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New Markets Credit Will Aid Recovery In Low-Income Areas

By Julia Fendler · 2021-04-28 17:39:17 -0400

Julia Fendler
Julia Fendler
The New Markets Tax Credit, or NMTC, program is a shining light for struggling communities, spurring economic development and producing job growth in low-income areas, many of which have been hit the hardest during the COVID-19 pandemic.

Established by the Community Renewal and Tax Relief Act of 2000, the program has been extended several times since its establishment, with the longest extension in its history effective Dec. 27, 2020, through the Consolidated Appropriations Act. This act included a five-year, $25 billion extension of the NMTC program, as defined by Section 45D of the Internal Revenue Code.

The credit has proven to be an extremely effective tool in spurring economic development in low-income communities since its inception. This is not a new development for this program, but it is one that makes the NMTC very relevant at this time in history and in our current economic climate.

Low-income communities have been hit especially hard by the COVID-19 pandemic: Unemployment is higher, poverty rates are increasing and businesses have shuttered at a greater rate, all in areas already experiencing economic struggles. However, the New Markets Tax Credit can help.

When a borrower in a low-income community is able to effectively utilize the NMTC to finance or refinance a project, a ripple effect begins that ultimately leads to increased investment and revitalization throughout the surrounding areas, and generally leads to a subsidy of 18%-25% benefit to the project. By its very foundation, the credit exists to aid economic communities and bring private investment into areas that need it most.

According to a recent release by the U.S. Bureau of Labor Statistics, 9.8% of U.S. households had at least one member unemployed in 2020 — twice the number in 2019.[1] To give a little bit of perspective on the power of the NMTC with regard to job creation, according to the Community Development Financial Institutions Fund, the division of the U.S. Department of the Treasury that administers the program, more than 830,000 jobs have been created or retained as a result of the NMTC program since 2003.[2]

The extension of the NMTC will only add to this total, as more projects lead to more job creation that ultimately results in numerous permanent and construction jobs. The New Markets Tax Credit Coalition estimates that the five-year extension will create approximately 590,000 jobs, and those numbers only reflect numbers from projects directly financed by the NMTC.[3]

The aforementioned job numbers do not take into account the follow-on ripple effect that is one of the most remarkable aspects of the NMTC. In essence, once a project in a low-income community is put into service, the area around it is likely to begin to experience positive changes. Employees of the NMTC-financed project, many of whom live in the same community in which the project has been completed, now have income that they can spend back into the local economy, thus leading to a revival of the surrounding area.

While there can be little doubt as to the ability of the NMTC to create and retain jobs in economically distressed areas, the credit is also a valuable tool in rejuvenating areas that have become empty and blighted — an increasing problem during the pandemic. The migration of workers from office to home has led to the closures of numerous offices, as well as of businesses that depend on those offices, and the employees who work within them, to survive.

The long-term ramifications of such migration are not yet known. But in the short term, many cities are faced with an abundance of empty and distressed properties. The day of reckoning for commercial real estate properties is likely on the not-so-distant horizon.

The NMTC can be used effectively here, too, however, to assuage some of the blight with projects offering new goods and services — and it can be used to finance a multitude of things. From child care and community facilities, to hospitals and addiction treatment centers, to manufacturing and retail, and even hospitality businesses, a sector that has been hit especially hard, many projects can benefit from the NMTC.

It is important to note the NMTC cannot be used for businesses or facilities featuring gaming, massage parlors, suntan or hot tub facilities, country clubs, any store whose principal purpose is the sale of alcoholic beverages for offsite consumption, or farming. The NMTC also cannot be utilized to finance residential rental property.

The NMTC is a more achievable financing option for borrowers with projects in low-income communities that struggle to complete their capital stack with conventional financing. The credit can, and frequently does, step in as a substitute for mezzanine debt. In addition to acting as a gap filler, the loans to NMTC borrowers — known as qualified low-income community investments, or QLICIs — offer flexible terms, and almost always have substantially lower interest rates than conventional financing (usually around 1%) and a 7-year interest-only payment period.

