How It Works
The Basic Idea:
The New Markets Tax Credit was designed to increase the flow of private sector capital to businesses, nonprofits, community facilities, and other important projects in America’s poorest communities. Rather than providing a direct federal grant to projects, the program marshals the private sector resources by providing a incentive for taxpayers to invest a community development organizations with a proven track record of impact in low income communities. These organizations put that capital to work, financing everything from manufacturing expansions to health clinics and daycare centers. Since 2000, the program has delivered $75 billion to nearly 5,000 projects, creating 750,000 jobs in hard hit communities.
How it Works:
The New Markets Tax Credit is a shallow “place-based,” gap financing tool designed to revitalize low-income communities. NMTC delivers capital to narrowly defined geographic locations: underserved census tracts that meet mandated criteria of economic distress. The NMTC was first authorized by Congress in 2000 and since that time the Credit has leveraged $75 billion in total project financing and created in hundreds of thousands of jobs in some of poorest rural and urban communities in America.
To deliver capital to these underserved “new markets,” the NMTC authorizing statute created a new category of investment intermediary, Community Development Entities (CDEs). A CDE is typically a non-profit loan fund, community development organization or private financial institution. To gain certification as a CDE the entity must be a domestic corporation, have a demonstrated mission of serving or providing capital to low-income communities or people, and maintain accountability to residents of low-income communities through representation on a governing or advisory board to the CDE. CDEs must be certified by the Community Development Financial Institutions (CDFI) Fund of Treasury, the administering agency for the NMTC.
The CDFI Fund conducts a competition for NMTC allocation on an annual basis. Applications for allocation are scored by the CDFI Fund in four areas: community impact, business strategy, capitalization strategy, and management capacity. Throughout the history of the NMTC, demand for credits has exceeded the authorized amount by six to one. The historical success rate of applications for credits is less than 25 percent.
Successful applicants have a track record of making loans and equity investments in underserved communities, either with previous NMTC allocations or through conventional lending. The CDFI Fund also provides a small preference for applicants that promise to undertake “innovative activities” or to invest in areas underserved by previous NMTC allocation awards.
When a CDE wins an allocation, it raises private investments and then deploys those investments to projects and businesses in low-income communities. In return for an equity investment in a CDE, a private investor – typically a private financial institution – receives a 39 percent credit against federal taxes, spread out over seven years. The CDE uses that capital to make loans or equity investments in businesses in low-income communities. NMTC-financed loans provide borrowers with financing at below market interest rates and often include non-traditional features unavailable through conventional financing.
The CDE uses that capital to make loans or equity investments in businesses in low-income communities. NMTC-financed loans provide borrowers with financing at below market interest rates and often include non-traditional features unavailable through conventional financing.
Who the Program Benefits:
NMTC projects are designed to create jobs and address unmet needs in low income communities. For example, the program finances health care facilities in medically underserved areas, grocery stores in areas without access to fresh food, and manufacturing facilities in communities hit hard by the multi-decade decline of American manufacturing. There is significant flexibility in the types of businesses and development activities that NMTC investments can support – including community facilities like childcare or eldercare facilities and charter schools, high-tech industrial facilities, programmatic space for nonprofits, and homeownership projects through Habitat for Humanity.
- Browse our project map for to learn more about what the NMTC finances
For their part, NMTC investors receive a modest tax incentive in exchange for their investments into CDEs. Returns are low. Despite this, demand for the credit is high. Most investors are motivated not by profit but by Community Reinvestment Act requirements, philanthropic interest, and the opportunity to expand their footprint into new markets.
All parties involved in NMTC transactions have a strong interest in maximizing the community impact of each dollar of NMTC allocation. CDEs who make high impact loans and investments will have a greater likelihood of success in future NMTC allocation rounds. Many are mission driven, and all have deep ties the low income communities they serve.