institutions: 

CIIS: Community Investment Impact System: 

HTC: historic tax credit: 

IRS: Internal Revenue Service: 

LIC: low-income community: 

LIHTC: Low-Income Housing Tax Credit: 

NMTC: New Markets Tax Credit: 

QEI: qualified equity investment: 

[End of section] 

United States Government Accountability Office: 
GAO:
441 G St. N.W. 
Washington, DC 20548: 

July 10, 2014: 

The Honorable Tom Coburn, M.D.
Ranking Member: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

Dear Dr. Coburn: 

Congress established the New Markets Tax Credit (NMTC) program as part 
of the Community Renewal Tax Relief Act of 2000 to encourage investors 
to invest in impoverished, low-income communities that traditionally 
lack access to capital.[Footnote 1] Conventional access to credit and 
investment capital for developing small businesses, creating and 
retaining jobs, and revitalizing neighborhoods is often limited in 
economically distressed communities or in communities with large low-
income populations. The NMTC provides investors (individuals, 
financial institutions, other corporations, etc.) with a tax credit 
for investing in communities that are economically distressed or 
consist of low-income populations. The investors are able to claim a 
credit equal to 39 percent of eligible investment spread over 7 years. 

The NMTC program is administered by the Community Development 
Financial Institutions (CDFI) Fund in the Department of the Treasury 
(Treasury) which allocates tax credit authority--the amount of 
investment which investors use as the base for determining the amount 
of tax credits they are eligible to claim--to Community Development 
Entities (CDE) that apply for and obtain allocations. These CDEs in 
turn offer the tax credits to private investors in exchange for equity 
investments with the CDEs. The CDEs then invest the capital they raise 
in qualified low-income community businesses. The resulting NMTC 
financial structures include the CDEs, investors, and qualified low-
income community businesses--as well as the transactions between them--
and may also include private loans and funding from other government 
programs. 

We have issued three reports on the status and initial results of the 
NMTC program.[Footnote 2] You asked us to follow up on these reports 
and review the NMTC financial structures and the amount of equity 
investment flowing through to qualified low-income community 
businesses. Our objectives were to assess: (1) NMTC financial 
structures in terms of their complexity, transparency, and their 
effect on the size of the federal subsidies going to NMTC projects, as 
well as controls to ensure that subsidies are not larger than 
necessary for the investment; (2) what is known about the types and 
amounts of fees and other costs that reduce the amount of equity 
reaching low-income community businesses; (3) what is known about the 
amount of equity left in the low-income community businesses after the 
7-year credit period; and (4) what is known about the NMTC projects 
that are at risk of failing by becoming economically nonviable. 

Our assessment criteria for objective 1 were drawn from our prior work 
evaluating tax expenditures, which discuss complexity (or simplicity), 
transparency, and duplication, as well as from internal control 
standards about the efficient use of resources.[Footnote 3] For 
objective 1, we reviewed the NMTC literature and interviewed 
representatives of CDEs and researchers who have evaluated the program 
to determine how the financial structures have evolved, and conducted 
and analyzed the results of a survey of CDEs to determine how the NMTC 
has been combined with other federal tax benefits, grants, and other 
assistance.[Footnote 4] Our criteria for objectives 2, 3, and 4 were 
GAO criteria for valid data--that they be sufficiently accurate and 
complete to capture program performance. For objective 2, we analyzed 
data from the CDFI Fund on fees (actual and projected) that CDEs 
charged to projects with loans and investments originating in 2011 and 
2012. (The CDFI Fund started collecting these additional data on fees 
in 2011 based on our recommendation.[Footnote 5]) For objective 3, we 
analyzed data from the CDFI Fund on the projected equity remaining in 
the business for projects beginning in 2011-2012. The CDFI Fund 
requires CDEs to project equity remaining in businesses for loans and 
investments originating in 2011 or later. For objective 4, we analyzed 
data reported by CDEs to the CDFI Fund that could indicate that a 
project is experiencing financial distress, such as whether a loan on 
a project is delinquent, charged off, or restructured. 

We conducted this performance audit from May 2013 to July 2014 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. See appendix I 
for more details about our scope and methodology. 

Background: 

The CDFI Fund is authorized to allocate tax credit authority to CDEs 
that manage NMTC investments in low-income community development 
projects. The CDEs are domestic corporations or partnerships with a 
primary mission of providing investment capital for low-income 
communities or low-income persons. Some CDEs are established by other 
public or private entities, such as local governments or financial 
institutions. Through the CDFI Fund, Treasury awards tax credit 
authority to CDEs through a competitive application process. After 
CDEs are awarded tax credit authority, they use it to attract 
investments from investors who then claim the NMTC. CDEs use the money 
raised to make investments in projects (one or more) in low-income 
communities. In the 11 rounds of allocations since 2003, Treasury, 
through the CDFI Fund, has made allocations to CDEs that total $40 
billion. 

The base for claiming the credit on a project is called the qualified 
equity investment (QEI). It equals the credit authority allocated to a 
project by a CDE and generally covers a portion of the total project 
costs. The equity in the QEI includes money provided by NMTC investors 
but may also include money from private lenders or other government 
entities. The NMTC, which is equal to 39 percent of the QEI, is 
claimed over 7 years--5 percent in each of the first 3 years and 6 
percent over each of the last 4 years. In recent years, private 
investors have claimed more than $1 billion in NMTCs annually. When 
the QEI does not cover the entire project cost, the NMTC financing is 
supplemented by other financing outside the NMTC allocation. 

CDEs are required to invest the funds they receive in qualified low-
income community investments, which include, but are not limited to, 
investments in operating businesses and residential, commercial, and 
industrial projects. Although the range of activities financed by CDEs 
varies, about half of NMTC investments have been used for commercial 
real estate projects. The program expired in 2013 but legislation has 
been proposed to extend it, and the President requested a permanent 
extension in his fiscal year 2015 budget proposal.[Footnote 6] 

The Financial Structures of NMTC Investments Have Become More Complex 
and Less Transparent While Treasury Guidance Covers Only the Simpler 
Structures: 

NMTC investors have developed financial structures that increase the 
amount of other funding from either private or public sources that are 
used with the NMTC--a process that is called increasing the leverage 
on the investment. These structures can increase the amount of federal 
subsidy to a project and can result in projects being undertaken that 
would not otherwise have been started for lack of sufficient funding. 
However, they also increase the complexity of the financial structures 
by adding more parties and more transactions, which in turn reduces 
transparency and may increase the cost in terms of fees and other 
related transactions costs. An assessment of the NMTC program as a 
whole requires complete information on all the costs and benefits 
attributable to the NMTC, including these administrative and 
compliance costs.[Footnote 7] 

Figures 1-4 are simplified illustrations of these increasingly complex 
financial structures.[Footnote 8] 

Figure 1: Simplified Example of a New Markets Tax Credit (NMTC) Basic 
Model: 

[Refer to PDF for image: model illustration] 

NMTC Investor: $10 million equity: 

Equity provided to the CDE in exchange for tax credits. 

Community Development Entity: Receives $10 million NMTC allocation. 

Low interest rate only loan. 

Low-income Community Business: $10 million of total investment. 

Interest payments to CDE. 

NMTC and interest payments from CDE to NMTC Investor. 

In the most basic of the NMTC financing structures, an investor 
contributes funds directly to a community development entity (CDE). 
The CDE has received authority from the CDFI Fund to issue tax credits 
for a $10 million project. The investor invests $10 million for 7 
years and receives a tax credit of 39 percent on the $10 million. At 
the end of the 7 years, all or a portion of the investor's equity is 
returned, and the low-income community (LIC) business is expected to 
operate on its own with financing from other sources, perhaps market 
rate loans. 

The return the investor earns is a combination of the tax credits plus 
interest payments made by the LIC business. The investor incurs some 
project related risks since the LIC business interest payments are not 
necessarily guaranteed and the business could go bankrupt and fail to 
repay the loan made by the CDE. 

The investor earns an annual rate of return of approximately 6 percent 
based on the credits alone which are claimed over the 7-year 
compliance period.[A] 

For the investor to receive a return equal to the market rate of 
return – which for this and the following example is assumed to be 7 
percent – the CDE could charge an interest rate to the LIC business as 
low as 1 percent. 

Revenue Effects: The present value of the lost tax revenue to the 
federal government is $3.46 million – the present value of the $3.9 
million in tax credits paid over 7 years evaluated at the federal 
government's 7-year borrowing rate of about 3 percent. 

Source: GAO analysis. GAO-14-500. 

[A] This rate of return represents the internal rate of return of the 
$10 million investment in terms of the value of the tax credits. The 
tax credit is 5 percent of the investment amount in each of the first 
3 years and 6 percent in each of the last 4 years during the 7-year 
compliance period. 

[End of figure] 

Figure 2: Simplified Example of New Markets Tax Credit (NMTC) 
Investment Leveraged with Private Funds: 

[Refer to PDF for image: model illustration] 

NMTC Investor: $2.97 million equity investment to Investment Fund. 

Leveraged Lender: $7.03 million loan to Investment Fund. 

Community Development Entity Receives $10 million NMTC allocation from 
Investment Fund. 

Low-income Community Business: $10 million of total investment from 
CDE. 

Interest payments from Low-income Community Business to CDE. 

Interest payments and NMTCs from CDE to Investment Fund. 

Investment Fund: 
$3.9 million in NMTCs to NMTC Investor; 
Interest payments for 7 years to Leveraged Lender. 

In this model the equity is combined in an investment fund with a loan 
from a leveraged lender. The NMTC investor receives tax credits on the 
full amount of the equity plus the loan. The equity investment is 
generally not paid back to the investor at the end of the compliance 
period. The leverage lender receives interest payments throughout the 
7-year compliance period and unless refinanced, the loan amount is 
repaid at the end of the compliance period. 

The borrowed funds and the equity investor's cash are used by the CDE 
to make an investment (usually in the form of loans) to the LIC 
business. The CDE then passes the tax credits and interest earned on 
the investment (less any fees) back to the investment fund, where they 
are distributed to the equity investor and leverage lender. 

In the example, the allocation is again $10 million but in this case 
the investor puts $2.97 million into the fund and the leveraged lender 
loans the remaining $7.03 million. The investor's $2.97 million is the 
present value to the investor of the stream of tax credits that will 
be generated by the investment evaluated at the 7 percent rate of 
return. The investor incurs limited project related risk since the 
credit can be claimed whether the low-income community business 
succeeds or not.[A] 

Effect on Complexity: The complexity of this structure creates added 
cost from the resources used to create entities like the investment 
fund and to negotiate the terms of the investment among an increasing 
number of participants. 

Revenue Effects: The present value of the tax revenue loss to the 
government is $3.46 million as in figure 1. 

Source: GAO analysis. GAO-14-500. 

