The New Markets Tax Credit (NMTC) is a federal tax incentive program designed to encourage investment in low-income communities. Since congress started allocating credits in 2003, the program has issued approximately $25 billion in tax credits. Specialized investment vehicles called community development entities (CDEs) compete for NMTCs, which are allocated by the U.S. Department of the Treasury. Once a CDE has been allocated NMTCs, they can award investors the tax credits. In order to qualify for NMTCs, a CDE needs to invest or provide loans to a business located in one of approximately 31,000 qualified low-income census tracts. In addition, most CDEs have pledged to place 75% of their investments in the most distressed census tracts, in order to increase their impact on low-income communities.

Source: www.multifamily.loans/apartment-finance-blog/the-new-markets-tax-credit-nmtc-what-you-need-to-know and www.commercialrealestate.loans/commercial-real-estate-glossary/new-markets-tax-credits-nmtc

The New Markets Tax Credit (NMTC) is a federal tax incentive program designed to encourage investment in low-income communities. Specialized investment vehicles called community development entities (CDEs) compete for NMTCs, which are allocated by the U.S. Department of the Treasury. Once a CDE has been allocated NMTCs, they can award investors the tax credits. In order to qualify for NMTCs, a CDE needs to invest or provide loans to a business located in one of approximately 31,000 qualified low-income census tracts. In addition, most CDEs have pledged to place 75% of their investments in the most distressed census tracts, in order to increase their impact on low-income communities.

In exchange for investing in a CDE, NMTC investors are awarded a tax credit equivalent to 39% of the equity they have invested. This credit is taken over a 7-year period, as a 5% annual credit for years 1, 2, and 3, and a 6% credit for years 4, 5, 6, and 7. A CDE can invest in itself or can receive investments from outside parties. In practice, most CDEs and investors are banks and other large financial institutions, but anyone can create a CDE and apply for NMTCs.

Between 2015 and 2017, around 50% of all New Market Tax Credits were awarded to Community Development Financial Institutions (CDFIs), private financial institutions created with the goal of providing affordable financing solutions to low income individuals and economically disadvantaged businesses. In contrast, 23% of credits were allocated to mainstream lenders and banks, while 5% were allocated to for-profit financial institutions.

In 2016, CDE’s that were awarded NMTCs invested nearly $45 billion in low-income areas, created three-quarters of a million jobs, and built or improved nearly 200 million sq. ft. of commercial real estate. For the 2017-2018 tax year, the federal government awarded CDEs $3.5 billion in NMTCs, which is estimated to stimulate at least $28 billion in development.

The New Markets Tax Credit (NMTC) program provides a federal tax incentive to encourage investment in low-income communities. The program has issued approximately $25 billion in tax credits since 2003. In exchange for investing in a CDE, NMTC investors are awarded a tax credit equivalent to 39% of the equity they have invested. This credit is taken over a 7-year period, as a 5% annual credit for years 1, 2, and 3, and a 6% credit for years 4, 5, 6, and 7. Between 2015 and 2017, around 50% of all New Market Tax Credits were awarded to Community Development Financial Institutions (CDFIs). In 2016, CDE’s that were awarded NMTCs invested nearly $45 billion in low-income areas, created three-quarters of a million jobs, and built or improved nearly 200 million sq. ft. of commercial real estate. For the 2017-2018 tax year, the federal government awarded CDEs $3.5 billion in NMTCs, which is estimated to stimulate at least $28 billion in development.

The benefits of using New Markets Tax Credits (NMTC) in commercial real estate include:

• Tax credits equivalent to 39% of the equity invested
• Tax credits taken over a 7-year period
• 50% of credits awarded to Community Development Financial Institutions (CDFIs)
• Investment of nearly $45 billion in low-income areas
• Creation of three-quarters of a million jobs
• Improvement of nearly 200 million sq. ft. of commercial real estate
• $3.5 billion in NMTCs awarded for 2017-2018 tax year
• Estimated $28 billion in development stimulated

In order to qualify for NMTCs, a CDE needs to invest or provide loans to a business located in one of approximately 31,000 qualified low-income census tracts. In addition, most CDEs have pledged to place 75% of their investments in the most distressed census tracts, in order to increase their impact on low-income communities. Between 2015 and 2017, around 50% of all New Market Tax Credits were awarded to Community Development Financial Institutions (CDFIs), private financial institutions created with the goal of providing affordable financing solutions to low income individuals and economically disadvantaged businesses. In contrast, 23% of credits were allocated to mainstream lenders and banks, while 5% were allocated to for-profit financial institutions.

The main risk associated with using New Markets Tax Credits (NMTC) in commercial real estate is that the credits may not be sufficient to cover the full cost of the project. Additionally, the process of applying for and receiving NMTCs can be lengthy and complex, and there is no guarantee that the credits will be awarded. Furthermore, the credits are only available for projects located in low-income census tracts, so projects located in other areas may not be eligible for NMTCs. Finally, the credits are only available for a limited time, so projects must be completed within the allotted time frame in order to qualify for the credits.

You can apply for New Markets Tax Credits (NMTC) in commercial real estate by creating a Community Development Entity (CDE) and applying for NMTCs. The U.S. Department of the Treasury allocates NMTCs to CDEs, who then award investors the tax credits. To qualify for NMTCs, a CDE needs to invest or provide loans to a business located in one of approximately 31,000 qualified low-income census tracts. In addition, most CDEs have pledged to place 75% of their investments in the most distressed census tracts, in order to increase their impact on low-income communities.

You can find more information about the application process on the Tax Policy Center website.