New Markets Tax Credit: Leveraging Investor Money in Low-Income Communities

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The New Markets Tax Credit (NMTC) Program permits any taxpayer to receive a credit against federal income taxes for making an investment in designated Community Development Entities (CDEs). A CDE then invests the capital in a low-income community.The tax credit is equal to 39% of the cost of the initial investment and is claimed over 7 years.

The goal of the program is to spur revitalization efforts of low-income and impoverished communities by incentivizing private investment in these areas. Capital is often hard to access because of the risk involved in lending in low-income communities, so having additional motivation for private investors encourages money lending in these areas.

Examples

  • A grocery store in one of the poorest neighborhoods in Washington, DC was developed with financing using the New Markets Tax Credit. The neighborhood has a 44% poverty rate, and its median income was 32% of the area median income. The grocery store is over 100,000 square feet and has a full service pharmacy, office supply aisle, and office space for additional businesses. This is the first grocery store to open in the area in nearly a decade.
  • The University of the Cumberlands in Williamsburg, KY was interested in improving its facilities not only for its students but also to improve the education and health of the extremely low-income Appalachian community in which it is located. The purpose of the project was to finance the construction and renovation of a health and science building and improve several other health and wellness facilities and athletic fields. The project was financed in part with private investment encouraged by the New Markets Tax Credit.
  • The Reinvestment Fund (TRF), a Philadelphia-based organization, partnered with The Food Trust, a non-profit dedicated to making healthy food available to all, to develop and implement a sustainable energy model for supermarkets in underserved communities in Philadelphia. The initiative recently completed a small grocery store demonstration project with energy audits and a revenue tracking system, and is now working with TRF’s supermarket financing program to identify sites for large, neighborhood green supermarkets. As result of this initiative, TRF is able to help new and existing supermarkets identify and evaluate energy efficiency measures, such as high-efficiency lighting and refrigeration equipment, which can translate into savings.
  • Ronan, Montana is a small rural town with a population of approximately 2,000 is located in the Flathead Indian Reservation about 60 miles from Missoula. This is the site for a new pharmacy and retail store funded in part with a New Markets Tax Credit (NMTC). The pharmacy, a woman and minority-owned business, started in 1989 in leased space. The $457,200 NMTC loan coupled with an $88,000 business loan from CRF enabled the owner to achieve her dream of building a state of the art pharmacy and retail store. The newly constructed space offers greater visibility, more energy efficient space, and room for expansion in the future.
  • (Examples come from this Web site)

How Does It Work?

The New Markets Tax Credit (NMTC) Program permits any taxpayer to receive a credit against federal income taxes for making an investment in designated Community Development Entities (CDEs).

Substantially all of the qualified equity investment must in turn be used by the CDE to provide investments in low-income communities. The credit provided to the investor totals 39 percent of the cost of the investment and is claimed over a seven-year credit allowance period. In each of the first three years, the investor receives a credit equal to five percent of the total amount paid for the stock or capital interest at the time of purchase. For the final four years, the value of the credit is six percent annually. Investors may not redeem their investments in CDEs prior to the conclusion of the seven-year period.

Throughout the life of the NMTC Program, the Fund is authorized to allocate to CDEs the authority to issue to their investors up to the aggregate amount of $26 billion in equity as to which NMTCs can be claimed, including $3 billion in Recovery Act Awards and $1 billion of special allocation authority to be used for the recovery and redevelopment of the Gulf Opportunity Zone.

To date, the Fund has made 495 awards totaling $26 billion in allocation authority.

Eligibility

An organization wishing to receive awards must be certified as a Community Development Entity (CDE). To qualify as a CDE, an organization must:

  • be a domestic corporation or partnership at the time of the certification application;
  • demonstrate a primary a mission of serving, or providing investment capital for, low-income communities or low-income persons; and
  • maintain accountability to residents of low-income communities through representation on a governing board of or advisory board to the entity.

Entrepreneurial Opportunities

Accessing capital can be a substantial roadblock for many small businesses. The New Markets Tax Credit provides investments that will help businesses in low-income communities thrive.

The program is flexible and allows the tax credits to be structured into a deal in a variety of ways to best meet the needs of the investors, borrowers, and the sponsoring organization. The tax credits, for instance, can be used to enhance an investor's Internal Rate of Return, provide a borrower with access to debt at a reduced interest rate (typically 1.00-3.00% below market), and/or repay equity investors with tax credits as opposed to actual cash.

The types of business investments eligible under the NMTC program are very broad, allowing virtually any real estate project or operating business. (Please note that there are some exceptions to this eligibility, such as insurance companies and others.) Projects can be undertaken by either for profit or nonprofit entities.

Definitions

  • NMTC - New Markets Tax Credit
  • Community Development Entity (CDE) - Any domestic corporation or partnership for federal income tax purposes that:
    • (a) has a primary mission of serving, or providing investment capital for, low-income communities or low-income persons;
    • (b) maintains accountability to residents of low-income communities through their representation on any governing board of the entity or any advisory board to the entity; and
    • (c) has been certified as a CDE by the CDFI Fund of the US Department of Treasury
    • A community development financial institution (CDFI) serving low-income areas can be a CDE.
  • Community development financial institutions (CDFI) - American financial institutions which provide credit and financial services to underserved markets and populations. A CDFI may be a community development bank, a community development credit union (CDCU), a community development loan fund (CDLF), a community development venture capital fund (CDVC), a microenterprise development loan fund, or a community development corporation.

News & Resources

 

Learn More

For more information on the New Markets Tax Credit, contact Steph Larsen at StephL@cfra.org or call 402-687-2100.