[A] The investor's risk is largely limited to "recapture" risk where 
the IRS reclaims credits from prior years as well as future credits 
due to issues related to CDE compliance with IRS regulatory 
requirements. See GAO, New Markets Tax Credit: The Credit Helps Fund a 
Variety of Projects in Low-Income Communities, but Could Be 
Simplified, GAO-10-334 (Washington, D.C.: Jan. 29, 2010) for a 
description of the events that can trigger a "recapture" of the credit. 

[End of figure] 

Figure 3: Simplified Example of a New Markets Tax Credit (NMTC) 
Investment Combined with (but Not Leveraged by) Other Public Funds: 

[Refer to PDF for image: model illustration] 

NMTC Investor: $2.38 million equity investment to Investment Fund. 

Leveraged Lender: $5.62 million loan to Investment Fund. 

Community Development Entity Receives $8 million NMTC allocation from 
Investment Fund. 

HTC Investor: $2 million HTC equity to Low-income Community Business. 

Low-income Community Business: $10 million of total investment. 

Interest payments from Low-income Community Business to CDE. 

Low-income Community Business: $2 million HTCs to HTC Investor. 

Interest payments and NMTCs from CDE to Investment Fund. 

Investment Fund: 
$3.12 million in NMTCs to NMTC Investor; 
Interest payments to Leveraged Lender. 

The leveraged structure can also be used with other public subsidies 
such as grants and tax credits where the subsidies are not part of the 
leverage structure; i.e., the grant or tax credit is not combined with 
the NMTC equity in the investment fund to serve as the basis for 
NMTCs. In contrast to figure 2, the CDE has only an $8 million NMTC 
allocation for the $10 million project but, in this example, all $10 
million of the project's expenditures also qualify for a federal tax 
credit for rehabilitating historic structures. The historic tax credit 
(HTC) rate is 20 percent which yields an HTC of $2 million. 

The NMTC that can be claimed on the $8 million allocation is $3.12 
million which has a present value to the investor of $2.38 million 
(evaluated at the 7 percent rate of return) which the investor puts 
into the investment fund. The remainder of the $8 million required to 
claim the NMTC credit is provided by the leveraged loan of $5.62 
million. The additional $2 million required to fund the $10 million 
project is provided directly to the LIC business as equity by the HTC 
investor. 

Effect on Complexity: The complexity in this case arises, in part, 
from the need to create additional financial entities to conform to 
the legal requirements of the different types of public funds. The HTC 
investor must use a legal entity called a master tenant (not shown in 
figure 3) to receive the HTCs and make the HTC equity investment in 
the LIC business. 

Revenue Effects: In this case, the revenue cost sums to $4.76 
million – $2.76 million (the present value of the $3.12 million of 
NMTCs) plus the $2 million of HTCs. 

Source: GAO analysis. GAO-14-500. 

[End of figure] 

Figure 4: Simplified Example of New Markets Tax Credit (NMTC) 
Investment Leveraged with Both Private and Public Funds: 

[Refer to PDF for image: model illustration] 

NMTC Investor: $2.97 million equity investment to Investment Fund. 

HTC Investor: $2 million HTC equity to Investment Fund. 

Leveraged Lender: $5.03 million loan to Investment Fund. 

Community Development Entity Receives $10 million NMTC allocation from 
Investment Fund. 

Low-income Community Business: $10 million of total investment. 

Interest payments from Low-income Community Business to CDE. 

Interest payments and NMTCs and HTC from CDE to Investment Fund. 

Investment Fund: 
$3.9 million in NMTCs to NMTC Investor; 
$2 million in HTCs to HTC Investor. 
Interest payments to Leveraged Lender. 

Other government subsidies can also be part of the leveraged 
structure; i.e., the grant or tax credit can be combined with the NMTC 
equity in the investment fund to serve as the basis for NMTCs. In 
figure 4, the investor claims the NMTC on the value of HTCs as well as 
on the NMTC equity and leveraged loan. The NMTC investor community 
often refers to this practice as “twinning” the NMTC with other tax 
credits or public assistance. 

The project has a $10 million NMTC allocation (rather than the $8 
million in figure 3) and, as before, $10 million of expenditures that 
qualify for the HTC yielding a $2 million HTC. 

The NMTC investor provides $2.97 million in equity but in this case 
the leveraged lender provides $5.03 million for a total of $8 million. 
By including the $2 million HTC, the investment fund is brought up to 
$10 million. Unlike figure 3, the NMTC investor claims the credit on 
the full $10 million. 

Effect on Complexity: As in the previous example, complexity arises 
from the need to create financial entities to conform to the legal 
requirements of the different types of public funds. But in this case, 
because the funds are pooled, additional effort is required to ensure 
that the funds are spent in accordance with regulations. For example, 
the HTC equity that qualifies for the NMTC in the investment fund must 
be used for the qualified rehabilitation expenditures that form the 
basis of the HTC. 

Revenue Cost: The present value of the $3.9 million in NMTCs is $3.46 
million. The total foregone revenue to the government, including the 
HTC, is $5.46 million. The revenue cost is higher than in figure 3 
because the HTC was used to leverage the NMTC. 

Source: GAO analysis. GAO-14-500. 

[End of figure] 

In 2003, the Internal Revenue Service (IRS) confirmed the ability to 
use private funding to leverage a NMTC structure.[Footnote 9] Also, in 
2004, Treasury issued final regulations generally allowing the NMTC to 
be combined with other tax credits.[Footnote 10] However, neither 
Treasury nor IRS has specifically confirmed the ability to use other 
federal or state funding to increase the leverage on NMTC investments. 

In Practice, NMTC Financial Structures Are More Complex: 

Many NMTC projects have financial structures that are more complex 
than the simple examples in figures 1 through 4. According to CDFI 
Fund data, 21 percent of projects originating in 2010 through 2012 had 
financial structures involving more than one CDE. In addition, 21 
percent of projects had four or more transactions involving financial 
flows (such as loans from the CDEs to the LIC business). The NMTC 
financial structures have become more complex over time. We estimated 
that 41 percent of NMTC investments were made using one of the 
leveraged models in 2006, while more recent industry estimates state 
that more than 90 percent used such leverage in 2013.[Footnote 11] 

The simplified structures in our examples also do not show some of the 
complexities that are required for the purpose of acquiring the tax 
benefit. For example, when the public funds are leveraged, as in 
figure 4, a pass-through entity that is disregarded for tax purposes 
is established to route the flow of funds back from the low-income 
community business to the investment fund to claim the NMTC. The 
complexity of the structures may reduce transparency by making it more 
difficult to trace the flow of private and public funds and the 
benefits from the tax subsidies. For example, investors can leverage 
other tax credits with the NMTCs to gain access to other tax benefits 
such as when the tax credit for solar equipment is leveraged to claim 
additional NMTCs and also claim accelerated depreciation deductions 
based on the solar equipment. 

However, as mentioned above, this complexity can have benefits because 
it may result in projects getting financing they could not get 
otherwise. For example, combining assistance from other government 
programs with the NMTC, as in figures 3 and 4, could finance projects 
that would not be viable if they had to rely on only the NMTC and 
private lenders for financing as in figure 2. 

A Majority of NMTC Projects Used Other Public Funds in 2010-2012: 

Based on our survey of CDEs with projects originating in 2010-2012, 
the use of other public sources of funds with the NMTC is widespread 
(as shown in Table 1). An estimated: 

* Sixty-two percent of all NMTC projects received other public 
funding--funds from federal, state or local public sources; 

* Thirty-three percent of all NMTC projects received other federal 
funding; and: 

* Twenty-one percent of all NMTC projects received funding from 
multiple other government programs. 

Among the most frequently used other federal sources by NMTC projects 
in our survey were historic tax credits (HTC) and tax-exempt bonds for 
private non-profit education facilities. In addition, for a number of 
NMTC projects in our survey, small business participants obtained 
loans guaranteed by the Small Business Administration. The other 
federal funds most often leveraged with the NMTC projects in our 
survey were the historic tax credits, Recovery Zone bonds and tax-
exempt bonds for private non-profit education facilities. The state 
and local funds most frequently leveraged with the federal NMTC were 
state historic tax credits and state new markets tax credits[Footnote 
12] (see appendix II for additional results from our survey). 

Table 1: Estimated Percentage of Projects Receiving Other Federal 
Funding (Projects Originating in 2010-2012): 

Type of Federal Funding: Tax credits; 
Percent of All NMTC projects: 8%; 
95 percent confidence interval[A]: 5-12%; 
Funding amount: $353 million; 
95 percent confidence interval: $59-$647 million. 

Type of Federal Funding: Tax-exempt bonds; 
Percent of All NMTC projects: 6%; 
95 percent confidence interval[A]: 4-11%; 
Funding amount: $2.023 million; 
95 percent confidence interval: $874 million-$3,172 billion. 

Type of Federal Funding: Grants; 
Percent of All NMTC projects: 11%; 
95 percent confidence interval[A]: 7-17%; 
Funding amount: $449 million; 
95 percent confidence interval: $258-$639 million. 

Type of Federal Funding: Loans; 
Percent of All NMTC projects: 11%; 
95 percent confidence interval[A]: 7-16%; 
Funding amount: $740 million; 
95 percent confidence interval: $271 million-$1.209 billion. 

Type of Federal Funding: Total; 
Percent of All NMTC projects: 33%; 
95 percent confidence interval[A]: 27-39%; 
Funding amount: $3.565 billion; 
95 percent confidence interval: $2.317-$4.813 billion. 

Source: GAO survey of NMTC projects originating in 2010-2012. GAO-14-
500. 

Note: Total percent of projects receiving other federal funding does 
not equal sum of components because some projects used more than one 
type of federal funding. 

[A] A 95 percent confidence interval means that if you were to 
determine an estimate for different probability samples, 95 out of 100 
times the confidence interval would include the actual population 
value. In other words, the actual population value is between the 
lower and upper limits of the confidence interval 95 percent of the 
time. 

[End of table] 

The use of multiple other government programs raises questions about 
unnecessary duplication. The CDFI Fund currently asks CDEs whether 
other public funds are used to finance projects but does not ask for 
any details such as the information on specific programs providing 
those funds. Therefore, it is not possible at this time to determine 
whether unnecessary duplication is occurring because of a lack of data. 

Complex NMTC Financial Structures May Mask Investments with Rates of 
Return That Are Higher Than Necessary: 

The competitive or market return should be sufficient to attract 
enough investors to fund the project because it reflects the return on 
comparable investments with similar risk. In figures 1 through 4 
above, we assumed for illustrative purposes that the competitive 
market rate of return was 7 percent. We also assumed that NMTC 
investors provided enough equity to the project (perhaps because of 
competition for the credits) that the credits claimed over the 7-year 
compliance period provided a market return. 

NMTC industry representatives have argued that competition for credits 
by potential investors and competition between CDEs for credit 
allocations works to ensure returns on NMTC investments are kept at 
market rates commensurate with NMTC investor's risk. The NMTC 
investor's level of risk depends on the financial structure that the 
investor uses. For example, when the NMTC investor uses a leveraged 
investment model, the investor does not generally share in the 
riskiness of the project. Unless the investor is also the leveraged 
lender or has some other financial interest in the project, it is not 
exposed to any risk from project failure because such an event 
generally does not stop the investor from claiming the credit. 

