What are New Markets Tax Credits?
Congress established the New Markets Tax Credit (NMTC) program in 2000 through the Community Renewal Tax Relief Act, a bipartisan effort to stimulate investment and economic growth in low-income urban and rural communities that lack access to the capital needed to support and grow businesses, create jobs, and improve local economies.
Since its inception, the NMTC Program has awarded $50.5 billion for community revitalization. This program has generated more than $42 billion in investments in low-income communities and businesses, resulting in the creation or retention of more than 750,000 jobs, and the construction or rehabilitation of more than 164 million square feet of commercial real estate.
NMTCs often serve as the catalyst for change in local communities. They stimulate economic development, redevelop vacant properties, invest in much needed community facilities, and expand charter schools. They stimulate economic development to support a variety of projects as a means of gap financing for low-income communities.
How do New Markets Tax Credits Work?
The NMTC program brings capital to eligible communities by providing investors with a federal tax credit for investments made in businesses or economic development. These projects are located in some of the nation’s most economically depressed communities – communities where the individual poverty rate is at least 20 percent, or where the median family income does not exceed 80 percent of the area’s median income. The NMTC program was designed to benefit local communities, businesses, and investors.
Each year, the CDFI Fund “allocates” tax credit authority to Community Development Entities (CDEs) based upon a highly competitive application process. CDEs are conduit lenders through which private capital flows from an investor to a “qualified” business (borrower) located in a low-income community. Once the allocation amounts are awarded by the CDFI Fund, each CDE raises capital from its investors, who then reduce their tax liability over a seven-year compliance period. The net benefit to the borrower is in the form of a substantially below-market loan with an array of flexible financing terms, such as interest-only loans and below market interest rates. The net benefit to the investor is in the form of a reduced tax liability.