Historic Rehabilitation • New Markets • Renewable Energy • Low Income Housing
The New Markets Tax Credit (NMTC) is a 39 percent credit on an equity investment to a Community Development Entity (CDE) that is claimed over a 7-year compliance period (5 percent over the first 3 years and 6 percent over the last 4 years). The CDE must then make a Qualified Equity Investment or loan to a Qualified Business in a Qualified Low-Income Community (LICs). Most Commercial and mixed-use real estate development projects located in LICs are Qualified Businesses. (Residential projects without a commercial component do not qualify.) The New Markets program is designed to encourage investments in LICs that traditionally have had poor access to debt and equity capital.
The New Markets Tax Credit and the historic tax credit are natural allies. LICs are defined as U.S. census tracts with a 20 percent poverty rate or household incomes at or below 80 percent of the area or statewide median, whichever is greater. Due to this liberal definition, 40 percent of all U.S. and most central business district census tracts qualify for the NMTCs. Because most old buildings are found in disinvested parts of any city or town, and most rehab tax credit projects are located in central business districts, in 2005 68 percent of all HTC Part 3 approvals were granted for properties in qualified NMTC census tracts.
Unlike the Federal HTC’s, the annual dollar volume of NMTC’s allocated by the U.S. government is capped. That means that CDEs must compete against each other to receive an allocation of New Markets Credits during each annual funding round. Once a CDE wins an allocation, it partners with an investor who is attracted by the tax benefits offered by the New Markets Tax Credit. In order to claim the credit, the investor must make an equity investment in a CDE.