New Markets Tax Credits (NMTCs) are an incentive for private organizations to invest in affordable financing in underserved communities. Great, but how do you understand them if you’re not a banker?
New Markets Tax Credits (NMTCs) are a complex topic, but they have a huge impact in low-income communities. Underserved communities are not often seen as “bankable” in the financial industry. Because of this, private investors and lenders tend to stay away from them. One solution to this problem is to entice private investors to help reinvigorate small businesses and real estate. That’s why the U.S. Treasury’s CDFI Fund created NMTCs.
First, a couple of quick definitions:
- Community Development Financial Institution (CDFI): A bank or lender with a mission to provide responsible financing and economic resources to underserved communities
- Qualified Active Low-Income Community Businesses (QALICB): A business or organization located in a distressed area that supports its community through development, business or charitable activities. For example, a QALICB may offer jobs that are pathways to living-wage careers, affordable healthy food, or education or health care services. QALICBs must meet the requirements in this document (page 21), provided by the CDFI Fund.
- Low Income Communities: An area where poverty rates and median family incomes fall below set levels, as well as other requirements listed in this document (page 13), provided by the CDFI Fund.
- Areas of Greater Distress: Communities that have been identified as most in need of support and access to capital. These areas are mapped out in the New Markets Tax Credit Eligibility Status Policy Map. Organizations looking to apply for NMTC investment funds can use this map to find out if their project is in an eligible census tract.
How Do NMTCs Work?
Here is a simplified description of the process: The CDFI Fund allots (or “allocates”) tax credits to a CDFI. The CDFI acts as a middle man, offering the credits to private investors and then working with other mission-based organizations to deploy those investments in economically distressed communities. In return for their investment, the private investor gets tax credits against their federal income tax.
This process brings access to capital with below-market rates into areas that need low-cost financing to grow. Now more than ever, these businesses need access to fair, affordable financing.
Over the past two decades, NMTC Program awards have spurred $8 of private investment for every $1 allocated. In 2021, the CDFI Fund allocated Lendistry $35MM in New Markets Tax Credits. With this allocation, Lendistry joins a long tradition of community development. Lendistry will use its NMTC allocation to spur investment in real estate in distressed communities and provide access to below-market-rate capital to QALICBs around the country. Click here to learn more.