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, veterans and other populations who have historically lacked 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 non-monetary NMTC allocation authority 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 because they provide substantial community and economic impacts to residents in low-income communities, low-income persons and other targeted populations:

  • 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”).

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

A NMTC Investor is typically a financial institution or a large corporation.

A NMTC Investor does not receive any direct or indirect ownership interest in the borrower or any of its affiliates.

Instead, a NMTC Investor receives a direct or indirect ownership interest in an affiliate the Allocatee, and that affiliate provides the NMTC financing to the borrower.

Generally, with respect to the Forgiven NMTC Loan:

  • it only requires approximate 1.0% to 1.2% 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:

  • it only requires below-market interest-only payments during the 7-year NMTC compliance period (although such interest rate is not as low as that of the Forgiven NMTC Loan, it is still generally significantly below market); and
  • it is forgiven at the end of the 7-year NMTC compliance period.

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

  • gap financing;
  • in the case of the Forgiven NMTC Loan, approximate 1.0% to 1.2% interest-only payments during the 7-year NMTC compliance period and forgiveness after such period;
  • in the case of the Non-Forgiven NMTC Loan, below-market interest-only payments during the 7-year NMTC compliance period (which rate may continue through the maturity date which can be up to 40 years and beyond any secured asset’s useful life);
  • subordination to existing and subsequent debt;
  • various non-traditional and favorable terms;
  • subject to flexible financial underwriting criteria;
  • 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;
  • ability to obtain additional financing (based on the benefits described above); 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).

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.

For each NMTC financing, an Allocatee spins off an affiliate.  The NMTC Investor then makes a “qualified equity investment” in such affiliate and the Allocatee makes a nominal capital contribution to the CDE (such as $100).

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.

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 one or more “sub-allocations” from one or more Allocatees, which is also an extremely competitive process.

Once an Allocatee “sub-allocates” a portion of its NMTC Allocation Award to a CDE, that CDE then is authorized to designate the NMTC Investor’s “qualified equity investment” as such, which entities the NMTC Investor to NMTCs equal to 39% of such “qualified equity investment.”

Each Allocatee has a service area, which can be national, regional, multi-state, or local and targets particular:

  • types of borrowers (such as for-profits or nonprofits);
  • types of operations (such as manufacturing, health care, or renewable energy/recycling etc.);
  • what the NMTC financing will be used for (such as for real estate, equipment or operations etc.);
  • types of communities that are benefited (such as rural or metropolitan);
  • types of economic distress in the “low-income community” (such as a certain minimum poverty rate or unemployment rate);
  • particular “underserved states” (which are those 10 states and Puerto Rico, which have been designated by the CDFI Fund as not receiving their proportionate share of NMTC financing over the past few years); and
  • types of direct and indirect community and economic impacts to residents in “low-income communities,” “low-income persons,” and other “targeted populations.”

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.

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 1.0% to 1.2% interest-only payments during the 7-year NMTC compliance period, and (b) forgiveness at the end of such period; or
    • Non-Forgiven Loan, the terms of which include (a) a principal amount between $1 million and $2 million; (b) below market interest-only payments during the 7-year NMTC compliance period; and (c) a term of up to 40 years (which begins to amortize after the 7-year NMTC compliance period and 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 of serving, or providing investment capital, for low-income communities or low-income persons.

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: