Glossary

New Markets Tax Credit (NMTC)

Also known as: NMTC

A federal tax credit program, administered by the U.S. Treasury's CDFI Fund, that allocates tax credit authority to certified Community Development Entities, which in turn make below-market loans or equity investments into businesses and real estate projects located in qualifying low-income census tracts.

The NMTC delivers its subsidy through a structure quite different from LIHTC or the historic tax credit: an investor contributes equity to an upper-tier investment fund, often combined with a leverage loan from the project sponsor or a third-party lender, in exchange for tax credits equal to 39% of the qualified equity investment, claimed over seven years -- 5% in each of the first three years, 6% in each of the remaining four -- and that fund in turn capitalizes a certified CDE, which makes a Qualified Low-Income Community Investment, typically a below-market-rate loan, to the actual project. This leveraged fund structure is deliberately engineered so that, after a mandatory seven-year compliance period, the CDE loan is frequently restructured, forgiven, or unwound at a discount in a manner that delivers the bulk of the subsidy's economic benefit to the real estate project itself rather than remaining an ordinary market-rate obligation. Because NMTC allocation authority is itself competitively awarded to CDEs rather than directly to developers, and a real estate project must independently locate a CDE willing to sub-allocate credit authority to its specific deal, NMTC transactions typically require longer lead time and more specialized transaction structuring than LIHTC or historic credit deals, and NMTC financing is frequently layered together with historic tax credits or a PILOT on a single adaptive reuse or economic development project.