America and Arkansas were built on the foundation of dreams—the dreams to own a thriving business; to purchase a home you’re proud of; to access quality education; to adequately provide for your family, and to live a vibrant wholesome life.

In many instances, dreams have been extinguished due to a lack of financial accessibility. At Arkansas Capital, one of our main goals is to create accessibility so that our Natural State neighbors can realize their dreams. Community engagement and targeted outreach make this vision for a better life a true possibility.

Community Development in Arkansas

Community development in Arkansas is essential as it supports improvements in the quality of life for low-and moderate-income individuals and rural communities. In 2020, the United States Census reported that more than 16 percent of Arkansas residents are living in poverty. The per capita reported income in 2019 was just over $26,000. This illustrates the dire need for community support and engagement. At Arkansas Capital, we strive to formulate and offer traditional and creative solutions that will stimulate economic growth through lending products, tax credits, and other funding mechanisms, and entrepreneurial training and development thereby creating stronger communities throughout the state.

Why Is Community Development in Arkansas So Important?

Community development advances our communities by increasing homeownership rates, spurring small business development, increasing graduation rates, supporting workforce development, and more. Community development ensures that Arkansas residents have vital living components to live more sustained and healthier lives. Investing in our neighbors allows us to build a foundation, which enables our neighborhoods to attract and keep talent, start and build businesses, and resolve problems that arise.

When community development works, it results in less crime, shrinks wealth gaps, creates more and better jobs, nurtures a more capable and willing workforce, and decreases overall problems that directly impact residents. Some examples of community development include:

• Helping an aspiring grocery store owner open a store in a food desert (a geographical area without access to grocery stores within a walkable distance); and,
• Helping property developers purchase and renovate dilapidated homes in poverty-stricken areas to decrease crime and increase overall property values in the area.

Building Arkansas Up

By promoting entrepreneurship, supporting small businesses, and striving to make commercial financing accessible, we can increase prosperity in Arkansas. One way we do this is by offering an array of lending products to build Arkansas up.

Lending Services

We offer loans to help our Arkansas neighbors

• create startups,
• acquire and expand existing businesses,
• build or expand commercial real estate,
• obtain working capital,
• purchase commercial equipment, and
• facilitate rehabilitation of properties.

To service a variety of borrowers, we offer the following types of loans:

• SBA 504
• USDA B & I
• Conventional commercial loans
• SBA7(A)
• Express

To ensure you are best positioned for long-term success, we offer:

• military loan advantages,
• competitive interest rates,
• lower down payments, and
• reasonable collateral requirements.

In addition to our lending services, Arkansas Capital impacts community development through its Heartland Renaissance Fund (HRF). HRF is a subsidiary of Arkansas Capital and a Community Development Entity (CDE) as certified by the U.S. Department of Treasury.

This CDE designation allows Arkansas Capital to facilitate community development financing and job creation opportunities targeted to low-income communities in Arkansas and surrounding states, most notably through the deployment of New Markets Tax Credits (NMTCs).

Arkansas Capital was the first CDE established in the state when it launched HRF in 2001. Since that time, through multiple rounds of allocations, Arkansas Capital has deployed $355 million of NMTCs into Arkansas and surrounding states.

With a combined $1.1 billion in transaction experience and over 75 years of experience in structuring investment capital, Arkansas Capital’s HRF team can help innovative, early-stage, and high-growth companies in the following areas:

• tax credit syndication / tax credit finance,
• developing public/private partnership opportunities, and
• alternative financing solutions.

Community Development the Arkansas Capital Way

“Our first question is not ‘how can we make money?’ Our first question is ‘where is there a need?’ Over the years, these things you’ve seen us do have been a response to specific needs—no one else is doing it, so we say, ‘Alright. Let’s do it.’’’

Sam Walls, III – President and COO, Arkansas Capital Corporation

We’d like to talk to you more about your ideas – call us, or fill out our online form to let us know how we can help.

Empty warehouses with cracked windows, outdated manufacturing facilities, and desolate commercial spaces: this scene is all too common in many impoverished areas in the United States. Thankfully, two federal tax incentive programs exist that are designed to improve such places by promoting private capital investment in distressed areas across the country. These two programs are the New Market Tax Credit (NMTC) Program and the Qualified Opportunity Zone (OZ) Program.

