What is New Markets Tax Credits (NMTC)?

The New Markets Tax Credit (NMTC) program is designed to encourage the introduction of capital by a private investor, typically a financial institution, to a commercial project, see a list of example projects below, which is located in the right location. This means, a commercial project, may be able to attract capital just because it is located in the right location.

The NMTC program allows a financial institution to invest in businesses located in a qualified location. For making this investment, the financial institution receives a 39% tax credit (39 cents for each dollar invested) of its total investment, which the financial institution receives over a 7-year period. Because the financial institution receives the 39% tax credit (year 1, 5%; year 2, 5%; year 3, 5%; year 4, 6%; year 5, 6%; year 6, 6%; year 7, 6% = 39%) over 7-years it is typically committed to the project for the 7-years. The tax credits are used by the investor (financial institution) to offset its tax liability. Even thought the tax credits are received by the financial institution over the 7-year period, the financial institution must make its entire investment, in the first year, which money is made available to the project.

See the IRS' full NMTC program publication.

The key question for anyone interested in NMTC financing is how much equity will remain in the project once the financial institution leaves the deal in year 7. The answer to that tees off of how much the investor paid for the tax credit. The higher the price paid per tax credit, the more capital is left in the project. Many variables drive that yield calculation, therefore, the amount fluctuates. For example, if the an investor purchases the 39% tax credit for 60 cents, then project will see a 23% net benefit at the end of year 7, which means that a $10 million dollar project should be left with $2.3 million at the end of year 7, and $7.7 million will need to be refinanced.

How does NMTC work?

NMTC Diagram

The equity investment made by the financial institution is passed through a third-party entity called a community development entity (CDE). The CDE holds the tax credits sought by the financial institutions. There are numerous CDEs that are affiliated with the financial institutions. The CDE receives the tax credits from the CDFI Fund, which is administered by the US Department of the Treasury.The capital investment that the CDE received from the financial institution passes through it and the money is made available to the project. Because of the tax credits, which the financial institution receives for making the capital investment, the money received from the financial institution is passed to the project at as free capital (equity), below market interest rates, with interest-only payments for 7-years, and/or part of the debt is forgiven at the end of the 7-year period. The amount of the free capital (equity) investment, the below-market interest rate, and/or the amount of the debt forgiven are based on a desired yield by the financial institution. At end of year-7, there is an exit strategy for the financial institution. Typically, the financial institution has no interest in the project after it exists.

Projects must be located in qualified locations to be eligible for NMTC financing, or benefit certain targeted populations. Projects have a better chance of being considered if they are in economically distressed areas and will have substantial community impact.

Desired Commercial Project

Non-exhaustive example of projects that have been financed with NMTC proceeds include, revitalization of downtown areas with renovations or construction of office buildings, commercial and retail buildings, shopping centers, mixed-use projects, for-sale housing, workforce housing, hotels, performing arts centers , theaters, charter schools, hospitals, assisted-living facilities, college campuses, high-tech and biotech facilities , homeless shelters, transitional housing, facilities to assist educating the homeless, and assistance with home ownership.

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