History of the NMTC program
New Market Tax Credits (NMTC) is a capital program tool designed to attract impactful investments to low-income communities. The federal program was originally established through the Community Renewal Tax Relief Act of 2000. Since 2002, the program has supported more than 5,300 projects across all 50 states and territories, totaling more than $50 billion in projects. NMTC’s upfront economic benefit makes otherwise unviable projects economically viable, while rewarding those with economic or social impact within low-income communities.
Congress sets the annual NMTC allocation amount every year. This allocation is administered by the U.S. Department of the Treasury’s Community Development Financial Institutions Fund (CDFI Fund). The CDFI Fund awards the allocation annually to intermediaries called Community Development Entities (CDE), who apply for the allocation. CDEs are domestic corporations or partnerships who ultimately decide which projects will receive a NMTC allocation.
NMTC Nuts and Bolts
All projects financed by NMTCs are located within a low-income census tract. More than 40% of U.S. census tracts qualify as low-income. Low-Income census tracts are defined as areas with a poverty rate exceeding 20%, or an area with an average household income less than 80% of the area median income. Due to the competitiveness of the program, most NMTC providers required projects to be located within a severely distressed census tract. These areas have a poverty rate greater than 30%, or an average household income less than 60% of the area median income. There are other criteria that allows a "low-income" tract to also qualify as severely distressed.
NMTCs can be used to finance for-profit and non-profit projects as well as operating businesses and commercial real estate projects where the users of the building are unrelated to the developer/sponsor. As the industry has matured, an emphasis on financing equipment and non-real estate uses has increased; however, most successful NMTC applicants include a real estate component. Typically, NMTC projects include: new construction, rehab of existing buildings or new equipment/production lines. NMTC is considered project-based financing, and the CapEx being financed by NMTCs must create a fairly high level of economic, social, minority or environmental impacts.
Improvements to the program
Legislatively, the NMTC program has more support than ever in Congress. Originally, the program created $1.5 billion in allocations. Since then, the annual allocation has ramped up to $3.5 billion per year. In summer 2021, the annual allocation is increasing again to $5 billion per year — a 42% increase! This increase allows more projects, people and communities to benefit from this tool.
Historically, the NMTC program has a one-year runway, meaning Congress renews the allocation annually. In December 2020, Congress passed a fie-year, $25 billion extension. The extension also ensures an annual $5 billion award every year until 2026.
Following the success of federal NMTC, several states have passed their own, smaller NMTC programs, most of which are very similar to the federal program. Some of these programs have received numerous renewals. Others were one-off programs. States that have implemented their own NMTC program include Ohio, Kentucky, Illinois, Louisiana, Maine, Mississippi, Alabama, Florida, Oregon, Nevada, and Utah, among others.