This article first appeared in Tax Credit Advisor.

Increasingly, climate solutions are central to preserving and creating wealth and well-being in communities across the country. 

At CohnReznick’s 2024 New Markets Tax Credit (NMTC) Summit, prominent Community Development Financial Institutions (CDFIs), Community Development Entities (CDEs), and alternative energy developers shared their experience financing renewable energy and climate resiliency initiatives in a community development context. 

Panelists highlighted the commonalities and potential synergies between the NMTC program and the Greenhouse Gas Reduction Fund (GGRF) program. Established under the Inflation Reduction Act (IRA), the GGRF is a $27 billion initiative of the U.S. Environmental Protection Agency (EPA) to reduce greenhouse gas emissions and air pollution. According to the EPA, GGRF is “the single largest non-tax investment within the [IRA] to build a clean energy economy while benefiting communities historically left behind.” The EPA announced awards in April 2024 and obligated the full $27 billion of funding to select recipients in August. 

Given the announcement by the CDFI Fund to merge the 2024 and 2025 NMTC allocation rounds into a single $10 billion round, an unprecedented level of federal funding will be available starting in 2025 to invest in communities disproportionately impacted by climate change and overburdened by pollution. 

How GGRF recipients plan to use awards

LIDACs & NMTC census tracts

GGRF recipients will make significant investments in renewable energy and climate-resilient projects and technologies. Of the $21 billion in GGRF funding under the National Community Investment Fund (NCIF) and Clean Communities Investment Accelerator programs, more than 70% of the program dollars are dedicated/committed to low-income and disadvantaged communities (LIDAC). 
LIDACs, for purposes of GGRF, are census tracts identified by the Climate and Economic Justice Screening Tool (CEJST), a publicly available mapping tool developed by the White House Council on Environmental Quality. LIDACs are also inclusive of census block groups that are at or above the 90th percentile for EJ Screen’s Supplemental Indexes, a publicly-available environmental burden screening tool managed by the EPA, and individuals and households with incomes not more than 80% of area median income (AMI) or 200% of the federal poverty level.

While GGRF screens do not utilize the NMTC qualified census tract criteria to identify LIDACs, there are similarities amongst them. For instance, CEJST, EJ Screen, and the NMTC program all consider federal poverty levels. 

Additionally, CEJST and the NMTC program contemplate Federally designated Indian Reservations and Alaskan Native Village Statistical Area, indicating there may be synergies qualifying projects under both programs.

Complementary capital

GGRF awardees are expected to provide financing at low interest rates (ranging from .25-5%) and favorable underwriting terms for qualifying projects and technologies. Loan financing will need to be collateralized under GGRF.

Overall, it appears that GGRF will be a potential source of complementary capital for NMTC projects as a source of leverage or direct project financing.

Community facilities and affordable housing projects

GGRF is expected to finance improvements in energy efficiency and climate adaptation of community facilities, such as Federally Qualified Health Centers (FQHCs) and small businesses. 

NMTCs can finance for-sale housing and mixed-use developments if at least 20% of revenue is from commercial uses. Affordable housing is a primary focus for GGRF. GGRF will finance efforts to solarize and decarbonize multifamily developments, single family homes, and resident-owned cooperatives. Similar to the NMTC program, the GGRF NCIF program defined housing affordability as income at or below the greater of (1) 80% AMI and (2) 200% of the federal poverty level. 

By financing renewable energy solutions through GGRF, NMTC transactions can reduce utility costs, address extreme heat conditions, and protect against weather-related disasters. 

Scaling community-led climate investments

Many GGRF recipients have been financing clean and renewable energy for several years. GGRF should help to scale these initiatives, potentially making them attractive NMTC investments. Initiatives include community solar projects and investments in electricity generation and storage.

Workforce Development

Workforce development is another critical component of GGRF. Access to training and skills needed to construct new clean and renewable energy technologies is essential. 

Additionally, GGRF awardees must meet Build America, Buy America (BABA) and Davis-Bacon and Related Acts (DBRA) requirements. 

Building America, a CDE and affordable housing developer, has closed $10 billion of financing for affordable housing and 30 NMTC projects, all requiring prevailing and union wages. In this context, the programmatic goals of GGRF are achievable and well-suited for future NMTC investments. 

How NMTC allocatees and developers can prepare for GGRF

GGRF is intended to accelerate an equitable transition to a clean economy. By prioritizing CDFIs and other community-oriented financial institutions, it is likely GGRF will be in the capital stack of future NMTC transactions. 

Geographic scan of climate justice issues

Conducting a geographic scan of climate justice issues is essential. This helps target investments where they are needed most. 

As noted above, qualifying criteria under GGRF and NMTC are similar but not the same in most instances when it comes to climate justice. For example, under the NMTC program, a site is in severely distressed a census tract if it is both: 1) a Brownfield site and 2) in a county for which Federal Emergency Management Agency has (a) issued a “major disaster declaration” and (b) determined eligibility for both “individual and public assistance;” provided that the initial project investment was made within 36 months of the disaster declaration.

Based on our review of the CEJST tool, neither characteristic appears to be a qualifying criterion under GGRF. Instead, the CEJST tool contemplates proximities to a Superfund site, hazardous waste facility or Risk Management Plan facilities with significant environmental and public health risks. As such, climate justice and environmental conditions will need to be carefully considered when determining place-based eligibility.

Community impact and reporting requirements

Highly impactful projects are likely to be competitive under both GGRF and the NMTC program. GGRF will have robust reporting requirements to capture the social and environmental outcomes. CDEs have been tracking and reporting the impact of NMTC projects since the program’s inception, more than 20 years ago. NMTC projects employ Community Benefit Agreements that have evolved to include broader metrics, such as environmental impacts. These agreements, leveraging standardized methodologies and community input, capture multifaceted impacts and provide a template for projects funded by GGRF.

New partnerships and programs to leverage

Collaborations with established and nascent green banks, CDFIs, and state energy offices will be vital for NMTC transactions looking to leverage GGRF. 

Leveraging other grant and tax credit programs under the IRA will provide additional support and funding for these projects.

Systems and infrastructure

Investing in systems and infrastructure to support these projects is necessary. This includes implementing new standards and resources to ensure meaningful emissions reductions. Peer-to-peer discussions, industry roundtables, and leveraging existing resources for scenario analysis provided by reputable organizations are critical for sharing best practices and driving meaningful change.

Conclusion

GGRF recipients are at the forefront of the renewable energy transition, driving economic and environmental justice through strategic investments. With a focus on affordable housing, community facilities, workforce development, and by leveraging complementary capital, like the NMTC program, they endeavor to create a more prosperous and sustainable future. Through innovative financing solutions and a commitment to climate justice, GGRF is paving the way for a greener, more resilient community development industry.

_{Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.}