The New Markets Tax Credit (NMTC) program provides up to 15% - 20% cash grant funding for real estate projects, businesses and non-profits that make investments in distressed areas. This page outlines how these tax credits work, the application process and how you can obtain them for your project.

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About The Author - Adam Tkaczuk

Adam Tkaczuk has secured over $500,000,000 of tax credit financing for real estate projects, businesses and non-profits. He is the Principal of Sterling Point Capital and tax partner at the private equity firm Ventoux Industrial Holdings. You can contact Adam by email at Adam@SterlingPointCapital.com.

 

How The NMTC Program Works

Each year the US Treasury, through the Community Development Financial Institutions Fund (CDFI) issues New Markets Tax Credits to Community Development Entities (CDEs) who in turn seek to invest these tax credits into the most impactful projects. There are over 200 CDEs in the country and they submit applications annually to the CDFI for these tax credits. It’s a highly competitive selection process such that only one out of every three CDEs win an allocation of NMTCs in any given year. Therefore, CDEs have become very specific in the types of projects they support – all in an effort to stand out from the other CDEs. For example, some CDEs focus on rural communities in one or two states while others will only invest in healthcare projects, while others only invest in projects that remediate contaminated sites (i.e., brownfields).

 

The CDEs that receive NMTCs will then allocate those tax credits to projects that they believe will have the largest social impacts and that align with their investment goals. The recipients can then sell the tax credits to investors which generates the cash subsidy.

 

 

 

 

 

 

 

 

 

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How Much Can You Get?

The largest allocation of NMTCs that you can receive is equal to your total project budget. So, a $15MM project can obtain a maximum of $15MM in NMTCs. However, one dollar ($1.00) of NMTCs is really a thirty-nine cent ($0.39) federal tax credit. This tax credit can be sold at closing for cash which generates the subsidy.

 

In the example below, we’ll assume that a $15MM project obtains a $10MM allocation of NMTCs. This $10MM of NMTCs represents a $3.9MM federal tax credit that a bank (or some other tax credit investor) will purchase. We’ll assume a 30% discount such that the tax credit investor will pay $2.7MM for $3.9MM of tax credits. This takes the form of an interest only loan (typically at 1% interest rate) that is forgiven after 7 years. After fees, the net benefit is usually in the 15% to 20% of the total allocation of NMTCs.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New Markets Tax Credits Structure:

The NMTC structure can get complicated, but the diagram below provides a simple overview.

 

 

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Referencing the chart above, you first have a bank or lender that provides a market rate loan to the project (upper left in the diagram). This can even be your own equity backed, self-sourced loan if you’d prefer. Either way, this loan is passed through the NMTC structure and remains unchanged all the way to the bottom where it is received by the project sponsor (i.e. the subsidy’s recipient).

 

The tax credit investor on the upper right also provides cash (called an “equity investment”) and receives the tax credit in return. This funding is also passed through the structure and becomes an interest only forgivable loan to the project sponsor. By law, all of this cash must pass through a CDE (Community Development Entity) in order to generate the NMTC. The CDE will take their fees out of the second loan proceeds and all other closing costs are taken from this second loan as well.

 

The project sponsor or subsidy’s beneficiary will receive a market rate bank loan and a low rate (often 1%) interest only loan that is forgiven after seven years. After seven years, the entire structure collapses and the sponsor is left with just their market rate loan. Why seven years? That’s because the New Markets Tax Credits don’t fully vest until year seven and the structure must remain in place for the tax credit investor to get the full benefit of the tax credit.

 

How to Obtain New Markets Tax Credits for Your Project:

As a potential recipient of NMTCs, your goal is to make your project align as much as possible with the annual CDFI application and to identify which CDE’s fit your project’s profile. It’s even better if you can get your project included in a CDE’s annual application to the CDFI and to market your project to the CDE community throughout the year.

 

To be considered for NMTC financing, your project must:

• Be located in a qualified distressed census tract;

• Have a budget of at least five million ($5,000,000), but ten million ($10,000,000) or more is better;

• The project must provide a benefit to the low-income community. This could be generated by an anchor tenant that provides jobs or social services or through apartment housing or direct job creation – if those jobs are accessible to the low-income community. Private businesses, real estate developers, healthcare centers and non-profits are common recipients of these tax credits.

• Have identified all other sources of financing (NMTCs are the-last-money-in) and all sources of financing must abide by the NMTC program’s requirements (see below).

• Priority is given to projects that are in underserved areas such as rural communities or in underserved states.

• Additional priority is given to projects that align with the current political climate. For example, when the opioid crisis was in the news, many healthcare centers that served impacted individuals were funded. Further, when Opportunity Zones were new, many projects that were located in these areas were funded.

• Finally, CDEs are under tremendous pressure to fund projects within a certain timeframe. If your project has all other financing lined up, all approvals are in place, and you can close quickly - you stand a good chance of getting an allocation before another project that is delayed.

 

Important Financing & Collateral Requirements:

One issue with the NMTC program is that your lender must take second position against any collateral for a period of seven years. The reason for this is that the tax credit investor is paying you upfront for the tax credits but the tax credits don’t fully vest until the seventh year. If there’s a default in the project, then they lose their tax credits and their investment. To cover this risk, the tax credit investors require a first position on any collateral involved in the project.  This is a common requirement that many of the national banks who fund these projects understand and are willing to work with.

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What I do and How I can Help:

I’ve secured nearly $50,000,000 of New Markets Tax Credits for projects and raise over $500,000,000 of tax credit financing for businesses, real estate projects and nonprofits. If you’d like to learn more about the NMTC program or if you’d like help obtaining these tax credits for your project, please feel free to contact me.

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“ACME worked with Adam to successfully secure economic development funding.. not only did his efforts yield $4.5M in direct support for our company's growth, his network of contacts and ability to get to just the right person (for our unique situation) made it happen in record time.  He is always the consummate professional, extremely diligent and detail oriented in his efforts, and has a knack for "seeing" the best path forward quickly.  If that's not enough, he's a delight to be around and fun to work with.  If you ever have occasion to take advantage of his deep financial skillset, you will not be disappointed.”

 

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