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Home > Seek Grants and Loans > Funding Directory > Tax Incentive or Tax Credit > New Markets Tax Credit Initiative
New Markets Tax Credits
What are New Markets Tax Credits?
The New Markets Tax Credit (NMTC) is a 39 percent credit on an equity investment to a Community Development Entity (CDE), such as NTCIC, that is claimed over a 7-year compliance period (5 percent over the first 3 years and 6 percent over the last 4 years). The CDE must then make a Qualified Equity Investment or loan to a Qualified Business in a Qualified Low-Income Community (LICs). Most Commercial and mixed-use real estate development projects located in LICs are Qualified Businesses. (Residential projects without a commercial component do not qualify.) The New Markets program is designed to encourage investments in LICs that traditionally have had poor access to debt and equity capital.
How do they Work in Conjunction with the Historic Tax Credit?
The New Markets Tax Credit and the historic tax credit are natural allies. LICs are defined as U.S. census tracts with a 20 percent poverty rate or household incomes at or below 80 percent of the area or statewide median, whichever is greater. Due to this liberal definition, 40 percent of all U.S. and most central business district census tracts qualify for the NMTCs. Because most old buildings are found in disinvested parts of any city or town, and most rehab tax credit projects are located in central business districts, in 2005 68 percent of all HTC Part 3 approvals were granted for properties in qualified NMTC census tracts. The IRS has provided specific guidance that allows for the twinning of the HTC and NMTC.
Unlike the federal Rehabilitation Tax Credits, the annual dollar volume of New Markets Tax Credits allocated by the U.S. government is capped. That means that CDEs must compete against each other to receive an allocation of New Markets Credits during each annual funding round. Once a CDE wins an allocation, it partners with an investor who is attracted by the tax benefits offered by the New Markets Tax Credit. In order to claim the credit, the investor must make an equity investment in a CDE.
For example: consider the existing investment partnership between Bank of America and NTCIC. NTCIC won a $53 million New Markets allocation in 2006. Bank of America provides equity to NTCIC’s National Trust Community Investment Fund which it invests in an historic commercial rehabilitation project that is eligible, by virtue of its location in an LIC, for both the federal historic tax credit (HTC) and the New Markets Tax Credit (NMTC). In exchange, the project transfers its historic and New Markets tax credits to NTCIF and ultimately, Bank of America. In addition to its usual investment return on the historic tax credit, Bank of America is also earning 39 cents (the value of the NMTC) on the dollar amount of its initial RTC equity investment. Bank of America is therefore willing to make a higher aggregate equity investment to reflect the value of both credits. This so-called “twinning” of rehabilitation and New Markets Tax Credits on the same real estate transaction has a net effect of adding 25-30 percent more equity to the transaction. This equity boost helps offset the more difficult economics of developing historic properties in disinvested communities.
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