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Applying for CDE Certification


Prepared by:

Reznick Group New Markets Tax Credit Practice

May 25, 2011

All applicants for New Markets Tax Credit (NMTC) Program allocations must have received (or have applied for) Community Development Entity (CDE) certification. Unlike the NMTC application process, the CDE application process is rolling, and there is no limit to the number of CDEs that may be certified. Both for-profit and not-for-profit enterprises are eligible. In addition, existing Community Development Financial Institutions (CDFIs) and Specialized Small Business Investment Companies (SSBICs) automatically qualify and do not need to complete a CDE certification application, although they do need to register electronically with the CDFI Fund. (Note that subsidiaries and affiliates of CDFIs, SSBICs or CDEs do not automatically qualify as CDEs; their parent organizations must submit a CDE certification application on the subsidiarys behalf.) To be certified as a CDE, three criteria must be met: 1. Be a legally established entity and a domestic corporation or partnership for federal tax purposes (single-member limited liability companies [LLCs] thus will not qualify as they are disregarded entities for federal tax purposes). 2. Have a primary mission of serving or providing investment capital to low-income communities (LICs) or low-income persons (the mission test). This must be reflected in the organizations bylaws, annual reports or other organizational documents; at least 60 percent of the organizations products or services must be directed to low-income individuals or to businesses or organizations that serve low-income individuals or communities. 3. Establish accountability to the LIC being served by having representatives from the LIC hold at least 20 percent of the seats on the CDEs governing or advisory board (the accountability test). LIC representatives must either reside within the community itself or represent the interests of the residents of the LIC (for example, an employee or board member of a community-based or charitable organization serving the LIC). Note that those principals and staff members (and their family members) of the entity applying for certification cannot be deemed LIC representatives. Although it is not required, it is highly recommended that the LIC representatives include one or more low-income persons from the community.

CDE Certification Workplan

Successful CDE applications require significant thought and preparation to ensure that the organization is being established with a solid foundation for its operations and for the purposes sought by the Fund. The following checklist should serve as a model workplan: Legally form the entity (if this has not already been done). Remember that single-member LLCs will not qualify. Apply for a Federal Employer Identification Number (EIN). Draft bylaws and/or operating/partnership agreement. These documents should clearly reflect the required mission to serve low-income communities.

Choose your service area. This service area should reflect the geographic region your CDE intends to service if awarded an NMTC allocation. Assemble your governance or advisory board. The experience and standing of the board members contribute greatly to the credibility of the CDE in the subsequent allocation application process. Strong LIC representation is important to act as the link between the CDE and the community. The LIC representatives must collectively represent your selected service area. Determine the products or services the CDE will provide. The proposed products and services must meet an unfilled need within the community, and do so in a way that is innovative and accessible. The information you include for products and services on the CDE application is for information purposes onlyit is the allocation application where this information is bindingit is important to focus on this issue from the start. Determine if you want to certify multiple entities within one application. It is not necessary to certify more than one CDE to apply for an NMTC allocation. However, in the event you are successful in winning an award, you will likely need to certify additional CDEs at a later date (i.e., nonprofits that apply for an NMTC allocation must guarantee they will form for-profit CDEs if awarded an allocation). Prepare application and compile supporting documents. Read directions for the application closely to ensure that all supporting documents are attached to the application and include all necessary information.

How Reznick Group Can Help

Reznick Group has been active in the New Markets Tax Credit Program since its inception in 2001. As a result, we have unparalleled experienced in providing assurance, tax, transactional and consulting services for Community Development Entities. We help organizations seeking CDE certification in several ways, including: Advising on the corporate structure of the organization, including the choice of governing board or advisory board members Evaluating service area options Advising on corporate bylaws to ensure that they adequately reflect the required mission to serve lowincome communities Advising on board composition and how the board will work with the CDE and the community Compiling and submitting the CDE certification application Interacting with CDFI Fund reviewers on behalf of the applicant.

For more information, please contact Gary Perlow, New Markets Tax Credit Leader, at gary.perlow@reznickgroup.com.

This publication contains only general information and is not intended by Reznick Group to be a rendering of accounting, business, financial, investment, legal, tax or any other professional advice or services. This publication is not a substitute for any professional advice or services.