Understanding the New Markets Tax Credits Program: A Closer Look at the Investor & Community Benefits
In 2000, Congress passed the New Markets Tax Credit (NMTC) bill to incentivize sustained investments in low-income communities, helping to lift those neighborhoods out of poverty.
The U.S. Department of Treasury’s Community Development Financial Institutions (CDFI) Fund, which empowers economically distressed communities nationwide, manages the NMTC program. The NMTC program encourages sustained investments over a seven-year period. The investor receives a 39 percent tax credit throughout the seven years: five percent for the first three years, then six percent for the remaining four years.
If you’re curious to learn more about the NMTC program and its unique advantages and disadvantages, we’re here to help. At Smith NMTC, we specialize in leveraging the unparalleled benefits of the NMTC program to spur affordable homeownership development, transforming communities and helping low-income and BIPOC families build intergenerational wealth.
Becoming a Community Development Entity (CDE)
To apply for and receive NMTC allocations, organizations must first apply to be a certified Community Development Entity. They can do so directly if they meet the criteria to be a CDE. Or, if they are a CDFI, they can apply to be a CDE in an expedited process.
Investors
Investors make their full investment on day one when the transaction closes and receive the tax credits over the seven-year period.
Their investment is equal to 39% of the total NMTC allocation amount times the current market price. Investors pay less than $1 for $1 of allocation because they take the credits over 7 years. Once they invest, they cannot pull out that investment until the seven-year compliance is over.
Investors are motivated to ensure borrowers have what they need to be successful in their ventures to prevent any risk of recapture. Even though the investors typically pass on the recapture risk to the borrower, a borrower is not always in a financial position to bear that risk—leaving the investor exposed.
This risk of recapture incentivizes both the investor and the borrower to ensure the borrower remains successful and compliant. Investors are also incentivized by the return on their investment, not only from the tax credits taken against income, but also by not having to pay dollar-for-dollar for the credit over the seven-year period. For example, on a $10 million investment, investors receive a credit of $3.9 million, but they may only pay $3.2 million for that credit depending on current market pricing.
Key Advantages of the NMTC Program
Advantages & Disadvantages of the NMTC Program for Investors
For the investor, the key advantage of the NMTC is the 39 percent tax credit taken incrementally over the seven-year period.
Institutional investors such as banks may also qualify for a Community Reinvestment Act (CRA) credit for certain types of investments, including Home Mortgage Disclosure Act (HMDA) credit for affordable for-sale housing projects—a double bang for their buck.
Advantages & Disadvantages of the NMTC Program for Borrowers/QALICBs
Borrowers/developers benefit from the NMTCs because the tax credit equity may be used to lower the cost of funds for the project, scale up production, provide deeper subsidies to low- to moderate-income buyers, and address market gaps in underserved communities that result in depressed market values.
Additionally, because the CDEs and investors are both focused on community outcomes and serving distressed communities, particular projects and borrowers that would be considered too risky under traditional underwriting standards will be able to receive the funding they need through a NMTC-funded loan/investment.
Investors require the borrower to guarantee the NMTC recapture risk, which includes the tax credit amount plus interest and penalties.
Advantages & Disadvantages of the NMTC Program for Low-Income Communities
The NMTC program fuels the physical and economic revitalization of distressed communities—which can occur through the expansion of access to quality affordable for-sale housing, health care, charter schools, transit, healthy foods, social and commercial services, and the creation of new jobs and businesses.
While there are few disadvantages, some complex regulations can act as a barrier to nonprofits or smaller community organizations that don’t have the staff or resources to handle the data, paperwork, and accounting.
Work with Smith NMTC
Using our expertise with the NMTC program, Smith NMTC partners with CDEs and nonprofit developers to increase access to for-sale affordable housing and community facilities that improve and stabilize low-income communities and provide opportunities to low-income people.
Since our founding in 2007, we’ve structured and facilitated more than 70 transactions in 33 states by using more than $675 million in NMTCs. To learn more about how we can support your organization with NMTCs, click here.