New Markets Tax Credits: A Primer for Nonprofit Leaders January 23, 2024

Because of how the NMTC program is structured, smaller projects don’t generate enough return for investors to justify the use of NMTCs. Any project with a budget less than $7 million isn’t likely to secure NMTCs as a result. 

The types of projects by nonprofit sponsors that most frequently secure NMTCs are health care centers, community centers, child care facilities, charter schools, food banks, grocery stores, vocational training facilities or other spaces that support workforce development, emergency and rehabilitation shelters, community hubs, and arts and culture facilities. 

Nonprofits must demonstrate that alternative sources of funding or financing cannot be secured to bridge the funding gap for which NMTCs are sought.

Projects must be located in a geographic area with documented need and should directly address a gap or inequity in the area. In many cases, CDEs provide NMTCs only in communities classified as “severely distressed” because that is viewed more favorably by the CDFI Fund. 

Whether building a new facility or renovating and expanding an existing one, the project must generate new, positive, and direct impacts for under-resourced communities (e.g., creating a large number of local jobs, providing needed goods or services, fostering BIPOC business ownership, and/or creating environmentally sustainable outcomes) that can be quantified and tracked. Because securing NMTCs is a competitive process, the bigger the positive impact of the project, the more likely it is that an organization will be able to access them. Impact as it relates to NMTCs is defined in large part by what the community needs.  

In an under-resourced neighborhood defined by the U.S. Department of Agriculture as a “food desert,” for example, a new grocery store is likely to have a significant impact – both by creating jobs in the community and ensuring that residents don’t have to travel elsewhere to access fresh, affordable foods that support their health and wellness. The same project would have much less of an impact and be less likely to be awarded NMTCs in a community that already has a full-service grocery store. 

Demonstrating that community members and stakeholders support the project is essential. This means that the nonprofit will need to spend time engaging these individuals and organizations before submitting an application to ensure that it can demonstrate this support.

CDEs typically want the project to be ready to begin shortly after the NMTC transaction closes. This is because the CDE will be judged on how quickly it deployed its NMTC allocation when applying to the CDFI Fund for future allocations. If a project isn’t likely to begin until months after NMTC funding is disbursed, the organization applying for an allocation should consider waiting until the CDE’s next application cycle to ensure that construction can begin quickly. 

The midpoint of an area’s income distribution, with half of the households in the area earning more than the AMI and half earning less than the AMI. Used to determine eligible communities/census tracts for NMTC allocations. 

A department of the U.S. Treasury, the CDFI Fund’s mission is to expand economic opportunity for underserved people and communities by supporting the growth and capacity of a national network of community development lenders, investors, and financial service providers. The NMTC program is administered by the CDFI Fund, which allocates tax credits to “Community Development Entities” (see definition below) via an annual competitive process. 

CDEs can be for-profit or nonprofit entities with a primary mission to provide capital to under-resourced communities. CDEs are allocated NMTCs by the CDFI Fund via a competitive application process that’s completed each year and serves as the intermediary for the provision of NMTCs to those applying for them to finance projects. Most CDEs are affiliated with Community Development Financial Institutions (like IFF), banks, or government entities. CDEs are allocated NMTCs based on their track record of serving “disadvantaged businesses and communities” and their plans for using the NMTC allocation to generate community impact in census tracts eligible for NMTCs to be used (see “distressed community” below). In effect, CDEs serve as the lender for NMTCs.

Provides financing for an NMTC-supported project that’s combined with an NMTC investor’s equity to provide the capital needed to complete the project. The financing from the leverage lender(s) is put into an investor-owned fund as debt, enabling the investor to retain 99.99% ownership of the fund. The organization may fill this role, though financial institutions can also serve as the leverage lender. 

A community in which the poverty rate is at least 20% or an area where the median family income (AMI) doesn’t exceed 80% of the statewide or metropolitan AMI, depending on the community’s location.  

The NMTC investor provides the capital in a NMTC transaction by investing in a CDE or sub-CDE that has been allocated tax credits. In exchange, the investor’s federal taxes are reduced over a seven-year period. NMTC investors in NMTC transactions are typically banking institutions with Community Reinvestment Act obligations. 

The borrower in a NMTC transaction. Organizations that receive NMTCs usually establish an affiliated entity to serve as the QALICB. QALICBs can be for-profit or nonprofit entities, with the primary qualification being that the QALICB’s activities result in positive community impact.

The capital put into the NMTC transaction by the tax credit and leverage loan investors. 

The capital provided to the organization completing the project (QALICB) by the CDE.

A community in which the poverty rate exceeds 30%; area median family income doesn’t exceed 60% of the state or metropolitan area, depending on where the community is located; unemployment rate at least 1.5 times greater than the national average. There are additional criteria that can classify a community as “severely distressed,” but the criteria above are more commonly used.

Provides a loan to the sponsor organization completing the project or its affiliate, which then uses the capital to make a leverage loan to the investment fund.

A subsidiary of a CDE. Sub-CDEs may be established for individual NMTC-supported projects, with the investor and CDE sharing ownership of the entity.