Opportunity Zone Magazine Volume 1, Issue 3 | Page 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
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
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