The goals of the programs are similar, working to improve economic situations in historically low-income areas. However, there are key differences when it comes to comparing the new market tax credit vs. opportunity zone programs. In this article, we’ll discuss the pros and cons of each incentive.

Pros of the New Market Tax Credit

The New Market Tax Credit incentive has generated $8 of private investment for every $1 of federal funding provided. It’s funded over 5,400 businesses and has developed 178 million square feet of manufacturing, office, and retail space. Since its beginnings in 2000, $27 billion in tax credits has been allocated to investors, halting disinvestment in communities that need economic support most. This is to say that there are many benefits happening across the nation as a result of the NMTC Program.

In addition to the obvious positive impact on communities across the nation, investors also benefit by applying the tax credit to their annual federal income taxes. The incentive allows investors a direct tax credit for seven years following an investment within a struggling community that culminates in a total tax credit on the amount invested of 39%. Investors can claim 5% of the specified investment amount every year for the initial three years. Then, they can claim 6% for each of the last four years, adding up to the seven-year 36% total tax credit.

Stipulations of the New Market Tax Credit

There are a few stipulations for the NMTC, which some investors may see as cons. Many first ask what can new market tax credits can be used for, and one potential con of the NMTC Program is that it can only be applied as a tax credit against the investors’ annual federal tax returns. It can be used in no other way.

Additionally, to qualify for the tax credits, the investment project must be designated as NMTC-eligible within a qualified census tract. The more economically distressed an area, the more likely the Community Development Entity (CDE) is to be approved to receive tax credits. Historically, the CDFI has preferred CDEs to invest in communities where poverty rates exceed 30% and the median incomes of the area are no more than 60% of the statewide median income.

Investors are required to go through a CDE to receive tax credits. All NMTC applicants must be certified as CDEs, then distribute the approved credits to the investors, meaning that a business or investor cannot directly apply for the tax credit.

Lastly, the NMTC is up for renewal yearly. This means Congress could decide to end the program. However, this is not expected in the future, as the incentive has been renewed a number of times since its inception in 2000 and has a proven track record of revitalizing low-income areas. Congress not only voted to continue the incentive in 2021, but they also increased funding for it. For many, the pros of the NMTC Program outweigh the potential cons.

Application Process for the New Market Tax Credit

The process of applying for the NMTC may vary depending on qualification and location, however, generally, it only takes five steps:

1. A Community Development Entity (CDE) must be established.
2. The CDE submits an NMTC Allocation Application.
3. Once the application is approved, the CDE will get the tax credit allocations to provide to the investors.
4. The CDE will distribute the tax allocations to private investors.
5. The private investors will put their money up according to their tax credit allocation.

Note that there are timelines regarding this application, so be sure to see the CDFI website, and reach out to us with any questions (click for state-specific information).

Differences Between the New Market Tax Credit vs. Opportunity Zone Programs

The primary difference between the new market tax credit vs. opportunity zone programs is that Congress must decide annually to renew the NMTC incentive, and it’s approved by the Treasury Department and the CDFI staff. The OZ program is a part of an International Revenue Service (IRS) rule; as such, it doesn’t have to be approved every year. Additionally, Arkansas Opportunity Zones affect capital gains on an investment, as opposed to being applied as a direct tax credit on a federal return (as the NMTC is).

Pros of the Opportunity Zone Program

In 2017, the US government developed the OZ Program to promote investments in economically disadvantaged areas. It also gave investors wondering how to invest in opportunity zones an additional avenue for wealth-building. There are 8,700 areas in the US that are designated Opportunity Zones, offering investors a number of communities to support while they generate passive income. Additionally, some Opportunity Zone tax benefits stand right now, including the following:

• Previously earned capital gains can be temporarily deferred by placing these assets in Opportunity Funds (an investment vehicle organized as a corporation or partnership for the purpose of investing in Opportunity Zone property). Those assets are not taxed until the end of 2026, or until they are no longer in the possession of the investor.
• With capital gains placed in an Opportunity Fund for at least 5 years, the investor’s basis on the original investment increases by 10%. If it is invested for at least 7 years, the amount increases by 15%.
• After 10 years, any additional appreciation on the initial investment is tax-free.