Some evidence suggests that some investors may receive returns that 
are above-market and therefore more than the necessary subsidy 
required to attract the funds. In a case study reported by the Urban 
Institute, an investor appeared to put in about $500,000 of NMTC 
equity to claim $1.2 million of NMTCs representing a return of about 
24 percent compounded annually.[Footnote 13] The NMTC was leveraged 
entirely with $2.5 million of federal and state HTCs without use of a 
conventional leveraged loan in the NMTC structure. As a result, 83 
percent of the qualified equity investment on which an investor 
claimed NMTCs was provided by other federal and state tax credit 
programs. 

However, the Urban Institute study authors said that, because of the 
complex financial structure, they could not rule out the possibility 
that the investor supplied other, non-NMTC funds to the project and at 
a lower rate of return. They noted that the NMTC financing was 
combined with a conventional loan outside the NMTC structure, owner 
equity, and a loan from the local municipality. If the NMTC investor 
supplied some of these additional funds, it is possible that the 
investor's overall rate of return may have been lower and more in-line 
with the market return. 

Guidance and Controls Do Not Exist to Prevent Above-Market Rates of 
Return or Unnecessary Duplication and Costs: 

Internal controls should provide reasonable assurance that operations 
and use of resources are efficient. In the context of the NMTC 
program, the resources administered by Treasury include the tax 
benefits claimed by the NMTC investors. One NMTC control has been 
Treasury and IRS guidance on allowable financial structures. The 
Secretary of the Treasury has the authority to limit how other federal 
tax benefits are used with the NMTC and the Secretary has used this 
authority to prohibit its use with the Low-Income Housing Tax Credit 
(LIHTC).[Footnote 14] While an IRS revenue ruling, issued in 2003, 
allowed using debt to leverage NMTC equity, the ruling did not 
explicitly address using other public funds, such as other tax 
benefits, to leverage the NMTC as in figure 4. 

Controls do not exist to monitor and prevent unnecessary use of other 
public funds to supplement the NMTC. As already noted, Treasury, 
through the CDFI Fund, does not collect information about the 
specifics of other public funding. For the CDFI Fund, Treasury does 
not have controls to limit the risk of cases like the example from the 
Urban Institute study where other public funds were used to expand the 
NMTC base and apparently generate a 24 percent rate of return for the 
NMTC investor. 

We believe that such controls could take a variety of forms and would 
have to be assessed relative to any added compliance and 
administrative costs. A control that would provide greater clarity 
about tax subsidies could be achieved by requiring CDEs to report the 
NMTC investor's overall rate of return on the NMTC project. As 
suggested by the Urban Institute example, this information would allow 
an assessment of whether the NMTC investor is earning a market return 
commensurate with the risk on its entire investment. With this 
information, an additional control could be implemented that would 
require CDEs to justify rates of return above a certain threshold by 
explaining why this project was so risky that it required a greater-
than-market rate of return. Other controls that could be considered 
include caps on rate of returns and mechanisms to ensure competition 
among NMTC investors sufficient to prevent above-market rates of 
return. The decision to adopt any of these controls would require that 
Treasury compare the benefits of the controls with any compliance 
costs from added complexity for taxpayers and administrative costs for 
Treasury from collection and evaluation of the data and monitoring the 
controls once they are put in place. 

The complexity of the financial structures creates a lack of 
transparency for taxpayers and IRS, and can increase both the risk of 
higher than needed NMTC rates of return and investment transactions 
costs. Combining multiple investment sources may help some NMTC 
projects to obtain sufficient financing to proceed. Indeed, NMTCs are 
often referred to as "gap financing" that can be added to other 
financing. Some projects may not require NMTC funding. The Urban 
Institute study estimated that about 20 percent of projects in the 
first 4 years of the program showed no evidence of needing NMTCs to 
proceed while about 30-40 percent did with 30 percent uncertain. 

However, even in the case where the NMTC funding is necessary, the 
intricate patterns of investment flows through NMTC structures, where 
multiple sources may be mingled and later dispersed, make it difficult 
to determine who is receiving subsidies and whether the return to NMTC 
investors is higher than necessary. In addition, the network of 
transactions in the NMTC financial structures increase costs both in 
terms of explicit CDE fees and other resources used to pay the legal 
and accounting costs necessary to establish the entities that make the 
transactions.[Footnote 15] 

Fees and Retentions Reduce the Available NMTC Equity but Lack of 
Transparency Makes the Size of the Reduction Uncertain: 

Fees and retentions directly reduce the amount of tax subsidized 
equity investment that is available to low-income community businesses 
but these costs do not represent the only way that equity can be 
reduced. The costs associated with financial structures could also 
appear in the form of higher interest rates, especially when the 
investor and leveraged lenders are related parties. In listening 
sessions organized by CDFI Fund officials, some CDEs reported that 
comparison of the fees that they charged to the fees charged by 
integrated investors/lenders were inaccurate because of the ability of 
integrated investors/lenders to receive compensation in other ways. 

The fees, interest, and other costs that can offset one another (a low 
fee may be offset by a high interest rate) also reduce transparency by 
making the net effect on the tax subsidized equity reaching the low-
income community business hard to determine. Officials at the CDFI 
Fund are attempting to address this issue by requiring CDEs to provide 
a disclosure statement to low-income community businesses about the 
size of tax subsidized equity and how it is affected by fees and 
interest rates.[Footnote 16] The new requirement that CDEs disclose to 
the low-income community businesses all transactions costs, fees, and 
compensation could help those businesses understand the final net 
benefit to the project being financed with NMTCs. However, because 
Treasury does not require the CDFI Fund to collect the CDE disclosure 
statements itself, the CDFI Fund database has incomplete information 
about fees, interest, and other costs. Without such complete 
information the Treasury is limited in its ability to analyze the 
final net financial benefit of NMTC investments to low-income 
community businesses. 

CDE Fees and Retentions Reduce the NMTC Equity Available to the Low-
Income Community Businesses: 

Our analysis shows that fees and retentions by the CDEs reduced the 
$8.8 billion of NMTC investment available to the businesses in 2011-
2012 by about $619 million or 7.1 percent. The initial reduction 
occurred as part of the NMTC investment that the CDEs retain to cover 
administrative costs before investing the remainder in the project. 
The CDEs then also charge fees over the course of the 7-year 
compliance period that further reduces the equity available to the 
project. These fees can take the form of front-end or origination fees 
at closing, on-going, or asset management fees during the compliance 
period, and closing fees at the end of the compliance period. shows 
the fees and retentions measured as a percentage of NMTC investment 
that reduce the equity that is available to the businesses. In 
addition, the projects may also incur third-party transaction costs 
for NMTC related accounting or legal services not provided by the 
CDEs. The CDEs are not required to report these other third-party 
transaction costs to the CDFI Fund. 

Table 2: New Markets Tax Credit (NMTC) Investment Retained and Fees 
Charged by Community Development Entities (CDEs), 2011-2012: 

Fee Types: NMTC investment retained by CDEs; 
Average fees: $0.2 million; 
Total fees for all projects: $170 million; 
Total fees as a percent of total NMTC investment[A]: 1.9%. 

Fee Types: CDE professional fees charged at or prior to close (front-
end); 
Average fees: $0.2 million; 
Total fees for all projects: $183 million; 
Total fees as a percent of total NMTC investment[A]: 2.1%. 

Fee Types: CDE professional fees charged during compliance period (on-
going); 
Average fees: $0.2 million; 
Total fees for all projects: $198 million; 
Total fees as a percent of total NMTC investment[A]: 2.3%. 

Fee Types: CDE professional fees charged at or after investment exit 
(back-end); 
Average fees: $0.1 million; 
Total fees for all projects: $67 million; 
Total fees as a percent of total NMTC investment[A]: 0.8%. 

Fee Types: CDE professional fees charged, Subtotal; 
Average fees: $0.6 million; 
Total fees for all projects: $448 million; 
Total fees as a percent of total NMTC investment[A]: 5.1%. 

Fee Types: Total; 
Average fees: $0.8 million; 
Total fees for all projects: $619 million; 
Total fees as a percent of total NMTC investment[A]: 7.1%. 

Source: GAO analysis of CDFI Fund data. GAO-14-500. 

Notes: Components may not sum to totals due to rounding. Dollar 
amounts are not adjusted for inflation. The fees contain both actual 
and projected amounts. The earlier in the project's history the fees 
are paid, the more likely the payments are to be actual rather than 
planned. The totals and subtotals include $2,000 in average fees and 
$1.4 million in total fees in a fourth category of CDE professional 
fees called "other" fees by the CDFI Fund not listed separately in 
this table. 

[A] The total qualified equity investment (QEI) for all projects 
originating in 2011-2012. 

[End of table] 

Higher CDE Fees and Retentions Are Associated with More Complex 
Financial Structures: 

Our analysis also shows that the amount of fees and retentions charged 
is strongly associated with the amount of NMTC investment in the 
project: the amount of NMTC investment accounts for about 50 percent 
of the variation in fees across projects. Although the CDFI Fund does 
not currently collect data that directly measure the complexity of 
investment structures, it does collect data on the number of 
investment transactions that occur on a NMTC project. These 
transactions often represent loans and investments to the business 
from different entities such as multiple CDEs, and can therefore be 
used as a proxy for more direct measures of complexity. Our regression 
analysis of these data shows that higher fees and retentions are 
associated with more complex structures as indicated by the number of 
transactions (see table 3 for details of this association between fees 
and retentions and financial structure, and other characteristics of 
the NMTC project). Fees and retentions are generally described by NMTC 
participants as reflecting mostly fixed costs, which would be more 
consistent with fees decreasing in proportion to the total size of the 
NMTC investment. 

Table 3: Project Characteristics Associated with Fees and Retentions 
Charged by Community Development Entities (CDEs), 2011-2012: 

Project characteristics: Amount of NMTC qualified equity investment; 
Effect on fees and retentions: Increased; 
Size of the effect: Change in dollar value of fees and retentions: 
$7,800 per $100,000 of additional NMTC-qualified equity investment. 

Project characteristics: Number of transactions as a proxy for 
financial structure complexity; 
Effect on fees and retentions: Increased; 
Size of the effect: Change in dollar value of fees and retentions: 
$4,800 per additional transaction. 

Project characteristics: Average interest rate; 
Effect on fees and retentions: Increased; 
Size of the effect: Change in dollar value of fees and retentions: 
$9,600 per 1.0 percentage point increase in the interest rate on NMTC-
related loans to the project. 

Project characteristics: Purpose: business; 
Effect on fees and retentions: Increased; 
Size of the effect: Change in dollar value of fees and retentions: 
$29,000 more in fees and retentions charged on transactions for 
business purposes than those for rehabilitation, or other purposes. 

