Community Development Financial Institutions and the Federal Healthy Food Financing Initiative

by SELC Volunteer, Kathryn Miller

Congress created the Community Development Financial Institutions Fund in 1994 to promote economic revitalization and community development.  To assist Community Development Financial Institutions (CDFIs) and Community Development Entities (CDEs) in meeting their missions, the CDFI Fund sponsors the following programs:

  1. CDFIs that provide loans, investments, financial services, and technical assistance to underserved populations and communities.
  2. The New Markets Tax Credit Program, which provides tax credits to help CDEs attract private-sector investment in low-income communities.
  3. The Bank Enterprise Award Program, which gives banks incentives to invest in CDFIs.
  4. CDFI Fund Native Initiatives, which provide financial assistance, technical assistance, and training to Native CDFIs.
  5. The CDFI Bond Guarantee Program, which issues bonds to support CDFIs investing in eligible community or economic developments.
  6. The Capacity Building Initiative, which provides “resource banks” of information and training materials to help build successful community businesses.
  7. The Capital Magnet Fund, which provides grants to CDFIs and qualified nonprofit housing organizations to finance affordable housing activities and related economic development activities. 1

In particular, the CDFI Fund recently teamed up with the Departments of the Treasury, Agriculture, and Health and Human Services to create a Healthy Food Financing Initiative.2  This initiative aims to provide grants and encourage financing for grocery stores, farmers markets, bodegas, food co-ops, and urban farms.3

In 2012, the California Healthy Food Financing Initiative became effective and created a council within the State Treasury Department (also known as the CHFFIC) to promote the same ideals as the Federal Healthy Food Financing Initiative.4  The California legislation was designed to have funding available to be used “to leverage other funding, including,… new markets tax credits, federal and foundation grant programs, incentives available to designated enterprise zones, the federal Specialty Crop Block Grant Program, and funding from private sector financial institutions pursuant to the federal Community Reinvestment Act.”5  Given the State budget crisis, the council within the State Treasury has not yet secured funds or developed any disbursement procedures.  The council does have a website and Facebook profile ( and should announce when funding becomes available.

The Federal Healthy Food Financing Initiative involves three CDFI Fund programs (1) the CDFI Program, (2) the New Markets Tax Credit Program (NMTC), and (3) the Capacity Building Initiative.  Each of these programs will be explained further in Section A and the application process to be eligible for these programs will be described in Section B.

 A. Healthy Food Financing Initiative Related Programs

1. The CDFI Program

The CDFI Fund provides monetary awards through its CDFI Program for technical assistance (TA awards) and financial assistance (FA awards).6  The money from these awards can be used to develop businesses, create jobs, develop commercial real estate, promote homeownership, develop affordable housing, and provide community development financial services.  A CDFI that offers financial services to low-income communities must be “certified” through the application process to be eligible for these awards.

TA grants are designed to be flexible to help build the infrastructure necessary to offer financial products and services to low-income communities.7  For example, CDFIs may use TA grants for equipment, materials, supplies, contract services, salaries and benefits, and staff training.

FA awards are usually equity investments, loans, deposits, or grants and can be used to finance capital, loan loss reserves, capital reserves, or operations.7  The CDFI must match the FA award dollar-for dollar with similar non-federal funds.9  For example, a FA award in the form of a grant must be matched by grant money from a non-federal source or a low interest loan with favorable terms must be matched by a private loan with similar terms.10  Federal funds include assistance from a federal agency and funds from a pass-through entity, such as a state agency, that are indirectly federal funds.11  Matching funds can come from private sources, retained earnings from operations, a line of credit, and other sources.12

2. The New Markets Tax Credit (NMTC) Program

To attract capital investment to low-income communities, the CDFI Fund awards tax credits allocations to CDEs, who then offer those credits to individual and corporate investors that make equity investments in the CDE.13  CDEs are financial organizations that act as vehicles for financial investments in low-income areas.14

The tax credit is the equivalent of “39 percent of the original investment amount and is claimed over a period of seven years (five percent for each of the first three years, and six percent for each of the remaining four years).”14  The American Taxpayer Relief Act of 2012 extended the NMTC Program to allow up to $3.5 billion in available credits for 2013.14

Treasury regulations spell out the complex details of the NMTC Program in 26 C.F.R. § 1.45D–1.  Investments in CDEs in low-income communities should be tied up for 7 years in order to get the full benefit of the tax credit.  Section 1.45D–1(d)(2)(i) requires that if returns on investments are received, the investing entity must reinvest those proceeds into other qualified low-income community investment or CDE during the 7-year credit period or the entity may lose the benefits of the credit under the recapture provision in 26 U.S.C.A. 45D(g)(3)(B).

