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.
