Out of Prospects? These Tax Credits Might Raise Millions of Dollars for Your Project

Private Cathedral High School in Los Angeles is opening this new performing arts center next month, with help from New Markets Tax Credits. The tax credits provided $3.7 million of the $18 million Cathedral had to raise for the capital project.

Private Cathedral High School in Los Angeles is opening this new performing arts center next month, with help from New Markets Tax Credits. The tax credits provided $3.7 million of the $18 million Cathedral had to raise for the capital project.

Editor’s Note: This article was first published on July 22, 2019.

With wealth increasingly concentrated in fewer hands, the number of American households supporting charity is declining, and small to mid-range gifts for capital projects are harder to win. Yet a small but growing group of charities has been able to offset those trends by raising millions of dollars apiece, using little-known federal tax credits.

The New Markets Tax Credit Program, as it’s known, is aimed at creating jobs. The program is particularly active in financially distressed rural areas, but struggling urban communities have benefited, too. Nonprofit organizations in economically distressed areas that need to erect new buildings or carry out other projects that will employ new workers may be eligible for the tax credits, which are also available to for-profit companies.

The tax credits are welcome news indeed among nonprofits able to benefit from them at a time when traditional fundraising is growing more challenging.

Disappearing Donors

In surveys of more than 9,000 nationally representative households conducted every two years, Indiana University’s Lilly Family School of Philanthropy found that the percentage of households making charitable donations declined from 68 percent in 2002 to 56 percent in 2014, a drop of more than 12 percent. (Further dips may emerge when the next set of results for 2016 comes out this summer.)

At the same time, raising money has become more difficult, according to Kevin Edwards and Paul Strunk, two experienced fundraisers who founded Edwards+Strunk, a Scranton, Pennsylvania, consulting firm. Between them, they have now helped six nonprofit organizations benefit from the New Markets Tax Credits program. 

The two fundraisers say that it’s harder these days to get traditional gifts over $1,000. Securing mid-range, major gift donations from $50,000 to $250,000 from individuals and families can be particularly challenging.

That’s because the pool of people who can afford to give at those levels is shrinking. “Thirty years ago, campaigns were getting about 80 percent of donations from 20 percent of the people at the higher end,” Edwards says. “Now, it’s more like 95 percent of the money comes from 3 percent of people at the top.”

A shrinking pool of donors and the decline of small to mid-range capital gifts are bad news for nonprofits in low-income communities, which already have a hard time attracting capital.

Such realities have made New Markets Tax Credits “a gift from heaven,” says Strunk, Edwards’ business partner.

But most nonprofit leaders still know nothing about the tax credits nearly 20 years after they were first enacted in 2000, a situation Strunk finds “shocking.”

Arturo Lopez, director of advancement at Cathedral High School in Los Angeles, is glad he learned about New Markets Tax Credits. His private school is holding a ribbon-cutting ceremony next month on a new performing arts center that cost $18 million. The project benefited from some $3.7 million raised from the tax credits.

“Without this money, the classroom part of the new center would’ve been completed, but we would not have been able to complete the theater as envisioned,” says Lopez.

How the New Markets Tax Credits Work

A division of the U.S. Department of the Treasury administers the program, authorizing banks or other entities that provide loans, investments, or financial counseling in low-income communities to allocate the tax credits to qualifying projects. Such organizations, called “Community Development Entities,” compete to receive an allocation of New Markets Tax Credits from the federal government. They then allocate the credits to qualifying projects in financially distressed areas.

The tax credits are monetized by selling them to corporations looking to reduce their federal tax burden. Tax credits are not cash. Corporate investors will negotiate a purchase price for each dollar of tax credit, currently paying about 85 cents on the dollar. After selling the tax credits and paying fees and consultant charges, a project can expect to receive between 22 and 25 percent of the original tax credit allocation as cash. The dollars raised allow the Community Development Entities to inject money into businesses, nonprofit projects and commercial real estate developments that meet certain criteria.

New Markets Tax Credits can be used to generate capital for up to 25 percent of a new facility or to expand an existing business operation. Money from the tax credits must be paired with other financial resources such as philanthropic support, owner equity, loans and other forms of credit.

Some businesses are ineligible for the tax credits, including golf courses, gaming facilities, farming businesses and most residential properties.

Since New Markets Tax Credits must be used in economically distressed communities, preference is often given to qualifying projects in rural and underserved states like Arkansas, Florida, Georgia, Idaho, Nevada, Tennessee, Texas and Wyoming.

A Funding Boost

Money generated from the tax credits has been used to improve addiction services and facilities, community centers, healthcare and schools.

Nonprofit projects cited in the 2015 New Markets Tax Credit Portfolio, for example, include a “solar canopy” project at the Cincinnati Zoo that will generate about 20 percent of the zoo’s power and create 77 permanent jobs. Another is the renovation and expansion of the WCNY Broadcasting and Education Center, home to the public broadcasting station in Syracuse, N.Y. That project produced 57 jobs.

Edwards says he first encountered New Markets Tax Credits when he was the lead fundraiser at Elms College in Chicopee, Massachusetts. At the time, the college was trying to build a new Center for Natural and Health Sciences. But the project was jeopardized when college leaders realized they needed $2 million to $3 million more than they’d anticipated.

“Elms College did not have a long history of capital fundraising, and we had borrowed as much as we could,” recalls Edwards. “That’s when one of our board members suggested we could make up the shortfall from New Markets Tax Credits—if we could qualify.”

While it was a lot of work, says Edwards, Elms College ultimately prevailed, qualifying as part of an economically distressed region and finding a Community Development Entity to allocate more than $12 million in tax credits. Those were sold to several regional banks, bringing over $3 million to the project. It was just the amount the college needed.

“Getting involved in the New Markets program can be an arduous, time-consuming process,” Edwards says. “But it does offer fundraisers and their organizations a valuable tool to use in meeting financial needs.”

He adds: “Let’s face it: Getting $3 million from New Markets Tax Credits is a lot of $100,000 gifts you don’t have to go find.”