For example, real estate CDEs will have no problem tying up an investment in a loan for at least 7 years, but in order to encourage investment in non-real estate related businesses that may need new equipment paid for with an amortizing five year or less loan, so long as any returns from that loan are reinvested after the short loan term expires, the credits will not be subject to recapture.

3. The Capacity Building Initiative

The Financing Health Food Options Resource Bank is a collection of useful documents and training materials that explain some of the overlapping federal food assistance programs that may be useful to a CDFI specializing in food production or sales in food deserts.17  The Resource Bank, last updated in 2012, includes 21 webinars with supporting documents to help start healthy food related organizations such as new grocery co-ops or underwriters for small farms.  The CDFI Fund also provides related trainings.

B. CDFI and CDE Application Requirements

Certification as either a CDFI or CDE is required to apply to receive funding or tax credits.  The CDFI Fund accepts CDFI certification applications annually and CDE certification applications on a continuing basis; however, CDEs that are applying for a tax credit allocation must meet an annual deadline set by the CDFI Fund.  Applicants that that receive rewards will sign an Award Agreement, an Assistance Agreement, or an Allocation Agreement that contains the annual reporting requirements for the organization’s award.

CDFIs are financial institutions such as community development banks, credit unions, loan funds, and venture capital funds that lend and make equity investments in low-income communities historically not well served by traditional financial institutions.18  To be certified, CDFIs must meet seven criteria:

  1. Be a legal entity;
  2. Have a primary mission of promoting community development;
  3. Be a financing entity;
  4. Primarily serve one or more Target Markets;
  5. Provide Development Services in conjunction with its financing activities;
  6. Maintain accountability to its defined target market; and
  7. Be a non-government entity and not be under control of any government entity.19

Applicants can submit CDFI applications and supporting documentation online through the portal.20

Applicants must be a registered legal entity and have an Employer Identification Number before submitting an application.  As a financing entity, the CDFI should have as its predominant business activity, “the provision, in arms-length transactions, of Financial Products, Development Services, and/or other similar financing.”21  The CDFI must also primarily serve defined “Target Markets” based on geographic and census population data that shows the financial services are for economically distressed communities.22  The CDFI maintains accountability to the community through representation on its governing board or in other ways that ensure resident participation.23

CDEs are domestic corporations or partnerships that act as “an intermediary vehicle for the provision of loans, investments, or financial counseling in Low-Income Communities.”24  There are three requirements to qualify as a CDE:

  1. Be a legally established entity and a domestic corporation or partnership for Federal tax purposes;
  2. Have a primary mission of serving or providing investment capital to LICs or Low-Income Persons; and
  3. Establish accountability to LICs through representation on its governing or advisory board25

Certified CDFI organizations and Small Business Administration designated Specialized Small Business Investment Companies automatically qualify as CDEs.25

Certified CDEs may apply to the CDFI Fund to receive a New Markets Tax Credit allocation to offer investors that make equity investments in the CDE.27.  Certified CDEs may also receive loans and investments from other CDEs that have been awarded tax credit allocations.27.  CDEs can be for-profit or non-profit, but only for-profit CDEs may receive tax credit allocations.27.

Unlike CDFI applications, CDE Applications must be printed and mailed to the Bureau of Public Debt.30  CDE applicants should access the CDFI Fund web portal at to use the Information and Mapping System program to determine geographic area eligibility for low-income communities.31

CDEs awarded tax credit allocations may only give tax credits to investors that make qualified equity investments, such as cash investments for stock or capital interest, in the CDE.

26 C.F.R. § 1.45D–1(c).  The CDE receiving tax credit allocations then must use “substantially all of such cash … to make qualified low-income community investments.”32  The “substantially all” requirement means at least 85% of the investor funds must go to qualifying investments, and this requirement must be satisfied each year in the seven year tax credit period.33  Qualified low-income community investments include the “investment in a qualified active low-income community business or a non-real estate qualified active low-income community business,” the purchase of certain loans from other CDEs, the provision of financial counseling services to a low-income community, and the investment in other CDEs.34  Under this section, active low-income community businesses can be non-profits, but active businesses cannot be a farm, golf course, country club, massage parlor, hot tub facility, suntan facility, gambling facility, or liquor store.35

Because farming operations are excluded from qualified low-income community investments, CDEs receiving tax allocations investing in farms cannot use that investment to count towards its “substantially all” requirement explained above.  However, there does appear to be an exception for small-scale farming operations with assets under $500,000.  The full text of the regulation dealing with investments in farming operations is as follows:

Farming. The term qualified business does not include any trade or business the principal activity of which is farming (within the meaning of section 2032A(e)(5)(A) or (B)) if, as of the close of the taxable year of the taxpayer conducting such trade or business, the sum of the aggregate unadjusted bases (or, if greater, the fair market value) of the assets owned by the taxpayer that are used in such a trade or business, and the aggregate value of the assets leased by the taxpayer that are used in such a trade or business, exceeds $500,000. For purposes of this paragraph (d)(5)(iii)(C), two or more trades or businesses will be treated as a single trade or business under rules similar to the rules of section 52(a) and (b).

26 C.F.R. § 1.45D–1(d)(iii)(C).  Additional special restrictions for loans to qualified low-income businesses and specific examples of how the CDE tax allocation requirements apply in practice can be found at Treasury Regulation 26 C.F.R. § 1.45D–1.

  1.  See, Community Development Financial Institutions Fund, U.S. Dep’t of the Treasury,
  2.  See, The CDFI Fund and the Healthy Food Financing Initiative: Fact Sheet,
  3.  See, The CDFI Fund and the Healthy Food Financing Initiative: Fact Sheet,
  4. Cal. Health & Safety Code § 104660 et. seq.; see also,
  5. Cal. Health & Safety Code § 104663(b).
  6.  See,
  9. 12 C.F.R. § 1805.500.
  10. 12 C.F.R. § 1805.501; see also, CDFI Financial Assistance Component: Matching Funds FAQ, CDFI Fund, 3 (Aug. 2008) available at
  11. CDFI Financial Assistance Component: Matching Funds FAQ, CDFI Fund, 3 (Aug. 2008) available at, at 7.
  12. CDFI Financial Assistance Component: Matching Funds FAQ, CDFI Fund, 3 (Aug. 2008) available at, at 9.
  13. 26 U.S.C.A. §45D;
  14. 26 U.S.C.A. §45D;
  15. 26 U.S.C.A. §45D;
  16. 26 U.S.C.A. §45D;
  17.  Found at
  18. CDFI Fund, CDFI Certification Application, 3 (Jan. 2013) available at
  19. CDFI Fund, CDFI Certification Application, 3 (Jan. 2013) available at; see also, 12 C.F.R. § 1805.100 et. seq.
  20. CDFI Fund, CDFI Certification Frequently Asked Questions, 2 (Mar. 2013) available at
  21. 12 C.F.R. § 1805.201(b)(2).
  22. 12 C.F.R. § 1805.201(b)(3).
  23. 12 C.F.R. § 1805.201(b)(5).
  24. CDFI Fund, CDE Certification Application, 3 (2009) available at
  25. CDFI Fund, CDE Certification Application, 3 (2009) available at
  26. CDFI Fund, CDE Certification Application, 3 (2009) available at
  27. CDFI Fund, CDE Certification Application, 3 (2009) available at, at 4
  28. CDFI Fund, CDE Certification Application, 3 (2009) available at, at 4
  29. CDFI Fund, CDE Certification Application, 3 (2009) available at, at 4
  30. CDFI Fund, New Market Tax Credit CDE Certification Question & Answer, 5 (July 2005) available at
  31. CDFI Fund, New Market Tax Credit CDE Certification Question & Answer, 5 (July 2005) available at, at 6-8.
  32. 26 U.S.C.A. § 45D(b)(1)(B).
  33. 26 C.F.R. § 1.45D–1(c)(5).
  34. 26 C.F.R. § 1.45D–1(d).
  35. 26 C.F.R. § 1.45D–1(d)(iii).