The New Market Tax Credit (NMTC) was created in 2000 to encourage investment in low-income, economically distressed areas by allowing federal income tax credits for investments in Community Development Entities (CDEs). The NMTC was initiated by PL 106-554 (the Community Renewal Tax Relief Act of 2000) and has distributed credits worth $26 billion through 2020.
While the credit has been extended by Congress several times since the initial legislation, and is currently due to expire again in 2025, additional extensions are being sought. The program is administered by the U.S. Department of the Treasury Community Development Financial Institutions Fund in cooperation with the IRS.
How Does The Program Work For Investors and CDEs?
Investors provide capital to the CDEs and in return obtain tax credits. The investor can redeem the credits at a rate of five percent annually for each of the first three years and then six percent each year for the next four years, to total 39 percent over seven years.
The CDEs are private entities that select the projects they want to invest in, identify and recruit investors, work with local nonprofit and for-profit businesses to achieve their goals, and report back to the CDFI Fund. According to data reported by the CDFI Fund in September of 2020, results to date have been noteworthy, including:
- The creation of over 231 million square feet of manufacturing, office, and retail space
- Financing of 7,800 businesses
- ¾ of investments made in highly distressed communities with low median incomes and high unemployment
- Creation of one million jobs at a cost to the federal government of less than $20,000 per job created
What Types of Projects are Eligible?
- The guidelines allow a broad range of project types, including:
- Commercial real estate development
- Mixed-use real estate development; however, commercial must comprise at least twenty percent of the project’s gross income
- Community facilities
- Skilled nursing and assisted living facilities
- Hotel developments
- Any business except these prohibited uses:
- Golf courses
- Casinos, racetracks, or other gambling operations
- Country clubs
- Tanning salons, hot tub facilities, or massage parlors
- Retail liquor store for sale of off-site consumption
- Farming
- Residential rental housing, except as noted above (part of a mixed-use commercial development or specialty skilled nursing facility).
Can an Airport Qualify as a Project for an NMTC?
The financing of airport construction or upgrade could be a permissible use of NMTC funds. Airports in the U.S. are typically financed by bond and grant funds, but small rural airports may be built and remodeled using private funds. One focus of the NMTC funds has been assisting Native American communities across the U.S., as these areas are often both remote and economically underserved. NMTC investments funded the expansion of an airport runway in Good News Bay, a coastal region of Alaska. The project allowed the airport to accommodate larger commercial aircraft, which in turn supported enhancements to the area’s fishing industry. This example from 2009 illustrates the diversity of projects that can benefit from the NMTC funding.
As with any investment option, you should discuss NMTCs with your financial advisor to determine if they serve your goals before proceeding.