Project characteristics: Amount of non-public funds used on project; 
Effect on fees and retentions: Decreased; 
Size of the effect: Change in dollar value of fees and retentions: $90 
less in fees and retentions per $100,000 of private funds invested in 
the project. 

Project characteristics: Poverty rate greater than 30 percent 
indicating distressed low-income community; 
Effect on fees and retentions: Decreased; 
Size of the effect: Change in dollar value of fees and retentions: 
$3,000 less in fees and retentions for projects in communities with 
poverty rates exceeding 30 percent. 

Legend: NMTC = New Markets Tax Credit. 

Source: GAO analysis of CDFI Fund data. GAO-14-500. 

Notes: The table summarized results for selected variables of a 
regression analysis of the relationship of total fees and retentions 
with other project characteristics. 

[End of table] 

CDEs That Reported They Charged No Fees or Retentions Illustrates the 
Program's Lack of Transparency: 

For about 20 percent of projects originating in 2011-2012, CDEs 
reported to the CDFI Fund that they charged zero fees or retentions on 
these projects (see figure 5). However, it seems unlikely that the 
services provided by the CDEs were uncompensated. While the payment 
may have come in different forms, a lack of transparency makes it hard 
to readily determine how much of the NMTC investment is being reduced 
and by what means. For example, NMTC program participants have 
suggested that these projects with no fee costs may be more integrated 
investments where banks or other large institutions may be lenders as 
well as investors. In this case, low fees may be offset by higher 
interest rates. We found some indirect evidence of this in another 
regression where the projects with no fees or retentions were analyzed 
relative to all the projects that had fees and retentions. Here, the 
analysis showed that the projects with higher average interest rates 
were more likely to charge no fees and retentions. For this subgroup 
of projects, the positive relationship between fees and interest rates 
that we found when we analyzed all the projects (as shown in table 3) 
is reversed. 

Figure 5: Number of Projects by Total Retentions and Fees Charged as a 
Percentage of Total New Markets Tax Credit (NMTC) Investment, 2011-
2012: 

[Refer to PDF for image: vertical bar graph] 

Total Retentions and Fees Charged by CDEs as Percent of NMTC 
Investment: 0%; 
Number of projects: 142. 

Total Retentions and Fees Charged by CDEs as Percent of NMTC 
Investment: 1%; 
Number of projects: 42. 

Total Retentions and Fees Charged by CDEs as Percent of NMTC 
Investment: 2%; 
Number of projects: 15. 

Total Retentions and Fees Charged by CDEs as Percent of NMTC 
Investment: 3%; 
Number of projects: 27. 

Total Retentions and Fees Charged by CDEs as Percent of NMTC 
Investment: 4%
Number of projects: 46. 

Total Retentions and Fees Charged by CDEs as Percent of NMTC 
Investment: 5%; 
Number of projects: 38. 

Total Retentions and Fees Charged by CDEs as Percent of NMTC 
Investment: 6%; 
Number of projects: 43. 

Total Retentions and Fees Charged by CDEs as Percent of NMTC 
Investment: 7%; 
Number of projects: 81. 

Total Retentions and Fees Charged by CDEs as Percent of NMTC 
Investment: 8%; 
Number of projects: 78. 

Total Retentions and Fees Charged by CDEs as Percent of NMTC 
Investment: 9%; 
Number of projects: 80. 

Total Retentions and Fees Charged by CDEs as Percent of NMTC 
Investment: 10%; 
Number of projects: 76. 

Total Retentions and Fees Charged by CDEs as Percent of NMTC 
Investment: 11%; 
Number of projects: 25. 

Total Retentions and Fees Charged by CDEs as Percent of NMTC 
Investment: 12%; 
Number of projects: 7. 

Total Retentions and Fees Charged by CDEs as Percent of NMTC 
Investment: 13%; 
Number of projects: 19. 

Total Retentions and Fees Charged by CDEs as Percent of NMTC 
Investment: 14%; 
Number of projects: 14. 

Total Retentions and Fees Charged by CDEs as Percent of NMTC 
Investment: 15%; 
Number of projects: 12. 

Total Retentions and Fees Charged by CDEs as Percent of NMTC 
Investment: 16%; 
Number of projects: 5. 

Total Retentions and Fees Charged by CDEs as Percent of NMTC 
Investment: 17%; 
Number of projects: 1. 

Total Retentions and Fees Charged by CDEs as Percent of NMTC 
Investment: 18%; 
Number of projects: 2. 

Total Retentions and Fees Charged by CDEs as Percent of NMTC 
Investment: 19%; 
Number of projects: 3. 

Total Retentions and Fees Charged by CDEs as Percent of NMTC 
Investment: 20%; 
Number of projects: 2. 

Total Retentions and Fees Charged by CDEs as Percent of NMTC 
Investment: 21%; 
Number of projects: 8. 

Total Retentions and Fees Charged by CDEs as Percent of NMTC 
Investment: 22%; 
Number of projects: 2. 

Total Retentions and Fees Charged by CDEs as Percent of NMTC 
Investment: 23%; 
Number of projects: 7. 

Total Retentions and Fees Charged by CDEs as Percent of NMTC 
Investment: 24%; 
Number of projects: 0. 

Total Retentions and Fees Charged by CDEs as Percent of NMTC 
Investment: 25%; 
Number of projects: 1. 

Total Retentions and Fees Charged by CDEs as Percent of NMTC 
Investment: More than 25%; 
Number of projects: 18. 

Source: GAO analysis of CDFI Fund data. GAO-14-500. 

[End of figure] 

Data on NMTC Equity Remaining in the Low-Income Community Businesses 
Are Not Sufficiently Complete or Accurate: 

Projects that have considerable equity are more likely to have better 
loan-to-value ratios and are generally more likely to obtain loans 
with better terms than projects without their own equity. For this 
reason, the larger the amount of equity remaining in the project, the 
greater is the likelihood that the project will continue on its own 
without any further government subsidies. However, the data available 
from the CDFI Fund reflect only the equity left by NMTC investors and 
may not give a complete picture of the economic viability of the 
business because it does not include other forms of equity, such as 
those from retained earnings for a successful business. Furthermore, 
the CDFI data on equity left in the business are not sufficiently 
reliable because they are incomplete and not accurate enough to 
capture program performance. According to our standards for measuring 
program performance, several elements should be considered when 
examining the quality of agency performance data including accuracy 
and completeness. 

However, our review showed that about 60 percent of projects 
originating in 2011-2012 had inconsistencies that made these data 
unreliable. Examples of these inconsistencies are: 

* Incomplete data: One or more CDEs involved in the project did not 
report any values making it impossible to calculate an amount for the 
entire project. 

* Inaccurate data: Equity remaining was projected to equal or exceed 
100 percent of all NMTC investments in the project. These amounts are 
not valid because they exceed the amounts of the original equity loan. 

* Zero values: Some CDEs may be reporting a zero value because they do 
not intend to leave equity in the project. But according to CDFI Fund 
officials, other CDEs may intend to leave equity in the project, but 
reported zero value for accounting reasons because the charge would 
not be recorded until a later date. Thus, the zero values may be 
understating the equity available to the low-income community 
businesses. 

We determined that one cause of data unreliability was the unclear 
instructions in the manual for entering data into the CDFI Fund's 
systems. The manual does not clearly explain the time period for which 
information should be reported, which may have led to the CDEs 
reporting according to different accounting rules. Incomplete and 
inaccurate data result in an inability to use the data to track an 
important indicator of the likely performance of the NMTC projects 
after the compliance period ends. As a result, it is not possible to 
determine from these data the amount of equity to remain in the low-
income community businesses after the 7-year credit period. 

Figure 6: Data Quality for Amounts of Equity Projected to Remain in 
the Low-Income Community Businesses, 2011-2012: 

[Refer to PDF for image: vertical bar graph] 

Incomplete data: 
Number of projects: 201. 

Inaccurate data: 
Number of projects: 135. 

Zero values: 
Number of projects: 143. 

Expected values: 
Number of projects: 363. 

Source: GAO analysis CDFI Fund data. GAO-14-500. 

Note: CDFI Fund does not require data on equity remaining for any 
loans of investments originating before December 31, 2010. The figure 
is based on 842 projects with loans or investments originating in 2011-
2012, the most recent available data. 

[End of figure] 

CDFI Fund Data on Distressed Projects Are Not Sufficiently Reliable: 

CDFI Fund data on projects experiencing financial distress, such as 
the number of days a loan is delinquent, track program performance in 
that they indicate how likely a project is to continue in business 
during and after the credit period. These indicators of financial 
distress must be weighed against other NMTC program goals. Another 
program goal is to encourage investors to invest in projects that may 
be more risky because they are located in low-income communities. 
Regardless, reliable performance data are needed to administer the 
program. 

Our review of CDFI Fund data on the current status and performance of 
loans to NMTC projects showed inconsistencies that made these data not 
sufficiently reliable to determine the number and extent of projects 
experiencing financial distress. Examples of these inconsistencies 
include: 

* Incomplete data: Ninety-nine percent of projects reported current 
loan status (a mandatory field), but approximately 30 percent of 
projects omitted additional information for the other potential 
indicators of distress such as the number of times a loan has been 
restructured, the number of days the loan is currently delinquent, and 
the dollar amount of any loan that has been charged off (optional or 
conditionally-required fields). 

* Inaccurate data: Potential inaccuracies appear when we compared 
CDEs' descriptions of troubled projects from their NMTC allocation 
applications with indicators of distress for those same projects in 
CDFI Fund databases. In their 2012 applications, CDEs described 193 
projects with delinquent, defaulted, or impaired loans in sufficient 
detail that we could identify those projects in the CDFI Fund data. 
But 49 of these projects showed no indications of distress in the data. 

The causes of data unreliability were unclear instructions and 
optional reporting. CDEs enter their data into the CDFI Fund's 
electronic database. How they enter the data is determined by 
instructions provided by the CDFI Fund. We found a lack of clarity in 
these instructions that prevented us from being confident that the 
data provided an accurate measure of distress. For example, the 
instructions did not clearly distinguish restructured loans from 
refinanced loans. However, refinancing may not be an indicator of 
distress. It can occur for a variety of economic reasons. In addition, 
the data were incomplete because reporting some information was 
optional. Without accurate and complete data, the CDFI Fund does not 
have sufficient information to track program performance related to 
the future viability of the NMTC funded projects. CDFI Fund officials 
told us that they are changing all the loan performance data points to 
make them mandatory. 

Difficulties in Determining Whether or Not a Project Has Failed: 

Project failures could significantly affect program performance by 
limiting its social and economic outcomes in low-income communities. 
However, determining when a project has failed is difficult. Projects 
that seem to be in difficulty based on the indicators of financial 
distress can become financially sound again. Some CDEs in their 2012 
applications described successful restructurings of projects 
experiencing financial difficulty. But other projects are in 
situations where recovery seems unlikely or the CDEs have in fact 
written off the projects (see text boxes 1 and 2 for details of 
examples of both types of outcomes). 

The CDFI Fund is developing additional tools to collect better 
information on failed projects. As discussed above, their current 
measures of financial distress are inaccurate or incomplete. However, 
even if the data are improved, the financial distress measures may not 
accurately identify project failures because the projects can recover 
from distress. The CDFI Fund is attempting to rectify this measurement 
problem with a close-out report which is intended to collect 
additional information on the status of the business at the end of the 
7-year compliance period, such as whether a business continues to 
operate or a real estate project has been put into service. 

Examples Illustrating Difficulties in Determining if a Project Has 
Failed: 

Text Box 1: Meat processing plant investment that failed. 

* An $8 million NMTC investment in a meat processing company involving 
two loans and one equity investment from one CDE; 

* According to news accounts, the investments were needed to address 
liquidity problems created by an expansion of this ongoing business 
that employed about 300 people; 

* According to the CDE's 2012 reapplication, the investments became 
impaired soon after the CDE made the investments when the leveraged 
lender limited the company's ability to borrow from its credit line, 
which forced the company into bankruptcy; 

* The CDE unsuccessfully sought alternative financing for the company 
but still suffered a loss of $5.2 million; 

* In the CDFI Fund data, one loan and one equity investment are 
reported as "charged off" for the full dollar amounts. The other loan 
is reported as "closed" but no amount charged off. 

Source: GAO analysis of CDFI Fund data and public sources. GAO-14-500. 

[End of text box] 

Text Box 2: Troubled college construction project that recovered: 

* A college construction project involving three CDEs and several NMTC 
loans; 

* In their 2012 reapplications for NMTC allocations, two of the CDEs 
reported that their loans for the project became delinquent for as 
much as 480 days because of construction delays and the economic 
recession of 2008; 

* The two CDEs reported that they worked with the borrower to 
rebalance the budget and bring in additional sources of financing; 

* At the time of their applications, the two CDEs reported that all 
the previous interest was paid and all subsequent interest payments 
had been on time; 

* The loans from the two CDEs show indications of poor performance 
(periods of delinquency) in CDFI Fund data; 

* The third CDE did not report any delinquent or impaired loans in its 
2012 reapplication, and its loans do not show any indications of poor 
performance in CDFI Fund data. 

Source: GAO analysis of CDFI Fund data. GAO-14-500. 

[End of table] 

Conclusions: 

The potential impact of the NMTC in promoting economic development in 
designated low-income communities is diluted if the NMTC provides an 
above-market rate of return. Similarly, the impact of a combination of 
assistance from government programs is diluted if in the same cases 
the combination of assistance is unnecessarily duplicative. Treasury 
guidance and controls that are designed to limit these risks can help 
ensure the NMTC program realizes the greatest possible impact on low-
income communities. 

Complete and reliable information is a vital component of assessing 
program effectiveness. While the complexity of the NMTC financial 
structures makes gathering information a challenge, there are several 
aspects of these structures where better information would aid in 
understanding the effectiveness of the program. These include the 
extent to which fees, interest rates, and other costs reduce the NMTC 
equity flowing to low-income community businesses, the amount of 
equity available to the low-income community businesses at the end of 
the 7-year compliance period, and the number of projects that failed 
or are at risk of failing. 

Recommendations for Executive Action: 

We recommend that the Secretary of the Treasury take the following 
actions: 

* Issue guidance on how funding or assistance from other government 
programs can be combined with the NMTC including the extent to which 
other government funds can be used to leverage the NMTC by being 
included in the qualified equity investment. 

* Ensure that controls are in place to limit the risk of unnecessary 
duplication at the project level in funding or assistance from 
government programs and to limit above market rates of return, i.e., 
returns that are not commensurate with the NMTC investor's risk. 

* Ensure that the CDFI Fund reviews the disclosure sheet that CDEs are 
required to provide to low-income community businesses to determine 
whether it contains data that could be useful for the Fund to retain. 

* Ensure that the CDFI Fund clarifies the instructions for reporting 
the amount of any equity which may be acquired by the low-income 
community business at the end of the 7-year NMTC compliance period. 

* Ensure that the CDFI Fund clarifies the instructions it provides to 
CDEs about reporting loan performance and make the reporting of that 
data mandatory. 

Agency Comments and Our Evaluation: 

We provided a draft of this product to Treasury for comment on June 
11, 2014. In its written comments, reproduced in appendix IV, Treasury 
concurred with two of our recommendations and reported that the other 
recommendations are under consideration. The CDFI Fund also provided 
technical comments that were incorporated, as appropriate. 

Treasury said that it is considering our recommendations to issue 
further guidance on how other government programs can be combined with 
NMTCs, and to ensure that adequate controls are in place to limit the 
risks of unnecessary duplication and above-market rates of return. 
Treasury reported that our recommendations would be reviewed in 
consultation with a recently formed working group that includes 
representatives from the IRS and the CDFI Fund to discuss potential 
administrative or regulatory changes. 

Treasury said that it is considering our recommendation about 
reviewing data presented in the disclosure sheets that CDEs are 
required to provide low-income community businesses. As our report 
states, not all information on the disclosure sheets, such as third-
party transactions costs, is reported to the CDFI Fund. This 
additional information on the disclosure sheets could be useful for 
the CDFI Fund to retain. 

Treasury agreed with our recommendation to clarify instructions for 
reporting any equity amounts that may be acquired by the low-income 
community business at the end of the compliance period. Treasury also 
agreed with our recommendation to clarify instructions to CDEs about 
reporting loan performance and make this data reporting mandatory. 

As agreed with your office, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from the report date. At that time, we will send copies to the 
appropriate congressional committees, the Director of the CDFI Fund, 
and other interested parties. In addition, the report will be 
available at no charge on the GAO website at [hyperlink, 
http://www.gao.gov]. 

If you or your staff have questions about this report, please contact 
me at (202) 512-9110 or at whitej@gao.gov. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. GAO staff who made key contributions to 
this report are listed in appendix V. 

Sincerely yours, 

Signed by: 

James R. White: 
Director, Tax Issues: 
Strategic Issues: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

The objectives of this report were to assess: (1) New Markets Tax 
Credit (NMTC) financial structures in terms of their complexity, 
transparency, and effect on the size of the federal subsidies going to 
NMTC projects as well as controls to ensure that subsidies are not 
larger than necessary for the investment; (2) what is known about the 
types and amounts of fees and other costs that reduce the amount of 
equity reaching low-income community businesses; (3) what is known 
about the amount of equity left in the low-income community businesses 
after the 7-year credit period; and (4) what is known about NMTC 
projects that are at risk of failing by becoming economically 
nonviable. 

For our first objective, we reviewed the NMTC literature and 
interviewed representatives of community development entities (CDEs) 
and researchers who have evaluated the program to determine how the 
financial structures have evolved. To assess the complexity and 
transparency of NMTC investment structures, we applied criteria from 
our prior work on evaluating tax expenditures.[Footnote 17] We also 
applied criteria from federal government internal control standards to 
assess whether controls are present to ensure that subsidies are not 
larger than necessary for a NMTC project.[Footnote 18] 

To report on the number, types, and funding amounts of other federal 
programs used on NMTC projects, we designed and implemented a web-
based survey to gather information on how projects were financed from 
the CDEs responsible for the project. Our survey population consisted 
of randomly selected NMTC projects with all loans and investments 
closing on or after January 1, 2010. Restricting the survey population 
to NMTC projects within our study's time period left us with a total 
of 1,265 projects in the population. We selected a stratified sample 
of 305 projects. From the first strata, defined as those projects for 
which there is an indication on the underlying population file that at 
least one of the funding sources was public dollars, we selected 126 
projects. From the second strata, defined as all other projects, we 
selected 179 projects. Although some projects in the second strata 
could actually have public dollars, this stratification helps ensure 
that our sample has enough of these cases to produce estimates of that 
domain. 

The survey asked the CDEs a combination of questions that allowed for 
open-ended and close-ended responses with regard to federal, state, 
local, and private funding sources. We pre-tested the content and 
format of the questionnaire with four knowledgeable CDEs and made 
changes based on pre-test results. The survey was a web-based survey. 
We sent an activation e-mail for the survey on March 7, 2014, and 
closed the survey on April 4, 2014. 

The practical difficulties of conducting any survey may introduce 
errors, commonly referred to as non-sampling errors. For example, 
differences in how a particular question is interpreted, the sources 
of information available to respondents, how the responses were 
processed and analyzed, or the types of people who do not respond can 
influence the accuracy of the survey results. We took steps in the 
development of the survey, the data collection, and the data analysis 
to minimize these non-sampling errors and help ensure the accuracy of 
the answers that were obtained. A second independent analyst checked 
all the computer programs that processed the data. In instances where 
multiple CDEs responded about the same project, we manually merged the 
data together into a representative single project following the 
Community Development Financial Institutions (CDFI) Fund's practices, 
such as reporting the highest value as the default estimate. 

We obtained responses for 214 of the 305 projects in our sample for an 
overall response rate of about 70 percent. Population estimates were 
produced by weighting the sample data from the responding projects to 
account for differing sampling rates for projects funded with public 
dollars and those funded without public dollars. We have treated the 
respondents as a stratified random sample and calculated sampling 
errors as an estimate of the uncertainty around the survey estimates. 
All percentage estimates based on this sample have 95 percent 
confidence intervals of within +/-7 percentage points of the estimate 
itself. For other numeric estimates, the 95 percent confidence 
intervals are presented along with the estimates themselves. We are 95 
percent confident that each of the confidence intervals in this report 
will include the true values in the study population. 

To address the last three objectives, we analyzed data from the CDFI 
Fund on NMTC investments in low-income community businesses from 2003 
through 2012. The CDFI Fund requires all CDEs that have been awarded 
NMTC allocations to submit an annual report detailing how they 
invested the qualified equity investment (QEI) proceeds in low-income 
communities. These reports must be submitted to the CDFI Fund by the 
CDEs, along with their audited financial statements, within 6 months 
after the end of their fiscal years. CDEs are required to report their 
NMTC investments in the CDFI Fund's Community Investment Impact System 
(CIIS) for a period of 7 years. Due to a time lag in reporting, NMTC 
investments reported in CIIS are less than the total amount allocated 
for the NMTC program.[Footnote 19] Given that the CDFI Fund requires 
CDEs to report information on project characteristics and financing 
once a year, CIIS data may not capture the most current information 
for all existing projects. However, the CIIS data that we used 
represent the most current available information as of December 2, 
2013 on the status of the program. We interviewed CDFI Fund officials 
with knowledge of CIIS about the steps they take to ensure its 
accuracy. Based on GAO's criteria for valid data--that they be 
sufficiently accurate and complete to capture program performance--we 
also determined the data on fees and retentions we used in this report 
were sufficiently reliable for our purposes (see below for discussion 
of the data we found unreliable for our purposes).[Footnote 20] 

To describe the types and amounts of fees and other costs, we analyzed 
data that CDEs reported to the CDFI Fund on the NMTC investment 
proceeds they retained and fees they charged to investors, low-income 
community businesses, and others. We analyzed the fee data at the 
project level for 794 projects with loans and investments originating 
in 2011 and 2012. The CDFI Fund began requiring that CDEs report data 
on QEI proceeds that the CDEs retained and their other fees starting 
with the 2011 reporting period, and only for loans and investments 
originating after December 31, 2010.[Footnote 21] We used fees data 
reported in basis points and data on the qualified low-income 
community investment (QLICI) amounts to calculate the total dollar 
amounts of fees. We compared our final results to other data on fees 
submitted by CDEs when applying for NMTC allocations in 2010 and 2011. 

