The intent of the NMTC Program

  • The intent of the federal new markets tax credit program (the “NMTC Program”) is to provide financing to low-income communities which have historically lacked access to traditional financing.
  • The NMTC Program particularly focuses on the benefits to the residents in such low-income communities and targeted populations (such as low-income persons, minorities, women and other populations who lack access to quality jobs, and community and consumer goods and services).

NMTCs are equal to 39% of the NMTC financing, which is known as a “qualified equity investment” (a “QEI”).

The NMTC Program subsidy is provided from a NMTC Investor’s effective purchase of the NMTCs (which are dollar-for-dollar offset against federal income taxes).

The Community Development Financial Institutions Fund, which is a division of the U.S. Treasury Department (the “CDFI Fund”), administers the NMTC Program.

Borrowers do not apply to the CDFI Fund for NMTC financing but rather they apply to those who have received NMTC allocation awards from the CDFI Fund.

Good Borrower and Project Candidates for NMTC Financing

Each of the following are good types of for-profit’s and nonprofit’s operations and projects for NMTC financing:

  • manufacturing facilities/operations;
  • health care facilities/operations;
  • grocery stores/operations;
  • charter and independent schools/operations;
  • qualified mixed-use projects (i.e., those that satisfy the “80/20 Test”);
  • community facilities/operations; and
  • renewable energy and recycling facilities/operations.

Economic Benefits of NMTC Financing

NMTCs are equal to 39% of the NMTC financing, which is a “qualified equity investment” (a “QEI”) (less the Allocatee’s “sub-allocation” fees).

None of the borrower, its affiliates or owners recognize the NMTCs.

Instead, investors (“NMTC Investors”) effectively purchase the NMTCs based on (a) current market pricing; (b) desirability of participating in the particular the NMTC financing; and (c) if it is competing with other NMTC Investors to participate in such NMTC financing. NMTC Investors are typically financial institutions (or large corporations, which is less common).

Generally, with respect to the Forgiven NMTC Loan:

  • the principal and favorable terms of which are provided by the proceeds of the NMTC Investor’s “purchase price” for the NMTCs;
  • it only requires approximate 1.5% interest-only payments during the 7-year NMTC compliance period; and
  • it is forgiven at the end of the 7-year NMTC compliance period.

Generally, with respect to the Non-Forgiven NMTC Loan:

  • a portion of the principal and the favorable terms of which are the provided by, or the result of, the NMTC Investor’s “purchase” of the NMTCs;
  • it only requires below-market interest-only payments during the 7-year NMTC compliance period; and
  • after the 7-year NMTC compliance period, the loan amortizes through its maturity date of up to 40 years (which can be beyond any secured asset’s useful life).

Generally, the economic benefits of the NMTC Program subsidy (whether in the form of the Forgiven NMTC Loan or the Non-Forgiven NMTC loan) include:

  • gap financing;
  • approximate 1.5% interest-only payments during the 7-year NMTC compliance period;
  • subordination to other creditors;
  • nontraditional and favorable terms, and subject to flexible underwriting criteria, such as:
    • the Non-Forgiven NMTC Loan with a below-market interest rate and a term up to 40 years (which can be beyond any secured asset’s useful life);
    • the Forgiven NMTC Loan being forgiven at the end of the 7-year NMTC compliance Period, or
  • ability to obtain additional financing;
  • ability to “leverage” its other sources of financing for a multiplier economic benefit;
  • “softer” foreclosure and enforcement rights if there is a default;
  • if applicable, state NMTCs provide additional subsidy; and
  • substantial community and economic impacts to residents in “Low-Income Communities” and “Targeted Populations,” including “Low-Income Persons.”

We identify, profile and solicit Allocatees and NMTC Investors that provide optimal nontraditional and favorable terms and flexible underwriting requirements based on the type of our borrower client, nature of its operations, and uses of NMTC financing.

