The new markets tax credit program has been around since 2001, but only recently has it received much attention as a means of financing renewable energy projects. A full description of how new markets tax credit financing works is way beyond the scope of a typical blog post. Suffice it to say that tax credits are awarded to investors who make investments in certain “community development entities” that in turn take the cash and invest it in businesses located in low-income communities (as determined by census data).
The investor receives a federal tax credit equal to 39 percent of the investment spread over seven years. The business benefits through very-low-interest financing, and/or a measure of debt relief after the seven-year period. For projects that qualify and line up all the necessary parties the benefit is substantial.
A few years ago, Congress mandated that a larger percentage of new markets tax credits be employed in rural, rather than urban, areas. This meant that renewable energy projects, such as large-scale solar, wind, and biomass projects became attractive candidates for new markets tax credit financing.
One such project is Burgess BioPower located in Berlin, New Hampshire, and developed by Cate Street Capital. The 75-megawatt biomass production plant is expected to be the Northeast’s largest when completed and will play a large role in revitalizing an area of New Hampshire that has been struggling to stay afloat.
The project will benefit from new markets tax credit financing as well as a section 1603 grant roughly equal to 30 percent of the project cost. It stands as a model for pairing new markets tax credits and renewable energy tax credits to finance a worthwhile and important project. In total, the project was financed by:
- $65,000,000 new markets tax credit financing
- $55,000,000 bridge loan against the expected grant and
- The proceeds from a taxable bond sale.
For the right project there are intriguing, and creative, ways to leverage a section 1603 grant (or tax credit) to increase the amount of new markets tax credits available. Also increasing the potential benefit for projects located in Maine is the brand new Maine New Markets Capital Investment Program, which provides a 39 percent Maine tax credit for qualifying investments, thus creating an aggregate new markets tax credit equal to 78 percent of the investment.