By enabling corporate investors to provide capital to community development entities (CDEs) in exchange for credits against their tax obligations, New Markets Tax Credit (NMTC) funds have turned social care into a smart investment.
The NMTC program has provided billions of dollars to for-profit and nonprofit organizations that help rebuild economically distressed communities.
Since its inception in 2000, the NMTC program has provided billions of dollars to for-profit and nonprofit organizations that help rebuild economically distressed communities. To date, the effort has created more than a million jobs and financed more than 6,500 projects across all 50 states, the District of Columbia, and Puerto Rico.
4 key players
NMTCs use a straightforward process involving four key players.
At the ground level, qualified active low-income community businesses (QALICBs) make change happen with NMTC funds. The funds that power QALICB projects are dispersed by CDEs. Their allocation ability is a direct result of CDEs’ position as a recipient for tax credits provided to them by the Treasury Department, which CDEs are authorized to sell to investors to generate community investment capital.
Community Development Financial Institutions (CDFI) Fund: Treasury Department program that administers the New Markets Tax Credit program
Private investors: Funders—often banks or other financial institutions—that make a seven-year qualified equity investment in exchange for a tax credit
Community Development Entity (CDE): Certified investment intermediary—typically an affiliate of a mission-driven organization, government entity, for-profit entity, or private financial institution—that serves low-income communities
Qualified active low-income community businesses: For-profit or nonprofit entities that receive NMTC investments
5 steps to funding a community project
- CDEs apply for certification from the CDFI Fund.
- Once certified, CDEs apply for NMTC Allocation Authority from the CDFI Fund. The CDFI Fund has a limited allocation each year. Only about 1/4 of applications—which are evaluated on the community impact, business strategy, capitalization strategy, and management strategy—are approved.
- CDEs that receive allocation authority raise private funds to invest in qualified projects.
- Private investors make a Qualified Equity Investment in exchange for a 39% tax credit over 7 years.Disclosure 3
- The credit typically funds about 25% of a qualifying project’s total cost—with owner equity, borrowed funds, or other grants and credits making up the remaining 75%. Qualified projects must invest in a low-income community—that is, where the poverty rate is 20% or higher or the median income is less than 80% of an area’s median income.Disclosure 4
The positive impact of a New Market Tax Credit
Since its inception, the NMTC program has expanded into communities across the nation. For the year 2022 alone, a sector breakdown of the number of businesses that benefited from New Markets Tax Credit funding throughout the U.S. illustrates that the popularity of the program only continues to grow.Disclosure 3
- Manufacturing/industrial (111)
- Healthcare facility (40)
- Projects supporting child care, youth, and families (28)
- Mixed-use (21)
- Grocery stores/healthy foods (7)
- Nonprofit hubs and multipurpose social services campuses (28)
- Retail, restaurants, and service sector (12)
- Other miscellaneous small businesses and office space (17)
- Schools (9)
- Museums, theaters, arts, and culture (8)
- Other miscellaneous community facility and nonprofit projects (17)
- College or vocational training (8)
- Business incubators and entrepreneurial research space (4)
- Hotels and tourism (7)
- Housing (28)
Benefits of NMTC loans
The simplicity of how NMTCs operate is a key factor in their success over the last two decades. The streamlined process and relatively easy access to funds they offer is one reason that so many businesses have participated in the program.
Another is the advantageous conditions afforded by New Markets Tax Credit loans. Every NMTC loan comes with the benefit of having:
- Below-market interest rates
- Flexible terms like longer amortizations
- Higher loan-to-value ratios
- Lower origination fees
The future of the New Markets Tax Credit program
The current extension of the NMTC program expires in 2025. In April 2023, the New Markets Tax Credit Extension Act of 2023 was introduced to Congress. The bill would make the tax credit permanent, with include minor adjustments to account for inflation.
In today’s uncertain economy, corporations are looking to attract capital to underserved communities. Now more than ever, there’s a push to revitalize neighborhoods, offer employment opportunities to residents, and jump-start small businesses. Consider whether the NMTC program may be a good option for your next investment.
How can NMTC efforts benefit your community?
To learn more, reach out to your community Truist relationship manager.