We attempted to compare these costs to costs on non-NMTC investments 
by reviewing industry data and academic studies on fees, and 
interviewing industry and tax credit experts. We also reviewed written 
and oral comments made by CDEs and industry experts to the CDFI Fund 
in response to a November 7, 2011, Federal Register notice soliciting 
comments on several possible NMTC program changes. The CDFI Fund 
specifically requested comments on whether additional rules, 
restrictions, and requirements should be imposed related to fees and 
expenses charged by CDEs. The CDFI Fund also held three listening 
sessions in December 2012 and January and February 2013 with a total 
of 45 CDE and industry experts. We reviewed the transcripts of these 
listening sessions and concluded from these reviews that the types of 
projects funded by the NMTC are so varied that we could not conduct a 
valid comparison of fee costs with those on non-NMTC projects. 

We attempted to determine the amount of equity that remains in low-
income community businesses by analyzing data reported by CDEs to the 
CDFI Fund on equity projected to remain in NMTC projects at the end of 
the 7-year credit period. We analyzed these data at the project level 
for 842 projects with loans and investments originating in 2011 and 
2012. Starting with the 2011 reporting period, the CDFI Fund began 
requiring that, if applicable, CDEs report the projected amount of any 
equity or debt investment which may be acquired by the low-income 
community business as the result of a put/call option or other 
arrangement for loans and investments originating after December 31, 
2010. After reviewing all 2,249 transactions for all 842 projects, we 
determined that data were usable for only 363 projects (about 40 
percent), and therefore the data could not be used to give 
sufficiently reliable descriptions of the equity remaining in the 
project for our purposes. We found the following problems with the 
data that made the values unreliable for our report. 

* For 201 projects, no data were reported by one or more of the CDEs 
involved in those projects. We concluded that in these cases we could 
not determine: (1) how many of these projects were non-leveraged where 
the failure to project a residual value might be expected; (2) how 
many indicated a true intention not to leave any equity in the 
project; and (3) how many were simply errors or omissions. 

* For another 143 projects, one or more CDEs involved reported a total 
projected residual value of $0. We concluded in these cases that the 
implications of zero for equity remaining were ambiguous. According 
CFDI Fund officials, some CDEs may in fact do not intend to leave any 
residual equity for the business to obtain at the end of the 7-year 
period. However, other CDEs may project $0 remaining now when in fact 
they intend to designate the amount of equity at a later date. These 
CDEs may be reporting a zero value at this time due to an individual 
CDE's internal practices or accounting rules particular to the CDE's 
form of incorporation. That is, the CDEs would not report a projected 
or final residual value until the put/call option was exercised by the 
business. 

* Of the remaining 498 projects, 135 projects had data showing that 
the total projected residual value for these projects appeared to be 
overstated. Some data showed that one or more CDEs reported projected 
residual values greater than or equal to the original equity 
investment values. In most of these cases, the CDEs appeared to have 
incorrectly reported a projected residual value for both leveraged 
loans and equity investments. Based on the typical leveraged model 
structure, the CDEs should have only reported the residual value of 
the equity investments. In other cases, one or more CDEs involved in a 
project reported the projected residual value of the equity investment 
twice--once as value for the equity investment, and then repeated it 
as a value for the leveraged loan. As a result of these reporting 
errors or inconsistencies, the total projected residual value for 
these projects appeared to be overstated. 

To determine the NMTC projects at risk of failing by becoming 
economically nonviable, we analyzed data reported by CDEs to the CDFI 
Fund that could indicate that a project is experiencing financial 
distress. We used indicators of financial distress that are available 
from CDFI Fund data, such as whether a loan on a project is 
delinquent, charged off, or restructured that could show increased 
risk of business failure. These indicators, in most cases, could not 
be used to conclude that a business has failed in the sense of being 
economically nonviable as the CDFI Fund does not currently have data 
on the ultimate disposition of NMTC projects. We analyzed the number 
of projects that showed indications of financial distress between 2003 
and 2012, and the dollar amounts invested in these financially 
distressed projects. We tested the reliability of these optional 
fields by reviewing CDEs applications for 2012 NMTC allocations. In 
the application instructions, CDEs were asked to discuss any 
delinquent, defaulted, or impaired loans or equity investments from 
prior NMTC investments. In the 2012 applications, we counted 281 
projects with delinquent, defaulted, or impaired loans or investments. 
Of these, 193 projects were described in sufficient detail that we 
could then match those projects to transaction-level data in CIIS. 
However, 49 of those projects did not show any indications of 
financial distress in CIIS. For some projects involving multiple CDEs, 
one or more CDEs may have described the project in their 2012 
applications as having delinquent, defaulted, or impaired investments, 
but only one CDE then reported any of the optional distress indicator 
data in CIIS. In other cases, CDEs described several projects in the 
2012 applications as having delinquent, defaulted, or impaired 
investments, but then those CDEs did not report any distress 
indicators for these projects in CIIS. In the end, we concluded that 
the CDFI Fund CIIS data on indicators of financial distress were 
insufficient for our purposes, largely due to the fact that nearly all 
of the distress indicators were optional data fields. 

We conducted this performance audit from May 2013 to July 2014 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Other Federal Funding Used in New Markets Tax Credit 
Projects: 

In our survey of New Markets Tax Credit (NMTC) projects, we asked 
Community Development Entities (CDEs) what other federal sources of 
assistance were used (in addition to the NMTC) to fund the project. 
[Footnote 22] CDEs could select from a pre-populated list of federal 
sources comprised of federal tax credits, public bond financing exempt 
from federal tax, grants or direct payments from federal agencies, and 
direct or guaranteed loans from federal agencies. Our survey also 
permitted CDEs to write in other federal sources not included in the 
pre-populated list. CDEs were also asked if the NMTC was "twinned" or 
"enhanced" with any of these federal sources inside the NMTC 
structure, i.e., did NMTC investors claim NMTCs based on these 
additional amounts of federal assistance. The NMTC investor community 
often refers to this practice as "twinning" the NMTC with other tax 
credits or other public assistance, but for purposes of this report, 
we define this as leveraging other public sources with the NMTC. The 
four tables below list the types of other federal assistance (from our 
pre-populated list of federal assistance and write-in descriptions) 
that CDEs reported as being used to finance our sample of NMTC 
projects, and whether these other federal sources were leveraged with 
the NMTC. 

Table 4: Other Federal Tax Credits Used in a Sample of New Markets Tax 
Credit (NMTC) Projects, 2010-2012: 

10 percent credit for rehabilitation of structures (other than 
historic): 
Federal source was leveraged with NMTC one or more times: [Empty]. 

20 percent credit for rehabilitation of historic structures (Historic 
Tax Credit): 
Federal source was leveraged with NMTC one or more times: yes. 

Business Energy Investment Tax Credit (ITC): 
Federal source was leveraged with NMTC one or more times: yes. 

Credit for qualified school construction bonds; 
Federal source was leveraged with NMTC one or more times: yes. 

Brownfield credits: 
Federal source was leveraged with NMTC one or more times: [Empty]. 

Source: GAO survey of NMTC projects originating in 2010-2012. GAO-14-
500. 

[End of table] 

Table 5: Tax Exempt Bond Financing Used in a Sample of New Markets Tax 
Credit (NMTC) Projects, 2010-2012: 

Exclusion of interest for airport, dock, and similar bonds: 
Federal source was leveraged with NMTC one or more times: [Empty]. 

Exclusion of interest on bonds for private nonprofit educational 
facilities: 
Federal source was leveraged with NMTC one or more times: yes. 

Exclusion of interest on bonds for private nonprofit hospital 
facilities: 
Federal source was leveraged with NMTC one or more times: yes. 

Exclusion of interest on Gulf Opportunity Zone Revenue Bonds: 
Federal source was leveraged with NMTC one or more times: [Empty]. 

Exclusion of interest on Recovery Zone Bonds: 
Federal source was leveraged with NMTC one or more times: yes. 

Federal Energy 179D (tax deduction): 
Federal source was leveraged with NMTC one or more times: [Empty]. 

Various public purpose state and local bonds[A]: 
Federal source was leveraged with NMTC one or more times: yes. 

Source: GAO survey of NMTC projects originating in 2010-2012. GAO-14-
500. 

[A] A number of survey respondents indicated receiving project 
financing from a variety of state and locally-issued bonds. 

[End of table] 

Table 6: Grants or Direct Payments Used in a Sample of New Markets Tax 
Credit (NMTC) Projects, 2010-2012: 

Department of Housing and Urban Development (HUD): 
Federal source was leveraged with NMTC one or more times: [Empty]. 

Community Development Block Grants/Entitlement Grants (CDBG): 
Federal source was leveraged with NMTC one or more times: yes. 

HUD Economic Development Initiative: 
Federal source was leveraged with NMTC one or more times: [Empty]. 

HUD Financial Grant: 
Federal source was leveraged with NMTC one or more times: [Empty]. 

HUD Capital Fund Education and Training Community Facilities Program: 
Federal source was leveraged with NMTC one or more times: yes. 

Neighborhood Stabilization Program (NSP): 
Federal source was leveraged with NMTC one or more times: yes. 

Public Housing Development Funds: 
Federal source was leveraged with NMTC one or more times: yes. 

Department of Energy: 
Federal source was leveraged with NMTC one or more times: [Empty]. 

Energy Efficiency and Conservation Block Grant (EECBG):
Federal source was leveraged with NMTC one or more times: [Empty]. 

Department of Health and Human Services: 
Federal source was leveraged with NMTC one or more times: [Empty]. 

Grants to Health Center Programs: 
Federal source was leveraged with NMTC one or more times: yes. 

Office of Head Start (OHS): 
Federal source was leveraged with NMTC one or more times: [Empty]. 

Department of the Treasury: 
Federal source was leveraged with NMTC one or more times: [Empty]. 

1603 Program: Payments for Specified Energy Property in Lieu of Tax 
Credits: 
Federal source was leveraged with NMTC one or more times: [Empty]. 

U.S. Treasury - Neighbor Works: 
Federal source was leveraged with NMTC one or more times: [Empty]. 

Department of Education: 
Federal source was leveraged with NMTC one or more times: [Empty]. 

Impact Aid grant: 
Federal source was leveraged with NMTC one or more times: yes. 