NMTC Financing Facilitated by “Allocatees” and “CDEs”

As previously discussed, the NMTC financing = the QEI (less the Alocatee’s “sub-allocation” fees).

Additionally, NMTC financing = the QEI = NMTC Allocation Award (as “sub-allocated” to the NMTC financing, as described below).

Each year, the Community Development Financial Institutions Fund (the “CDFI Fund,” which administers the NMTC Program) provides non-monetary NMTC allocation authority awards (“NMTC Allocation Awards”) to “qualified community development entities” (“CDEs”), after an extremely competitive process.

If a CDE receives such an award, it becomes an “Allocatee.”

A NMTC Allocation Award authorizes an Allocatee to designate its NMTC financings/QEIs as entitled to NMTCs to the extent it “sub-allocatees” a portion of its NMTC Allocation Award to each NMTC financing/QEI.

An Allocatee facilities NMTC financings without using any of its own funds and receives “sub-allocation fees” for each NMTC financing, and a portion of borrowers’ Forgiven NMTC Loan interest payments permit the Allocatee to pay ongoing asset management and monitoring fees as well as overhead during the 7-year NMTC compliance period.

Borrowers must compete to obtain a “sub-allocation” from one or more Allocatees, which is also an extremely competitive process.

Each Allocatee (a) has a service area (which is national, regional, multi-state or local); and (b) targets certain types of borrowers (such as health care, manufacturing, or education etc.); what the NMTC financing will be used for (such as real estate, equipment and/or operations financing); types of communities (such as rural or urban), and location in the United States in which the borrower or project is located (such as an “underserved” state).

In the case of the NMTC Forgiven Loan (or a pool of Non-Forgiven Loans), each Allocatee spins off a separate CDE for the applicable NMTC financing(s).

How NMTC Transaction Participants Benefit

The benefits of the Forgiven NMTC Loan (which arises from the 39% NMTCs) is shared among each of:

  • the NMTC investor, which:
    • receives the NMTCs equal to 39% of the QEI (less the Allocatee’s “sub-allocation” fees);
    • receives an internal rate of return on the QEI;
    • generally receives credit under the Credit Reinvestment Act; and
    • is subject to less capital risk (because it borrows a portion of the QEI from one or more “Leverage Lender(s)”);
  • the borrower, which receives gap financing with nontraditional and favorable terms, which is subject to flexible underwriting criteria, in the form of either:
    • a Forgiven Loan, the terms of which include (a) approximate 1.5% interest-only payments during the 7-year NMTC compliance period, and (b) forgiveness at the end of such period; or
    • a Non-Forgiven Loan, the terms of which include (a) a principal amount between $500,000 and $5 million; (b) a below-market interest rate; and (c) a term of up to 40 years (which can be beyond any secured asset’s useful life); and
  • the Allocatee, which:
    • receives “sub-allocation fees;”
    • receives reimbursement for its ongoing asset management, monitoring, and overhead etc; and
    • is able to further its mission as a CDE.

NMTC financing can be combined with state NMTCs, historic tax credit financing, and other community and economic development programs (such as opportunity zone financing, and those provided by the USDA Programs and the CDFI Programs).  However, NMTC financing cannot finance any square feet to the extent that low-income housing tax credits finance such square feet.

Although the typical NMTC financing structure is quite complex based on all of the sources of funds, the fundamental economics and initial structure of any NMTC financing is illustrated in the following link:

For a discussion and illustration of the unwind of NMTC financing after the 7-year NMTC compliance period, please click on the following link:

For a more detailed discussion of the benefits of NMTC financing to a borrower, and applicable legal requirements and underwriting requirements, please click on the following link:

Please click the following link to watch our pre-recorded webinar:

To apply as a borrower for NMTC financing, please click on the following link:

For a more detailed discussion of the benefits of participating as a CDE in NMTC financing, and applicable legal requirements and underwriting requirements, please click on the following link:

To apply as a CDE for a NMTC Allocation Award, please click the following link: