Have you heard the term “New Market Tax Credit”? Established by Congress in 2000, the NMTC program is a federal initiative aimed at stimulating investment in low-income and economically distressed communities. By offering tax incentives to investor corporations, it encourages private investment in businesses and real estate projects within underserved communities across the US.
Objectives of the NMTC Program
The program’s main goal is to bring jobs to low-income or underserved communities and to provide services those communities lack, such as grocery stores or healthcare. It addresses these gaps by:
- Attracting private investment. By providing tax credits to investor corporations, the program makes it more appealing for investors to direct resources into underserved areas — blighted urban neighborhoods, rural areas lacking jobs, or minority communities such as Native American communities.
- Promoting economic development. Investments facilitated by the NMTC program support the development of businesses, commercial real estate, and community facilities, creating jobs and fostering economic growth. The most heavily funded projects tend to be industrial projects or industries that provide jobs to local residents.
How the NMTC Program Works
The program is built on an allocation of tax credits, administered by the U.S. Treasury.
1. The CDFI Fund
Administered by the U.S. Department of the Treasury, the Community Development Financial Institutions (CDFI) Fund awards NMTC allocation authority to Community Development Entities (CDEs) through a competitive application process, based on each CDE’s track record, community impact, and capacity to leverage private investment.
Funding is based on what Congress allots each year. For the 2023/2024 round, 948 organizations applied for $14.8 billion in funding, while the allotment was about a third of that — $5 billion. That competitive process helps ensure resources go to the projects likely to generate the most community benefit. The 2024/2025 round saw $10 billion allotted.
2. CDEs (Community Development Entities)
A CDE is a domestic corporation or partnership that serves as an intermediary between investors and low-income communities. To receive NMTC allocations, a CDE must demonstrate a primary mission of serving or providing investment capital to low-income communities or individuals.
- Low-income communities: CDE investment must go into low-income communities or areas otherwise designated as in need — brownfields, FEMA disaster zones, state enterprise zones, and areas lacking food or medical resources.
- Investor contribution: Investors — typically banks or large financial institutions — provide capital to CDEs in exchange for NMTCs, in the form of equity investments or loans.
- Deployment of capital: CDEs use the capital raised to finance qualified low-income community investments (QLICIs), including loans or equity investments in businesses and real estate projects within targeted areas.
- Receipt of tax credits: Investors receive tax credits over a seven-year period, totaling 39% of the initial investment — 5% annually for the first three years, then 6% annually for the remaining four.
Example: An investor (typically a bank) makes a $10,000,000 investment into a CDE — $3,000,000 as equity and $7,000,000 as debt. The investor receives back 39% of the $10M investment as tax credits ($3,900,000), plus interest on the $7M debt portion.
The Do’s and Don’ts
DO: NMTCs are intended to stimulate growth in the communities they serve, with a focus on commercial ventures:
- Development of for-sale housing is permitted
- Mixed-use development is permitted if 20% or more of gross income is allocated to the commercial portion
- Ground-up or new construction — retail, industrial, healthcare, mixed-use
DON’T: Not permitted:
- Rental of real estate where no substantial improvements are being made
- Rental housing where the residential portion exceeds 80%
- “Sin” businesses
How Can Investors Benefit?
1. Borrowing From the Community Development Entity
For a qualifying investment in a low-income community, an investor can access funds below market-rate development cost for their project. Loans are usually interest-only for seven years, making them affordable through the stabilization period. At the end of that term, the tax credit for the equity investor will have been depleted, and that investor typically exits for a nominal value, with the borrower assuming the debt provided by the NMTC — an advantageous exit for both parties. Deal size minimums are typically $5 million or greater.
2. Accessing Funds Otherwise Not Available
Using NMTC funds as part of a capital stack allows investors to finance projects that otherwise wouldn’t pencil out, or would be highly restricted on LTV — filling a financing “gap” other sources won’t cover. Locally, Community First Fund is one example of an entity with an approved CDE providing access to this capital.
There are many types of CDEs, each focused on different missions — some on community services, others on rural job creation, and others on for-sale housing development. The type of project should guide which CDE you approach, since NMTC allocations are made to the CDE based on its intended use and mission, not on a project-by-project basis. This differs from Low-Income Housing Tax Credits, which are project-specific.
The Bottom Line
The New Market Tax Credit program is a powerful financing tool for bringing investment and economic development to America’s low-income communities. By offering tax incentives for corporate investment, it provides vital funding for community needs and helps raise the standard of living for residents.
