Today’s rates for a wide variety of multifamily loans
Check Today's Rates →
The New Markets Tax Credit (NMTC): What You Need to Know
The New Markets Tax Credit, or NMTC, is designed to encourage investment in low-income communities through the use of Certified Development Entities — specialized financial entities which must be authorized and annually re-certified by the Community Development Financial Institutions Fund (CDFI Fund).
What is the New Markets Tax Credit (NMTC)?
The New Markets Tax Credit, or NMTC, is one of the largest tax credit programs in the United States, having issued approximately $25 billion in tax credits over the last 15 years. The NMTC is designed to encourage investment in low-income communities through the use of Certified Development Entities, specialized financial entities which must be authorized and annually re-certified by the Community Development Financial Institutions Fund (CDFI Fund), a U.S.. government agency which promotes economic development in distressed areas throughout the country.
How The New Markets Tax Credit (NMTC) Program Works
Once a Certified Development Entity is certified by the CDFI Fund, it can bid for New Markets Tax Credits, a limited amount of which are issued each year. The process is competitive, and projects will be assessed on their potential positive impact on low-income communities. If a CDE receives NMTCs, it can allocate them to investors, who receive a 39% tax credit of the equity they invest in a CDE. The tax credit is taken over a 7-year period, at a rate of 5% each year for the first three years and 6% per year for the remaining four years.
Technically, a CDE can propose an investment in any eligible low-income census tract, but in practice, the more economically distressed, the more likely the CDE is to receive NMTCs. In recent years, the CDFI fund has preferred CDEs to invest mostly in highly distressed areas, where poverty rates are upwards of 30% and area median incomes are no more than 60% of the statewide median income.
In addition, a CDE must re-invest any funds provided by investors within 12 months of receiving them. A for-profit institution, such as a bank or a group of investors, could create a CDE and invest in it, or could find outside investors. While non-profits and for-profit groups can both create CDEs, only for-profit groups can receive and issue New Markets Tax Credits.
If a Community Development Entity does not invest “substantially all” of its funds into eligible commercial real estate and businesses with 12 months, or it loses its certification from the CDFI Fund, the NTMC credits that have been issued will typically be subject to recapture. This means that investors will have to repay the full amount of any tax credits back to the federal government.
Where Do CDEs Invest NMTC Funds?
CDEs invest in “Qualified active low-income community businesses” (QALICBs), which may be for-profit or non-profit entities. CDEs can do this either by purchasing an equity stake in the business, or by issuing a loan to the business, or some combination of the two. QALICBs can use CDE funds finance real estate, equipment, or other eligible assets, though the most common project types include retail/mixed use properties, manufacturing and food processing businesses, health care firms, and office and professional services companies.
NMTCs, Multifamily Properties, and The LIHTC Program
NMTCs cannot be used with purely multifamily-aligned properties. There must be at least a 20% commercial property component; i.e. no more than 80% of the property can be residential. This is based on revenue, not square footage. NMTCs cannot be directly mixed with Low Income Housing Tax Credits (LIHTCs), but they can be used in the same project by utilizing a “condominium structure,” i.e. by legally separating the commercial and multifamily parts of a building into two distinct ownership entities. Alternatively, a “master-lease” structure may be used, in which the ownership entity leases the commercial part of the structure out to an affiliate company, who subleases it to commercial tenants. These projects, in certain cases, could be eligible for HUD multifamily financing, such as HUD 221(d)(4) or HUD 223(f) loans, which provide very low interest rates and extremely long (35-40 year), fully amortizing loan terms. However, to qualify for NMTCs, businesses must create jobs in the area, which may be somewhat difficult with multifamily properties, making it slightly harder to qualify.
Related Questions
What is the New Markets Tax Credit (NMTC)?
The New Markets Tax Credit, or NMTC, is one of the largest tax credit programs in the United States, having issued approximately $25 billion in tax credits over the last 15 years. The NMTC is designed to encourage investment in low-income communities through the use of Certified Development Entities, specialized financial entities which must be authorized and annually re-certified by the Community Development Financial Institutions Fund (CDFI Fund), a U.S. government agency which promotes economic development in distressed areas throughout the country.