Over the course of the program, 91.92% of all QLICIs were made with below-market interest rates.[4] Other nontraditional terms offered included: origination fees and debt service coverage ratios lower than conventional financing, nontraditional collateral packages, and lengthier periods of financing that are interest-only than conventional loans. All of these things make the financing much more attractive and attainable to borrowers with projects in low-income communities than financing by conventional means.

The NMTC is a 39% tax credit. However, unlike most incentives, the tax credit benefit does not flow directly to the project borrower. Credits are awarded to conduit entities called community development entities. CDEs submit applications for allocations of tax credits to the Community Development Financial Institutions Fund annually, and the fund then awards an allocation of credits to chosen CDEs.

The process is extremely competitive. Once a CDE has received an allocation of credits, it chooses projects in low-income communities located in qualified census tracts in which to make capital infusions. NMTC borrowers[5] can be real estate or operating businesses. Once a CDE is identified for a particular project, a tax credit investor makes a capital infusion into the CDE.

NMTC investors are typically large corporations, most often one of the larger banks. The investor is able to claim the tax credit against their federal tax liability.[6]

Eligibility for an NMTC project is based on qualified census tracts, of which approximately 43% of all U.S. census tracts qualify.[7] Census data is used to determine whether an address is eligible for credits. A qualified census tract either suffers from a poverty rate greater than 20% or an income at or below 80% of the area median income.[8]

Although all tracts meeting the aforementioned qualifications will be eligible, most CDEs choose projects that fall into areas of even higher distress, known as severely distressed census tracts, which have the following characteristics:

  • The poverty rate is greater than 30%;

  • Median family income is at or below 60% of the median family income;

  • The unemployment rate is at least 1.5 times the national average;

  • The tract is located in a qualified nonmetropolitan county; and

  • The tract contains targeted populations for which the project qualifies.[9]

Through 2017, over 75% of NMTC investments had been made into areas classified as severely distressed.[10]

The NMTC is currently set to expire on Dec. 31, 2025. But in a renewed effort to make the NMTC permanent, Reps. Terri Sewell, D-Ala., and Tom Reed, R-N.Y., recently introduced The New Markets Tax Credit Extension Act of 2021, H.R. 1321, in the U.S. House of Representatives,[11] and Sens. Roy Blunt, R-Mo., and Ben Cardin, D-Md., introduced similar legislation in the U.S. Senate, S. 456.[12]

The NMTC has created approximately $8 in private investment in low-income communities for every $1 of federal funding,[13] including directly financing over 5,400 businesses. There is no doubt that the utilization of the credit in low income communities is a critical tool to have in our toolbox as we emerge from the pandemic, and one that all public finance attorneys should consider when advising clients on various projects.

With the dire economic numbers that the U.S. is facing as the COVID-19 crisis continues, the NMTC can powerfully stimulate the economy in low-income communities, and help lead the U.S. through the recovery period and beyond.

Julia Fendler is an attorney at Butler Snow LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] U.S. Bureau of Labor and Statistics (April 21, 2021). Employment Characteristics of Families Summary.

[2] Community Development Financial Institutions Fund. New Markets Tax Credit Program. Retrieved from

[3] Rapoza, B., Possibility of Permanent Extension of New Markets Tax Credit Offers Great Opportunities, (March 24, 2021).

[4] Community Development Financial Institutions Fund (2019) New Markets Tax Credit NMTC Public Data Release.

[5] NMTC borrowers are referred to as qualified active low-income community businesses.

[6] The investor claims 5% for each of years 1-3 and 6% for years 4-7.

[7] Tax Policy Center Urban Institute & Brookings Institution, What is the new markets tax credit, and how does it work? Retrieved from,billion%20(in%202020%20dollars).

[8] The median family income is based on the percent of statewide median family income.

[9] Targeted populations, however, have largely fallen out of favor with CDEs in the last few years.


[11] New Markets Tax Credit Extension Act of 2021, H.R. 1321, 117th Congress (2021-2022).

[12] New Markets Tax Credit Extension Act of 2021, S.456, 117th Congress (2021-2022).


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