Cons of the Opportunity Zone Program

Opportunity Zones operate differently from the NMTC Program. Investments in low-income communities are inherently risky, which is, in itself, a potential con. However, there are a few other cons to consider when it comes to this government incentive:

• OZ investments are treated as capital gains; the more you gain, the more you pay in taxes.
• Only accredited investors with a net worth of $1 million who can meet specific guidelines can invest.
• The buy-ins are high, typically requiring a minimum $100K.
• The investment model is virtually untested, having only launched in 2017; without an established track record, the risk is increased.
• The program may aid in gentrification, causing the displacement of residents and businesses in Opportunity Zones.
• Some experts predict that the continual utilization of Opportunity Zone benefits could negatively impact low-income communities, as it could put the focus of generating income before the benefit of the community in question.

Conclusion

If you’re searching for a way to positively impact low-income communities and generate income, these types of investment opportunities could be for you. Both routes can offer incredible returns and tax breaks; however, don’t forgo the research. Fully analyzing the projects and pros and cons of the new market tax credit vs. opportunity zone programs is advisable in order to mitigate risk and make the best decision for you and the community you might impact.

Our subsidiary, Heartland Renaissance Fund, LLC (HRF) is one of the largest Arkansas-focused community development entities, as well as a multi-round recipient of the US Treasury’s New Market Tax Credit Allocation. Since 2003, we’ve received $335 million in federal allocation. We’ve monetized and invested the credits in numerous low-income communities, truly making our state a better place to live and do business.

For more information about our opportunities, contact us today at 800-216-7237, or fill out our online contact form. We look forward to making a difference with you!

At Arkansas Capital, our goal is creating partnerships between Arkansans and the lending community. We have been worked with our subsidiary, Heartland Renaissance Fund, LLC (HRF), to deploy $200 million in New Markets Tax Credit (NMTC) to Arkansas communities. HRF is one of the largest Arkansas-focused community development entities (CDEs) and a multi-round recipient of the U.S. Treasury’s New Market Tax Credit Allocation.

Now, you may be asking “what are New Market Tax Credits?” Keep reading to answer that question and find out about the important New Market Tax Credits program offered by Arkansas Capital through HRF.

New Markets Tax Credits

New Markets Tax Credits (NMTC) are a federal tax incentive aimed at spreading investment and economic development to low-income areas in the United States. Since its inception in 2000, NMTC has facilitated the establishment of 4,800 projects spread across all 50 states.

The incentive program works by allowing a 39% tax credit to qualified investors. This increases value by reducing tax expenses. Despite the benefits accrued by a new investment or company, not many investors understand the incentive tax program.

Here, we will explain:

1. What is Tax Credit Investment?
2. Is Tax Credit good or bad?
3. What are New Market Tax Credits?
4. What does it mean to be NMTC Qualified?
5. What can New Market Tax Credits be used for?
6. What is a New Market Tax Credit Loan?

What Is Tax Credit Investment?

Tax Credit Investment is a means of making an investment that helps socially, environmentally, or even governmentally. The government uses tax credits to encourage growth in necessary areas of the economy. A Tax Credit Investment almost guarantees a return on your investment by getting a higher tax return or paying less taxes during tax season.

Depending on the specific tax credit program, Tax Credit Investments can be great ways to invest in socially conscious ways. New Markets Tax Credits, for example, encourage growth in low-income areas. Others might prompt green energy resources or improve diversity.

Is a Tax Credit Good or Bad — And What Is It?

A tax credit is the sum of money an investor or taxpayer is allowed to deduct from payable taxes. As a taxpayer, you already know taxes reduce your net income because they are an essential payment when you make money. A tax credit increases your net income by reducing your liability to the state.

Most taxpayers consider a tax credit to be a good thing. While both credits and deductions make what you owe in taxes decrease, they do so in very different ways. Tax credits in particular reduce the amount of taxes you owe dollar by dollar. You may pay less back in taxes, or you might get a higher refund.