The New Markets Tax Credit (NMTC) is a federal tax incentive program designed to encourage investment in low-income communities. Since congress started allocating credits in 2003, the program has issued approximately $25 billion in tax credits. Specialized investment vehicles called community development entities (CDEs) compete for NMTCs, which are allocated by the U.S. Department of the Treasury. Once a CDE has been allocated NMTCs, they can award investors the tax credits. In order to qualify for NMTCs, a CDE needs to invest or provide loans to a business located in one of approximately 31,000 qualified low-income census tracts. In addition, most CDEs have pledged to place 75% of their investments in the most distressed census tracts, in order to increase their impact on low-income communities.
How does the NMTC benefit commercial real estate investors?
The New Markets Tax Credit (NMTC) program provides commercial real estate investors with a federal tax incentive. In exchange for investing in a Community Development Entity (CDE), investors are awarded a tax credit equivalent to 39% of the equity they have invested. This credit is taken over a 7-year period, as a 5% annual credit for years 1, 2, and 3, and a 6% credit for years 4, 5, 6, and 7. Between 2015 and 2017, around 50% of all New Market Tax Credits were awarded to Community Development Financial Institutions (CDFIs), private financial institutions created with the goal of providing affordable financing solutions to low income individuals and economically disadvantaged businesses. In 2016, CDE’s that were awarded NMTCs invested nearly $45 billion in low-income areas, created three-quarters of a million jobs, and built or improved nearly 200 million sq. ft. of commercial real estate. For the 2017-2018 tax year, the federal government awarded CDEs $3.5 billion in NMTCs, which is estimated to stimulate at least $28 billion in development.
For more information, please visit Tax Policy Center's website.
What are the eligibility requirements for the NMTC?
The eligibility requirements for the NMTC are that the business must be a “Qualified Active Low-Income Community Business” (QALICB). This means that the business must be located in a low-income community, have a primary purpose of serving the low-income community, and have at least a majority of its employees living in the low-income community. Additionally, the business must be a for-profit or non-profit entity, and must use the funds to finance real estate, equipment, or other eligible assets. For more information, please see this page from the CDFI Fund.
What types of projects are eligible for the NMTC?
The New Markets Tax Credit (NMTC) can be used to finance "Qualified active low-income community businesses" (QALICBs), which may be for-profit or non-profit entities. The most common project types include retail/mixed use properties, manufacturing and food processing businesses, health care firms, and office and professional services companies. NMTCs cannot be used with purely multifamily-aligned properties, as there must be at least a 20% commercial property component. However, a “condominium structure” or “master-lease” structure may be used to combine NMTCs with Low Income Housing Tax Credits (LIHTCs). These projects may be eligible for HUD multifamily financing, such as HUD 221(d)(4) or HUD 223(f) loans, which provide very low interest rates and extremely long (35-40 year), fully amortizing loan terms.
Source: The New Markets Tax Credit (NMTC): What You Need to Know
How can I apply for the NMTC?
You can apply for the NMTC through a Certified Development Entity (CDE). A CDE is a specialized financial entity which must be authorized and annually re-certified by the Community Development Financial Institutions Fund (CDFI Fund), a U.S. government agency which promotes economic development in distressed areas throughout the country. The process is competitive, and projects will be assessed on their potential positive impact on low-income communities. If a CDE receives NMTCs, it can allocate them to investors, who receive a 39% tax credit of the equity they invest in a CDE. The tax credit is taken over a 7-year period, at a rate of 5% each year for the first three years and 6% per year for the remaining four years. For more information, please visit this page.
What are the advantages and disadvantages of the NMTC?
The New Markets Tax Credit (NMTC) is a federal tax incentive program designed to encourage investment in low-income communities. It has several advantages, including the ability to attract private capital to low-income areas, create jobs, and stimulate economic development. Additionally, the NMTC can provide investors with a 39% federal tax credit over a seven-year period. However, the NMTC also has some drawbacks. For example, the program is complex and requires specialized knowledge to navigate. Additionally, the program is competitive, and not all applicants are guaranteed to receive the tax credits.
Sources: