New Markets Tax Credits: Bringing Private Capital to Public Services

By Published On: September 30, 20216.4 min read

Often the neighborhoods that are the most in need of commercial real estate investment are the ones least likely to get it. Low-income communities struggle to fill vacant lots with community-oriented businesses, while wealthier neighborhoods have plenty of businesses and other community resources. The New Markets Tax Credit (NMTC) addresses this disparity.

What Is the New Markets Tax Credit (NMTC)?

The New Market Tax Credit was first authorized by Congress in 2000 to “bring down the cost of capital in communities outside of the economic mainstream,” as Paul Anderson, Vice President at Rapoza Associates, a public interest lobbying firm, explained to

Investors receive tax breaks for qualified NMTC investments into Community Development Entities (CDEs), organizations with a track record of loans and investments in underserved areas. CDEs use those investments to fund business expansions, health centers, daycare facilities, business incubators and other community projects.

According to the Treasury Department, NMTCs have generated strong benefits for a number of communities across the country.

Here’s a statement from the CDI Fund website:

“Since 2003, the NMTC Program has created or retained more than 830,000 jobs. It has also supported the construction of 56.7 million square feet of manufacturing space, 94.5 million square feet of office space, and 67.2 million square feet of retail space.”

How Does the New Markets Tax Credit Program Work?

The New Markets Tax Credit Program starts with Congress authorizing the amount of credits, which it then passes on to the Treasury Department’s Community Development Financial Institutions (CDFI) Fund to administer. The CDFI fund receives and reviews applications, determines which entities and projects will be awarded credits and how much, and then distributes the credits to qualified Community Development Entities (CDEs), which we’ll dive into in the next section.

Once the CDEs receive the tax credit authority, they can go out and sell the tax credits to investors for their projects, usually regulated financial institutions like banks. The investors make debt or equity investments in the CDEs’ projects. As the Treasury Department explains, “Using the capital from these equity investments, CDEs can make loans and investments to businesses operating in low-income communities on better rates and terms and more flexible features than the market.”

Investors can claim these credits in as little as seven years. According to the Tax Policy Center, that’s 5% of the investment for each of the first three years, and 6% of the project for the next four, a total of 39% of the NMTC project. Anderson said NMTC financing fills an approximately 20-30% gap in the capital stack of a project while the business or nonprofit organization using the credits receives below-market financing terms over seven years.

NMTCs in Action

Kevin Boes, president and CEO of New Markets Support Company (NMSC), a subsidiary of Local Initiatives Support Corporation (LISC), said that among other projects, NMSC likes to invest in healthcare. In this scenario, NMSC wants to fund a health center that serves Medicaid patients. Without the tax credit, let’s say it would cost a developer $10M to build it, and they might have to put up two or three million. And then they could go out and get a, say, 70% bank loan to cover the rest of the cost. With the New Market Tax Credit, at least two and a half million or so of that $10M development cost is covered from capital from a tax credit investor.

What Is a Qualified Community Development Entity?

A qualified Community Development Entity (CDE) is the entity through which capital flows from investors and to community-benefiting projects. As defined by the Treasury Department, CDEs are “a domestic corporation or partnership that is an intermediary vehicle for the provision of loans, investments, or financial counseling in low-income communities.”

CDEs must also have a demonstrated record and mission of serving or providing capital to low-income communities, and maintain accountability to those communities through representation on a governing or advisory board. As Boes explained, “We’re the intermediary or the middlemen in the equation that connect the capital to the communities.”

Examples of CDEs include affiliates of mission-driven organizations like Community Development Financial Institutions (CDFIs), community development corporations (and affordable housing developers), government agencies or banks.

Who Is Eligible for the New Markets Tax Credit?

Only qualified CDEs are able to apply for and receive NMTC funding. In general, developers and individual real estate investors that don’t fit the above definition of a CDE cannot apply for the tax credits themselves.

So Where do CRE Developers and Investors Fit In?

For most NMTC projects, investors are generally regulated financial institutions like banks. If a developer or individual real estate investor is interested in benefiting from the program, they would try to convince a CDE to use a portion of its tax credit allocation on a project in an eligible community.

Let’s say you’re interested in building a hospital in a low income community, or a business incubator or community recreation center. The problem is you don’t know if the project would be financially feasible.

Try getting in touch with a CDE in your area that has NMTCs and seeing if they and their investors are willing to put the tax credits towards your project. You can find qualified CDEs through the CDFI fund’s NMTC Awardee States Served map. Boes noted that CDEs may seek you out if you’re a developer with a clear track record of projects in NMTC communities, and that there are consultants who work to pair developers with CDEs.

Which Areas and Projects Are Eligible?

Investments must be placed in low-income census tracts, defined as census tracts with poverty rates at or above 20% or median incomes at or below 80% of the area median income. Potential projects can be checked against eligible tracts through a mapping system created by the CDFI Fund.

Almost any kind of project based in one of the designated census tracts is eligible, with a few exceptions, as Anderson explained:

  1. Developments primarily focused on rental housing, unless it’s housing within a mixed use space (for example, multifamily units and some form of retail or commercial space)
  2. Most agricultural uses
  3. Certain “sin businesses,” including casinos and liquor stores
  4. Non-tangible assets

A quick way to check for areas that may qualify for the NMTC is to look for opportunity zones and locations designated for inclusionary zoning and density bonuses. These are all indications of low-income areas in need of affordable housing.

How to Apply to the NMTC Program

If you plan to apply as a qualified CDE, and can prove your entity meets the requirements, here’s what you need to do.

Qualify as a CDE

Submit an application to the Treasury Department’s CDFI fund showing you meet the requirements for a CDE. You can find information about the application here.

Attend Workshops and Webinars

The CDFI fund, in addition to answering questions by phone and email, hosts a number of workshops and webinars that guide applicants through the process and address concerns. There are usually two conference calls per application round, and an annually updated list of frequently asked questions.


Look for the notice that the application round has begun. In 2020, the round opened in late September. Applicants had until October 6 to submit their application as a qualified CDE, and until November 16 to submit the full application. Recipients and allocations will be announced in September, 2022.

Injecting Capital and Hope Into Underserved Communities

The NMTC levels the economic playing field of low and higher income communities. It’s a win-win for CDEs, investors and neighborhoods: CDEs or their development partners get to build in the areas they know best, these neighborhoods get much needed businesses through investors’ capital, and the investors get a tax break.

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