New Markets Tax Credits
During the Clinton Administration, Congress created New Markets Tax Credits (NMTC) to encourage private development in low-income communities. The program significantly endorses commercial business and not-for-profit human services construction. The program is very flexible in the type of projects that it can fund and has been used for a variety of developments, such as: shopping centers, mixed use (housing/retail) facilities, hotels, office buildings, warehouses, charter schools, medical facilities, manufacturing plants, not-for-profit agencies (both administrative offices, as well as operational facilities), and homeless shelters.
The program awards approximately $3.5 billion annually for NMTC projects. The project developers receive a 39% tax credit on all development project costs. While not-for-profit agencies cannot directly use the credits, the NMTC regulations allow the credit to be sold to other investors, providing a funding source to not-for-profit projects. The NMTC transaction benefits are substantial – rewarding the not-for-profit agency with funding ranging from 18 - 22% of the project's total cost.
A not-for-profit developer must establish a rather complex financial structure to transfer the tax credit to the project investors. As a result, the NMTC transaction takes considerable time to fully execute. The financial structure and project funding syndication require multiple financial institutions, as well as several legal and accounting firms. The actual transaction can take two to four months to complete.
What kind of projects do New Markets fund?
The regulations for a qualifying project are very broad. For example, a project could be a human services organization, or a business such as a shopping center, hotel, manufacturing facility, office space, school, childcare facility, health care facility, etc. It helps to keep in mind that Congress created the NMTC program to encourage developers to build infrastructure in low-income communities.
There are a few businesses that do not qualify: golf courses, country clubs, massage parlors, hot tub or sun tanning facilities, race tracks or other gambling facilities, or any store whose principal purpose is selling alcoholic beverages for consumption off premises.
How does a project qualify for a NMTC?
To qualify for a NMTC, the project must be operated in a Low-Income Community or it must qualify with respect to serving a targeted population – e.g., provide jobs for low-income persons in a high-income neighborhood.
What is the definition of a Low-Income Community?
A Low-Income Community is a United States census tract in which at least 20% of its population is at the poverty level or the area medium income is no more than 80% of the greater of the statewide or metropolitan area medium income.
How does an agency comply as operating in a Low-Income Community?
An agency must meet one of the following to qualify as operating in a Low-Income Community:
- 50% of the gross income must be derived from the Low-Income Community.
- At least 40% of the tangible assets must be located in the Low-Income Community.
- At least 40% of the services performed by its employees must be performed in the Low-Income Community.
How does an agency comply as serving a Targeted Population?
One of the following tests must be met to qualify with respect to a targeted population:
- At least 50% of gross income must be from low-income persons — which are defined as individuals whose family income is not more than 80% of the area median family income.
- At least 40% of the employees must be low-income persons.
- At least 50% of the business must be owned by low-income individuals.
Is there a minimum project scope?
Given the high transaction costs for completing a NMTC transaction, a project needs to be at least $6 million in cost – although many projects range from $10 - 15 million in scope.