Tools in the toolbox: New Markets Tax Credits

When developers think about financing tools, they often start with traditional debt, equity, and maybe a tax credit or two. But New Markets Tax Credits (NMTCs) deserve a spot near the top of the development toolbox - especially for projects in underserved communities.

NMTCs can be complex, but when used correctly, they can be a game-changer for projects that otherwise struggle to pencil out.

What are New Markets Tax Credits?

The New Markets Tax Credit program is a federal incentive designed to encourage private investment in low-income communities. Investors receive federal tax credits in exchange for making equity investments in qualifying projects.

At a high level:

• Investors receive 39% of their investment back as a federal tax credit
• The credit is claimed over seven years: 5% annually for the first three years 6% annually for the remaining four years
• Projects must be located in a qualified low-income community

How the NMTC structure works

NMTC transactions involve a few specialized players and layered financing:

• Community Development Entities (CDEs): Certified entities that receive NMTC allocation authority from the U.S. Treasury They deploy credits into qualifying projects
• Investors: Typically banks or large corporations seeking tax credits and CRA benefits
• Qualified Active Low-Income Community Businesses (QALICBs): The project-level business receiving NMTC financing

In practice, NMTCs are often paired with loans, grants, and other incentives to reduce the overall cost of capital. Early legal and tax structuring is critical to ensure the transaction qualifies and remains compliant throughout the credit period.

Common NMTC-funded projects include:

• Mixed-use developments
• Manufacturing facilities
• Health care centers
• Educational facilities
• Grocery stores and food access projects
• Nonprofit and community facilities

Key benefits of NMTC financing

From a developer’s perspective, NMTCs can:

• Lower the effective cost of capital
• Support larger or more impactful projects
• Attract mission-driven capital
• Improve returns while advancing community goals

Things to watch out for

NMTCs are powerful - but not simple. Developers should be prepared for:

• Complex deal structures
• Longer closing timelines
• Higher upfront transaction costs
• Strict compliance requirements during the seven-year credit period

These challenges are manageable, but they require thoughtful planning and experienced advisors from the outset.

When NMTCs make sense

NMTCs are most effective when:

• The project is in a qualifying census tract
• Traditional financing leaves a significant funding gap
• The project delivers clear community benefits
• The developer is prepared for a more involved closing process

New Markets Tax Credits aren’t the right tool for every deal, but for the right project, they can unlock capital that isn’t available elsewhere. Understanding how NMTCs fit into the broader development toolbox can open the door to more ambitious, impactful projects.

Feel free to reach out to Kirstyn Wildey Fritz to discuss how New Markets Tax Credits might fit into your development strategy.