Department of Education unspecified grant: 
Federal source was leveraged with NMTC one or more times: [Empty]. 

Department of Defense: 
Federal source was leveraged with NMTC one or more times: [Empty]. 

Department of Defense unspecified grant: 
Federal source was leveraged with NMTC one or more times: [Empty]. 

Environmental Protection Agency (EPA): 
Federal source was leveraged with NMTC one or more times: [Empty]. 

EPA Grant: 
Federal source was leveraged with NMTC one or more times: [Empty]. 

Federal Communications Commission (FCC): 
Federal source was leveraged with NMTC one or more times: [Empty]. 

FCC Grants for Rural Healthcare: 
Federal source was leveraged with NMTC one or more times: [Empty]. 

Federal Home Loan Bank: 
Federal source was leveraged with NMTC one or more times: [Empty]. 

Federal Home Loan Bank grants: 
Federal source was leveraged with NMTC one or more times: [Empty]. 

Department of Veterans Affairs (VA): 
Federal source was leveraged with NMTC one or more times: [Empty]. 

VA tenant improvement payment: 
Federal source was leveraged with NMTC one or more times: [Empty]. 

Unspecified: 
Federal source was leveraged with NMTC one or more times: [Empty]. 

Rural Community Assistance Partnership (RCAP): 
Federal source was leveraged with NMTC one or more times: [Empty]. 

American Recovery Reinvestment Act (ARRA): 
Federal source was leveraged with NMTC one or more times: [Empty]. 

Source: GAO survey of NMTC projects originating in 2010-2012.GAO-14-
500. 

[End of table] 

Table 7: Direct Loans or Guaranteed Loans Used in a Sample of New 
Markets Tax Credit (NMTC) Projects, 2010-2012: 

Department of Agriculture: 
Federal source was leveraged with NMTC one or more times: [Empty]. 

Business and Industry Loans: 
Federal source was leveraged with NMTC one or more times: [Empty]. 

Community Facilities Loans: 
Federal source was leveraged with NMTC one or more times: [Empty]. 

Department of Housing and Urban Development: 
Federal source was leveraged with NMTC one or more times: [Empty]. 

Section 108 Community Development Loan Guarantees: 
Federal source was leveraged with NMTC one or more times: [Empty]. 

Supplemental Loan Insurance Multifamily Rental Housing: 
Federal source was leveraged with NMTC one or more times: [Empty]. 

Small Business Administration (SBA): 
Federal source was leveraged with NMTC one or more times: [Empty]. 

SBA 7(a) Guaranteed Loan: 
Federal source was leveraged with NMTC one or more times: [Empty]. 

SBA 504 loan program: 
Federal source was leveraged with NMTC one or more times: [Empty]. 

SBA unspecified guaranteed loan: 
Federal source was leveraged with NMTC one or more times: [Empty]. 

Department of Education: 
Federal source was leveraged with NMTC one or more times: [Empty]. 

Charter School Credit Enhancement Grant: 
Federal source was leveraged with NMTC one or more times: [Empty]. 

Department of Energy: 
Federal source was leveraged with NMTC one or more times: [Empty]. 

ARRA Energy Loan Program--Green Energy Loan Fund: 
Federal source was leveraged with NMTC one or more times: [Empty]. 

Other: 
Federal source was leveraged with NMTC one or more times: [Empty]. 

Department of Housing and Community Development (state) CDBG-ARRA: 
Federal source was leveraged with NMTC one or more times: yes. 

Source: GAO survey of NMTC projects originating in 2010-2012. GAO-14-
500. 

[End of table] 

[End of section] 

Appendix III: Regression Analysis of Total Fees and Retentions 
Associated with Characteristics of the Project Using CDFI Fund Data, 
2011-2012: 

Variable Name: Average interest rate on loans; 
Coefficient: .0968962; 
Std. Error: .0360374; 
t: 2.69; 
P>|t|: 0.007. 

Variable Name: Dollar amount of NMTC qualified equity investment (QEI); 
Coefficient: .0782438; 
Std. Error: .0014382; 
t: 54.40; 
P>|t|: 0.000. 

Variable Name: Number of transactions (financial structure complexity); 
Coefficient: .0482567; 
Std. Error: .0189266; 
t: 2.55; 
P>|t|: 0.011. 

Variable Name: Poverty rate > 30% (distressed community); 
Coefficient: -.302405; 
Std. Error: .1086737; 
t: -2.78; 
P>|t|: 0.005. 

Variable Name: Dollar amount of non-public funds used on project; 
Coefficient: -.0009428; 
Std. Error: .0002418; 
t: -3.90; 
P>|t|: 0.000. 

Variable Name: Purpose: business; 
Coefficient: .2869305; 
Std. Error: .1392813; 
t: 2.12; 
P>|t|: 0.040. 

Variable Name: Purpose: construction; 
Coefficient: -.0928775; 
Std. Error: .1401169; 
t: -0.66; 
P>|t|: 0.507. 

Variable Name: Origination year: 2012; 
Coefficient: -.1675759; 
Std. Error: .1076841; 
t: -1.56; 
P>|t|: 0.120. 

Variable Name: Constant; 
Coefficient: -.5996888; 
Std. Error: .1900319; 
t: -3.16; 
P>|t|: 0.002. 

Source: GAO analysis of CDFI Fund data. GAO-14-500. 

Notes: N=2,018; R-squared = 0.6028. Dollar amounts are scaled in 
$100,000 units. 

[End of table] 

The table reports the results of an ordinary least squares regression 
with the dependent variable equal to the amount of fees and retentions 
charged. Omitted category variables are: project type equal to 
"rehabilitation or other" and origination year equal to "2011." The 
regression was also estimated using various functional forms including 
quadratic and log forms of the regression equation. These 
specifications either were rejected as statistically insignificant or, 
in the case of some of the log specifications, resulted in a 
substantial decrease in the explanatory power of the regression as 
measured by its R-squared. 

This regression was also estimated with fees and retentions as 
separate dependent variables, and, in these cases, the results were 
different for certain variables of interest. With fees as the 
dependent variable, neither the interest rate nor the number of 
transactions was statistically significant at the 95 percent 
confidence level. However, the size of the qualified equity investment 
remained positive and significant. With retentions as the dependent 
variable, the retentions were positively and significantly related to 
interest rates but had no statistically significant relationship to 
the number of transactions. 

[End of section] 

Appendix IV: Comments from the Department of the Treasury: 

Department of The Treasury: 
Community Development Financial Institutions Fund: 
Washington, D.C. 20220: 

Memorandum: 

Date: July 1,2014: 

To: James R. White: 
Director, Tax Issues: 
Government Accountability Office: 
From: [Signed by Jeff Berg for] Dennis Nolan: 
Acting Director: 
Community Development Financial Institutions Fund: 

Subject: Draft Audit Report - New Markets Tax Credit: Better Controls 
and Data Are Needed to Ensure Effectiveness (GAO-14-500): 

On June 11, the Government Accountability Office (GAO) issued a report 
entitled "New Markets Tax Credit: Better Controls and Data Are Needed 
to Ensure Effectiveness." The New Markets Tax Credit (NMTC) Program is 
administered by the Community Development Financial Institutions Fund 
(CDFI Fund). The draft report provided the following recommendations 
to the Secretary of the Treasury: 

1. Issue guidance on how funding or assistance from other government 
programs can be combined with the NMTC including extent to which other 
government funds can be used to leverage the NMTC by being included in 
the qualified equity investment. 

2. Ensure that controls are in place to limit the risk of unnecessary 
duplication at the project level in funding or assistance from 
government programs and to limit above market rates of return, i.e. 
returns that are not commensurate with the NMTC investor's risk. 

3. Ensure that the CDFI Fund reviews the disclosure sheet that 
Community Development Entities (CDEs) are required to provide to low-
income community businesses to determine whether it contains data that 
could be useful for the CDFI Fund to retain. 

4. Ensure that the CDFI Fund clarifies the instructions for reporting 
the amount of any equity which may be acquired by the low-income 
community businesses at the end of the 7 -year NMTC compliance period. 

5. Ensure that the CDFI Fund clarify the instructions it provides to 
CDEs about reporting loan performance and make the reporting of that 
data mandatory. 

The CDFI Fund's responses to each recommendation are discussed below. 
Due to the limited time provided for the CDFI Fund to review the 
report's findings and methodology, specific comments on those items 
are not provided in this response letter. 

GAO Recommendation #1: 

Issue guidance on how funding or assistance from other government 
programs can be combined with the NMTC including extent to which other 
government funds can be used to leverage the NMTC by being included in 
the qualified equity investment. 

Auditee Response: 
Recommendation is Under Consideration. 

Management Response: 

The CDFI Fund recently formed a working group to discuss potential 
administrative or regulatory changes to the NMTC Program. The working 
group includes representatives from the Treasury Department's Internal 
Revenue Service; Office of Tax Policy; and Office of Small Business, 
Community Development and Affordable Housing. This recommendation, which
considers broad policy issues, will be reviewed in consultation with 
the working group and other relevant Treasury officials. 

GAO Recommendation #2: 

Ensure that controls are in place to limit the risk of unnecessary 
duplication at the project level in funding or assistance from 
government programs and to limit above market rates of return, i.e.
returns that are not commensurate with the NMTC investor's risk. 

Auditee Response: 
Recommendation is Under Consideration. 

Management Response: 

Assessing the depth of the subsidy necessary to mitigate risk and 
finance projects in low-income communities requires careful 
consideration of the purposes that various types of public support
play in project implementation. In addition, it is important to 
consider how NMTC-financed projects leverage private funds to supply 
public goods and access to capital and credit in low-income 
communities that are chronically underserved by mainstream financial 
institutions. This recommendation will be reviewed in consultation 
with the working group discussed in our response to Recommendation #1, 
above. 

GAO Recommendation #3: 

Ensure that the CDFI Fund reviews the disclosure sheet that CommUnity 
Development Entities (CDEs) are required to provide to low-income 
community businesses to determine whether it contains data that could 
be useful for the CDFI Fund to retain. 

Auditee Response: 
Recommendation is Under Consideration. 

Management Response: 

The CDFI Fund currently collects most of the data contained in the 
disclosure sheet provided by CDEs to low-income community businesses 
through the Community Investment Impact System (CIIS), the CDFI Fund's 
data impact monitoring system. In 2010, in response to a prior GAO
report (GAO-10-334), the CDFI Fund added thirteen questions to the 
CIIS which closely mirror the disclosure sheet provided to borrowers. 
In an effort to minimize the reporting burden for CDEs, the CDFI Fund 
is assessing technical approaches that would eliminate manual 
reconciliation of the data that it collects in the CIIS with the data 
reported in the disclosure sheets. 

In response to this recommendation, the CDFI Fund will consult with 
OMB with respect to the requirements of the Paperwork Reduction Act 
(PRA) to assess whether this recommendation implies collecting the 
same data twice: through the disclosure sheet that is provided by the 
CDE to the borrower; and through the data reported by the CDE to the 
CDFI Fund on each transaction's fees, interest and terms, and other 
costs. 

