The New Markets Tax Credit (NMTC) program is a federal subsidy program designed to incentivize investments into low-income communities, providing approximately 25% of project cost in flexible, below market funding that is typically forgiven at the end of the 7 year compliance period. NMTC investors make investments in companies known as Community Development Entities (CDEs) that in turn make loans to businesses in low-income communities. The intent of the program is to spur positive economic revitalization in these areas.
NMTCs create benefits to tax credit investors, businesses that need capital, and state and local government and economic development authorities.
|Senior Loan||$7M||Interest only for 7 years at 7%|
|Subordinate Loan||$3M||Interest only for 7 years at a very low interest rate (e.g., 1%)|
|BENEFIT TO INVESTOR|
|$3,900,000||Total tax credit|
|$900,000||Total return over 7 year period (approx. 10% IRR)|
|BENEFIT TO BORROWER|
|$1,260,000||Interest savings on sub debt (assume 6% lower)|
|($1,200,000)||Tax on cancellation of subordinated debt*|
|($1,150,000)||Additional NMTC Transaction Costs|
*Calculated at 40% tax rate. The tax from debt cancellation can be deferred and does not apply to tax-exempt entities.
A low-income community is a census tract with at least 20% poverty, or one that has a median family income that is at or below 80% of the area’s median family income.
Investments are made in the form of equity-like loans to businesses located in low-income census tracts or ones that predominantly serve or primarily employ low-income persons. This financing typically is applied as “gap financing” for the development of commercial, industrial and retail real estate projects (including community facilities). Other NMTC financeable projects may also include for-sale housing designated for moderate-to-low-income families, renewable technologies, and sustainable, environmentally friendly technologies operating on a commercial scale.
NMTCs also can be used to offset the cost of industry-related consulting services such as assistance to a newly formed CDE, project plan development, financial modeling, and operating assistance. Innovative applications of NMTCs are on the rise. The only true way to find out whether your construction project is NMTC-eligible is by asking a CDE.
There are two ways to access the program. To fund a single project, you will need to solicit CDEs that currently have an allocation and have an investment strategy that complements your business model and geographic location. If you have rather large project or a pipeline of projects in need of financing, the best option is to form a CDE and apply directly for an allocation of NMTCs.
The borrower must be a Qualified Active Low-Income Community Business (QALICB), which is a business that meets the following requirements: