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Community Development Entity: Building Trust With the New Market Tax Credit Program

Article

February 10, 2025

Establishing trust as a Community Development Entity (CDE) is essential for driving meaningful change in low-income communities. This involves identifying impactful projects, forming strategic partnerships and addressing financial hurdles to safeguard sustainable community development. By leveraging proven strategies and engaging with stakeholders, CDEs can overcome perceived market risks and access the capital needed to fund transformative initiatives.

How Do CDEs Work?

CDEs have a mission to invest in low-income communities. They are able to complete this goal through receiving NMTC program funds and selecting projects that will benefit the community the most and allocating the funds:

Using the NMTC Program

The NMTC program is a powerful tool for revitalizing underserved areas. Increasing access to investment capital addresses a common challenge in low-income communities — the scarcity of funding for development projects.

Congress authorized the NMTC program in 2000 to bring down the cost of capital in communities left outside the economic mainstream. Taxpayers receive a 39% federal tax credit (taken over seven years) for qualified investments in CDEs, organizations with a track record of making loans and investments in underserved areas. CDEs use the proceeds of investments to finance business expansions, community facilities and other projects prioritized by communities.

Funding Projects with Community Impact

CDEs focus on funding projects that address critical needs while delivering measurable benefits for low-income communities. Many of these projects face significant financing gaps, which CDEs work to bridge through targeted investment.

Whether they include manufacturing facilities, healthcare facilities or small business incubators, the projects selected by CDEs act as catalysts for broader community revitalization. By prioritizing developments with high potential for social and economic impact, CDEs ensure their investments lead to tangible improvements in quality of life, aligning with their mission to uplift underserved areas.

CDE Strategic Investment Approaches

CDEs craft their investment strategies to align with both regulatory requirements and their mission to serve low-income communities. The NMTC allocation agreement provides a framework for these investments, while the unique needs of target regions shape the specific focus areas.

For instance, a CDE based in Central Appalachia may prioritize projects that help transition away from the economy’s reliance on coal, while a CDE located in a region adjacent to many Native reservations may target their investments to projects that build up the strength of the reservation and businesses owned by Native people. This tailored approach guarantees that every investment addresses the community's distinct challenges and opportunities.

Example of Success: The Innovate Fund

The Innovate Fund exemplifies the power of CDEs in action. With $328 million allocated across 28 projects in North Carolina, South Carolina, Tennessee, Virginia, West Virginia and Georgia, it has driven significant economic and social progress. The Innovate Fund has supported the creation of over 7,000 jobs for low-income community residents, served over 700,000 people through its community facilities, and developed or redeveloped over 3.5 million square feet of real estate. Its success demonstrates the transformative potential of strategic, community-focused investments.

Community Engagement: The Cornerstone of Trust for CDEs

Building trust with the community is a cornerstone of a CDE’s success. Being trusted by the community ensures that the CDE can effectively identify and address local needs, as well as foster strong community relationships and participation.

Community members are more likely to participate in projects and initiatives with CDE partners with whom they have an established relationship, as CDE’s with established relationships are also more likely to attract funding and resources from all sources. Another benefit of community trust is increasing the likelihood of multi-CDE deals, which creates a broader community reach and impact by providing more allocations for a larger project.

Governance and Accountability

Advisory boards play a critical role in maintaining a CDE’s accountability and alignment with community priorities. Comprised of individuals representing low-income areas' interests, these boards guarantee that investments are community-driven and meet the rigorous standards of the Community Development Financial Institutions (CDFI) Fund. Certification with the CDFI Fund signals a CDE’s commitment to financial integrity and meaningful community engagement, bolstering confidence among investors and stakeholders alike.

Let Us Be Your Guide

Becoming a trusted CDE is no small task. The process can be complex, from navigating the NMTC allocation agreement to fostering community trust and maintaining compliance with CDFI requirements. Cherry Bekaert's Strategic Financing Services team is well-versed in crafting unique investment strategies, building community relationships and leveraging industry knowledge to maximize your project’s impact. Let us partner with you to drive meaningful change and safeguard long-term success in low-income communities.

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