GAO Recommendation #4: 

Ensure that the CDFI Fund clarifies the instructions for reporting the 
amount of any equity which may be acquired by the low-income community 
businesses at the end of the 7-year NMTC compliance period. 

Auditee Response: 
Management concurs with the Recommendation. 

Management Response: 

The CDFI Fund will address this issue in the next version of the CIIS 
scheduled for release in August 2014. The CIIS update will implement a 
new close-out form at the end of the seven-year compliance period to 
collect data on the equity left in low-income businesses and status of
businesses and projects. The close-out data will complement the 
current data collected on the "projected residual value left in the 
qualified business." In conjunction with the release of the new 
version of the CIIS, the CDFI Fund will provide additional guidance in 
the CIIS reporting instructions on completing the close-out form and 
conduct training sessions for users. 

GAO Recommendation #5: 

Ensure that the CDFI Fund clarify the instructions it provides to CDEs 
about reporting loan performance and make the reporting of that data 
mandatory. 

Auditee Response: 
Management concurs with the Recommendation. 

Management Response: 

The CDFI Fund is addressing this recommendation. The next version of 
the CIIS will require all loan performance data to be mandatory. In 
addition, the CDFI Fund will provide additional guidance in the CIIS 
reporting instructions that will be released with the new version of 
the CIIS in August 2014. 

Thank you again for the opportunity to review and comment upon your 
draft report. We appreciate your efforts and the collaborative 
relationship that you fostered during the course of your review. 

[End of section] 

Appendix V: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

James R. White, (202) 512-9110, or whitej@gao.gov. 

Staff Acknowledgments: 

In addition to the contact named above, Kevin Daly, Assistant 
Director; Amy Bowser; Cathy Hurley; Mark Kehoe; Jill Lacey; Edward 
Nannenhorn; Mark Ramage; Wayne Turowski; and Elwood White made key 
contributions to this report. 

[End of section] 

Related GAO Products: 

2014 Annual Report: Additional Opportunities to Reduce Fragmentation, 
Overlap, and Duplication and Achieve Other Financial Benefits. 
[hyperlink, http://www.gao.gov/products/GAO-14-343SP]. Washington, 
D.C.: April 8, 2014. 

Community Development: Limited Information on the Use and 
Effectiveness of Tax Expenditures Could Be Mitigated through 
Congressional Attention. [hyperlink, 
http://www.gao.gov/products/GAO-12-262]. Washington, D.C.: February 
29, 2012. 

Efficiency and Effectiveness of Fragmented Economic Development 
Programs Are Unclear. [hyperlink, 
http://www.gao.gov/products/GAO-11-477R]. Washington, D.C.: May 19, 
2011. 

Opportunities to Reduce Potential Duplication in Government Programs, 
Save Tax Dollars, and Enhance Revenue. [hyperlink, 
http://www.gao.gov/products/GAO-11-318SP]. Washington, D.C.: March 1, 
2011. 

New Markets Tax Credit: The Credit Helps Fund a Variety of Projects in 
Low-Income Communities, but Could Be Simplified. [hyperlink, 
http://www.gao.gov/products/GAO-10-334]. Washington, D.C.: January 29, 
2010. 

HUD and Treasury Programs: More Information on Leverage Measures' 
Accuracy and Linkage to Program Goals Is Needed in Assessing 
Performance. [hyperlink, http://www.gao.gov/products/GAO-08-136]. 
Washington, D.C.: January 18, 2008. 

Tax Policy: New Markets Tax Credit Appears to Increase Investment by 
Investors in Low-Income Communities, but Opportunities Exist to Better 
Monitor Compliance. [hyperlink, 
http://www.gao.gov/products/GAO-07-296]. Washington, D.C.: January 31, 
2007. 

New Markets Tax Credit Program: Progress Made in Implementation, but 
Further Actions Needed to Monitor Compliance. [hyperlink, 
http://www.gao.gov/products/GAO-04-326]. Washington, D.C.: January 30, 
2004. 

[End of section] 

Footnotes: 

[1] Pub. L. No.106-554, § 121, 114 Stat. 2763 (2000) codified at 26 
U.S.C. § 45D. 

[2] See list of related GAO products at the end of this report. 

[3] For more detail on these criteria, see GAO, Tax Expenditures: 
Background and Evaluation Criteria and Questions, [hyperlink, 
http://www.gao.gov/products/GAO-13-167SP] (Washington, D.C.: Nov. 29, 
2012); GAO, Understanding the Tax Reform Debate: Background, Criteria 
and Questions, [hyperlink, http://www.gao.gov/products/GAO-05-1009SP] 
(Washington, D.C.: Sept. 1, 2005); and GAO, Standards for Internal 
Control in the Federal Government, [hyperlink, 
http://www.gao.gov/products/GAO/AIMD-00-21.3.1] (Washington, D.C.: 
Nov. 1, 1999). 

[4] All estimates based on our survey are subject to sampling error. 
For percentage estimates, the 95 percent confidence intervals are 
within +/-7 percentage points of the estimate itself. 

[5] GAO, New Markets Tax Credit: The Credit Helps Fund a Variety of 
Projects in Low-Income Communities, but Could Be Simplified, 
[hyperlink, http://www.gao.gov/products/GAO-10-334] (Washington, D.C.: 
Jan. 29, 2010). 

[6] At the time of this report's publication, there are many bills 
pending in Congress that would extend the expired NMTC. For example, 
the Senate had begun floor debate on S.2260, which would extend the 
NMTC through 2015. The House of Representatives had yet not begun 
considering H.R.3939 or H.R.4365, which would permanently extend the 
credit. 

[7] For a discussion of the criteria appropriate for evaluating tax 
expenditures such as the NMTC, see GAO, Tax Expenditures: Background 
and Evaluation Criteria and Questions, [hyperlink, 
http://www.gao.gov/products/GAO-13-167SP] (Washington, D.C.: Nov. 29, 
2012). 

[8] The simplified examples focus on the revenue effects of the NMTC 
and are not intended to be estimates of the credit's total revenue 
cost. For example, they do not reflect other tax liabilities that 
investors may incur on the credit claimed that would reduce the 
revenue cost. For estimates of NMTC revenue costs, see U.S. Congress 
Joint Committee on Taxation, Estimated Revenue Effects of the Revenue 
Provisions Contained in the "Family and Business Tax Cut Certainty Act 
of 2012," as reported by the Senate Committee on Finance, Aug. 29, 
2012, JCX-71-12. 

[9] In Rev. Rul. 2003-20, the IRS ruled that for purposes of 
determining the NMTC allowable under Section 45D, the amount of the 
QEI made by an investment fund may include cash from a nonrecourse 
loan that the investment fund invests as equity in a qualified CDE. In 
Rev. Rul. 2010-17, the IRS ruled that the amount of QEI could also 
include cash from a recourse loan. 

[10] In Notice 2002-64, IRS allowed the NMTC to be combined with other 
federal programs except the Low-Income Housing Tax Credit (LIHTC). 
Treasury issued final regulations in 2004 incorporating the guidance 
from the 2002 IRS Notice--see Treas. Reg. § 1.45D-1(g)(3). Investors 
interpreted the Treasury regulations, together with the 2003 Revenue 
Ruling allowing leveraging of private debt, to permit leveraging with 
other federal programs such as historic tax credits where the value of 
these credits was used to increase the base of the NMTC by being 
loaned to an investment fund. Treasury has not amended its regulations 
or issued specific guidance to address this practice. 

[11] GAO, Tax Policy: New Markets Tax Credit Appears to Increase 
Investment by Investors in Low-Income Communities, but Opportunities 
Exist to Better Monitor Compliance, [hyperlink, 
http://www.gao.gov/products/GAO-07-296] (Washington, D.C.: Jan. 31, 
2007); and New Markets Tax Credit Coalition, New Markets Tax Credit 
Progress Report 2014, (Washington, D.C.: June 10, 2014). 

[12] According to data from an accounting and consulting firm, 15 
states currently have state new markets tax credit programs and 36 
states have state historic tax credit programs. Novogradac & Company 
LLP, Tax Credit Resource Centers, accessed June 10, 2014, [hyperlink, 
http://www.novoco.com/resource_center/index.php]. 

[13] Urban Institute, New Markets Tax Credit (NMTC) Program 
Evaluation: Final Report, a report prepared for U.S. Department of the 
Treasury, Community Development Financial Institutions (CDFI) Fund, 
April 2013. 

[14] 26 U.S.C. § 45D(i)(1); Treas. Reg. § 1.45D-1(g)(3). 

[15] These risks of higher costs led, in part, to our prior suggestion 
that Congress consider a pilot test whereby some NMTCs would be 
converted to grants. 

[16] As part of their 2012 NMTC Allocation Agreements with the CDFI 
Fund, CDEs are now required to prepare a separate stand-alone document 
that discloses "any and all direct and indirect" NMTC-related 
transactions costs related to the loan or investment (such as third-
party legal and accounting costs), and any compensation (fees) that 
the CDE is assessing the low-income community business prior, to, 
during, and at the conclusion of the 7-year NMTC term. The CDFI Fund 
provided a sample disclosure statement to CDEs based on commonly-used 
leverage model transactions and typical costs identified with NMTC 
transactions. The CDEs are required to provide the low-income 
community businesses a final disclosure statement at closing. 

[17] GAO, Tax Expenditures: Background and Evaluation Criteria and 
Questions, [hyperlink, http://www.gao.gov/products/GAO-13-167SP] 
(Washington, D.C.: Nov. 29, 2012) and Understanding the Tax Reform 
Debate: Background, Criteria and Questions, [hyperlink, 
http://www.gao.gov/products/GAO-05-1009SP] (Washington, D.C.: Sept. 1, 
2005). 

[18] GAO, Standards for Internal Control in the Federal Government, 
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1] 
(Washington, D.C.: Nov. 1, 1999). 

[19] U.S. Department of the Treasury, Community Development Financial 
Institutions Fund, "New Markets Tax Credit Public Data Release: 2003-
2011 Summary Report," July 2, 2013. 

[20] GAO, Managing for Results: Assessing the Quality of Program 
Performance Data, [hyperlink, 
http://www.gao.gov/products/GAO/GGD-00-140R], (Washington, D.C.: May 
25, 2000). 

[21] Seventy-three projects were excluded because they had loans and 
investments originating both before and after December 31, 2010, and 
49 projects were excluded because one or more CDEs appeared to have 
reported fees data incorrectly by reporting fees as a percentage of 
the QEI rather than as basis points as instructed by the CDFI Fund. 

[22] As noted in appendix I, our survey population consisted of 
randomly selected NMTC projects with all loans and investments closing 
on or after January 1, 2010. Restricting the survey population to NMTC 
projects within our study's time period left us with a total of 1,265 
projects in the starting population from which we drew our sample. 

[End of section] 

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