What is the downside of receiving a tax refund like this? Because the New Market Tax Credits are specifically intended for low-income communities, these projects or businesses may not be as successful as they would be in more industrialized or higher-income areas. While you do receive the tax credit, the program can have this downside for investors.

The other downside of receiving a tax refund through what is called Tax Credit Investments is that there can be a lot of hoops to jump through. Certain requirements must be met and the types of programs or businesses may be limited by the rules of the tax credit in question.

What Are New Markets Tax Credits (NMTC)?

New Markets Tax Credits are a specific tax credit applicable only to projects or businesses investing in low-income areas. The tax credit works as an incentive for investors to initiate projects in New Market Tax Credit qualified areas.

NMTC offers a 39% tax credit to new investors over 7 years. The tax credits are split into two phases: a tax credit of 5% of your initial investment for the first three years and 6% for the remaining four years. However, the tax credits are only achieved through Community Development Entities (CDEs).

Who are Community Development Entities (CDEs)? CDEs are investment units that serve low-income communities. The advisory board of a qualifying CDE must be composed by at least 20% of local community members. NMTC are awarded to CDEs, who then attract investors to provide equity and receive tax credits in return.

What Are New Markets Tax Credits For?

New Markets Tax Credit are intended to encourage investments and development in all the forgotten corners of the United States, particularly those suffering from widespread poverty or low-income status. The program works under the assumption that investors may shy away from investing in areas considered less productive.

As an investor, the location of your business is a key area of concern. To compensate for the expectation of perceived low returns, the government allows you to deduct 39% of income tax from the total tax payable over 7 years. The tax credit reimburses the income you might have earned in a more favorable location. Using the New Market Tax Credit investment makes seemingly poor business locations more viable, attracting investors.

What Does It Mean To Be NMTC Qualified?

An NMTC qualified investor intends to start or expand a business into designated low-income communities by working with CDEs. Low-income communities are census tracts with a poverty level of at least 20%, family incomes 80% less than the area median, or a non-metropolitan census tract exhibiting certain signs of distress based on Census data.

Eligibility for the New Markets Tax Credits is also qualifying a business as Qualified Active Low Income Community Businesses (QALICBs). Investors through the New Market Tax Credit must meet certain conditions.

What Can New Market Tax Credits Be Used For?

What does it mean to be NMTC Qualified? The projects and businesses that qualify for New Markets Tax Credits must meet any of the following criteria in addition to operating in low-income communities:

1. The project provides business loans to businesses owned by women and minority communities. These loans provide capital for small and medium businesses to increase development.
2. The investment must create quality employment for qualifying communities. Most NMTC qualified investors operate in areas whose unemployment rates are one and a half times higher than the national average.
3. Qualified NMTC investors must also demonstrate their commitment to environmental sustainability. Low-income communities may face poor conditions, such as insufficient clean water. Rehabilitation works are also included in the eligible projects under the environmental sustainability programs.
4. Providing amenities like healthcare and education services in low-income communities are also eligible for NMTC. Other qualifying projects include affordable housing and real estate developers who offer flexible rent arrangements for tenants.

What Is a New Markets Tax Credit Loan?

Once you know what New Market Tax Credits are, what a New Market Tax Credit Loan means is an easy guess. In addition to what NMTC sends back, the NMTC program also offers loans to encourage business growth in economically distressed areas. A New Markets Tax Credit Loan provides financing for borrowers to buy, build, or renovate space for their business or organization in low-income areas. This is arranged through the CDE of the area.

Research shows that some NMTC-qualified projects would work even without incentives. The apparent low return from investments in low-income communities may turn into an advantage. Investments in poverty-stricken areas sometimes generate returns equal to what might be expected in any location. Subsequently, the tax credit becomes an additional, bonus return for businesses in low-income communities.

Let Us Help You Grow

If you are looking for a CDE to get started with the New Market Tax Credits program, Arkansas Capital Corporation can help. In addition to deploying $200 million in NMTC capital, we have worked with HFR to fund 35+ projects, and create or retain 3,538 jobs. Let us help you today! Contact Arkansas Capital at 800-216-7237 or 501-374-9247.