Opportunity Zone Magazine Volume 1, Issue 3 | Page 19

19 Currently, CDFIs rely heavily on large CDFI bank institutions and foundations to provide their capital market with programs like the Equity Equivalent Investment (EQ2), which is a capital product for CDFIs and their investors. It is a financial tool that allows CDFIs to strengthen their capital structures, leverage additional debt capital, and as a result, increase lending and investing in economically disadvantaged communities. They also rely on Program Related Investment (PRI) that lend capital to smaller CDFIs at a very low interest rate which allows them to re-lend to businesses and development projects in lowincome and underserved communities. In return, large banks receive Community Reinvestment Act (CRA) credits and foundations fulfill their mission. HOW CAN CDFI’s PARTICIPATE IN THE OZ PROGRAM? Who would provide their capital market investments? Banks and foundations are not driven to create capital gains and CDFIs do not have the expertise or experience of raising equity investment nor to administer the fund. The answer is for CDFIs and QOF to combine their resources through a joint venture partnership for win-win opportunities that provide a triple benefit for CDFIs, QOFs and low-income communities as a whole. provide loans for businesses and development projects. However, equity is not in their wheelhouse and so it is logical for CDFIs to work together with OZ fund managers. CDFIs know the communities and their needs, have relationships with community organizations and legislators in those areas, and already provide the debt or loans to the businesses and development projects in the areas. THE ROLE OF CDFI’s It is not easy for CDFIs to participate in the OZ program. Since the OZ incentive is catered toward equity investments, it provides a challenge to the CDFI funds because they are more designed with a debt or lending capacity, which is a challenge for CDFIs to participate in the program. A majority of CDFIs aren’t designed and structured for equity, they are designed for debt. How would a Joint Venture Partnership be structured between CDFIs and OZ funds? The OZ fund partner would perform the roles of managing the QOF, be involved in the capital raising, administration, exit strategies, and have the experience with the equity market instrument. CDFIs would perform the roles of facilitator for the OZ community, act as originator for the suitable transactions, facilitate relationships with community leaders and officials, go through the process of making sure the project is qualified, secure the renderings, deliver the senior or subordinated debt to a transaction in order to fill a gap, and work through the financing portion of the transaction together with provision of expertise in certain financing products. HOW TO LEVERAGE CDFI’S INVESTMENT PRODUCTS WITH QOF’s NEW MARKET TAX CREDITS PROGRAM (NMTC) The NMTC permits individual and corporate taxpayers to receive a 39% tax credit against federal income taxes for making Qualified Equity Investment (QEI) in Qualified Low-income community (QLIC) business or real estate project. Averaging a 6% increase equity investment over seven years to the project or business, the investment needs to stay in the project for a minimum of seven years. For a QOF investment to defer capital gains, and also to eliminate capital appreciation, it needs to stay in for 10 years. BANK ENTERPRISE AWARD PROGRAM (BEA) The BEA Program provides equity-like loans to certified CDFIs that demonstrate serving or providing loans or investments in OPPORTUNITYZONE.COM