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The Allocation Agreement


Prepared by:

Reznick Group New Markets Tax Credit Practice
May 25, 2011

Once a Community Development Entity (CDE) has succeeded in securing a tax credit allocation through the New Markets Tax Credit Program, it will receive its allocation agreement. This document sets forth the range of rules, regulations and restrictions the CDE must follow as a condition of receiving its tax credit allocation. It, in other words, becomes the CDE’s “bible” during the course of its operations. The agreement must be closely reviewed before it is signed.

The Agreement
The allocation agreement is divided into three sections, or schedules. The first schedule, “Organizational Specific Terms and Conditions” is based on the individual CDE’s allocation application, and translates the vision put forth in the application into performance obligations and restrictions. It is thus important to check the wording of this section carefully against the application. Typographical errors do occur, but more important, the Community Development Financial Institution (CDFI) can exercise subjective judgment in how it converts statements from the application into performance requirements. For example, a CDE whose application says it will focus on developing medical facilities may find its agreement includes a requirement that at least 50 percent of its allocations be given to such projects. The CDE must carefully review these interpretations and make sure it agrees with them. If there are issues with how the CDFI has interpreted the application, this is the time to discuss them with the Fund. The second schedule, “General Allocation Terms and Conditions,” is the same for every CDE and is not subject to change. Nonetheless, it needs to be closely reviewed, as it lists various reporting and filing requirements, definitions of key terms, and representations and warranties being made by the CDE to the Fund. The third schedule, “Form of Opinion of Counsel,” is a letter that must be submitted by the CDE’s attorney, confirming that the CDE meets various legal requirements to conduct its business. Note that the allocation agreement sets forth the programmatic requirements that the CDE must meet; the separate issue of regulatory compliance falls under the jurisdiction of the Internal Revenue Service. Once the allocation agreement has been reviewed and finalized, there should be a meeting of the CDE’s management team, board of directors and external advisors to review the document. In addition, a review of the agreement should be part of the orientation process of any member of the team that joins later on.

Maintaining Compliance with the Agreement
As the CDE undertakes its operations, it must make sure that it continues to meet the terms of the agreement. Some issues to be aware of include: Amending the agreement. As the CDE conducts its business, it may find that it wants to undertake a transaction that is beyond the scope of the original agreement—perhaps in a state other than those listed in the agreement’s service area, or a type of investment other than those originally specified. In this case, the CDE can apply to amend the agreement. Keep in mind, however, that amendments are difficult to

obtain. The key to a successful amendment request is to show that it represents a marginal change that remains within the original intent of the application, rather than a wholesale revision. Material events. The agreement lists a number of material events that must be reported to the Fund in a timely manner. These include changes in key personnel, adverse financial conditions and changes in the CDE’s ownership. In addition to the specific events outlined, however, the CDE is also required to report “other events that may be determined by the CDFI Fund, in its sole discretion, to be material events.” When in doubt, then, it is best to err on the side of disclosure. Maintaining the spirit of the agreement. The agreement includes the requirement that the CDE use its allocation “only to the extent that such uses are generally consistent with the strategies…set forth in the Allocation Application.” Interpreting this intentionally broad phrase can be challenging, particularly when it comes time to structure fees for individual transactions. The CDE’s management and advisors need to step back continually and ask if their deals not only meet the letter, but the spirit, of the agreement. Meeting the three-year benchmarks. All allocation agreements include a requirement that 60 percent of the allocation be distributed within the first three years. In addition, 85 percent of the deployed allocation at this point must be used in the service areas and for the product types specified in the agreement. This three-year benchmark acts as a midpoint check on the CDE’s activities. It is important to monitor the CDE’s loans and investments against this timetable so that the CDE does not find itself too far out of scope as the deadline approaches.

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, compliance, transactional and consulting services for CDEs. We can help with allocation agreements in a number of ways, including:  Reviewing the allocation agreement against the application to identify inconsistencies or subjective interpretations  Preparing allocation amendment requests  Deciphering material events and advising on appropriate strategy for notifying the CDFI Fund  Advising on a CDE’s activities so that they remain within the spirit of the agreement  Monitoring compliance with investment benchmarks. For more information, please contact Gary Perlow, New Markets Tax Credit Leader, at

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.