What are New Markets Tax Credits?
The New Markets Tax Credit (NMTC) program was established to spur investment into operating businesses and real estate projects located in low-income communities. Special purpose entities called Community Development Entities (CDEs) apply annually to the US Treasury Department for delegated authority to sell these federal tax credits. The proceeds from that sale are then used to fund investments, typically structured as low interest rate loans, in qualifying businesses or commercial real estate developments.
NMTCs were not designed to be a primary source of funding, but they can be an excellent option to fill a gap in funding for projects that make economic sense. The credit provided to the investor totals 39% of the cost of the investment made in the CDE and is claimed over a 7-year credit allowance period. NMTC net proceeds can fund about 20% of a project and are paired with owner equity, borrowed funds, or other grants/public funds.
How to qualify
To be eligible for NMTCs, a potential project must generally be located in a low-income community. These areas are located throughout the United States and are determined by a variety of census tract data. In general, a project is likely to qualify if it is located in an area where the average median income is at or below 80% of the state or metropolitan median income.
More important, for a project to attract allocation for CDEs, it should generally be located in an area that meets higher poverty, income, and unemployment criteria than the minimum. CDEs will seek projects in these "high distress" areas so as to maximize the community impact made by their deployment. CDEs will also closely evaluate a project’s ability to make a demonstrable impact in the low-income community where the project is located, align with the goals of the NMTC program, and show readiness to proceed using a variety of other criteria.
In general, businesses may not include golf courses, tanning salons or massage parlors, package liquor sales, farms, or residential rental income that exceeds 80% of annual gross revenue.
The Baker Tilly difference
- One of the benefits of working with a full-service public accounting and advisory firm is that we have in place stringent quality control and independence measures that are required of all CPA firms. Consulting firms need not abide by these structures. These standards, combined with a tailored approach to every project, ensure compliance, mitigate risk, and maintain transparency for your key stakeholders.
- Unlike many of our competitors in the NMTC community, Baker Tilly serves many industry groups and maintains highly specialized CPAs and consultants who understand your operational issues. Because these industry teams are seamlessly integrated, our clients benefit from a 360-degree view of a NMTC project throughout its entire life cycle—from initial concept through completion.
- We work closely with owners, developers, community leaders, lenders, investors, and tax credit recipients to optimize a project’s approach to capital. But we don’t just make suggestions—we help identify the most favorable terms and assist with the implementation of federal, state, and local tax credits and incentives, negotiated incentives, and other loan programs to minimize equity requirements.
- Baker Tilly operates two of its own CDEs, which means you gain firsthand insight on the investment selection process and ongoing compliance requirements.
- On behalf of our CDE clients, Baker Tilly works with all major investors to provide services related to closing transactions, as well as post-closing servicing and compliance monitoring for NMTC investments.
Our services for borrowers include:
- Determine NMTC eligibility
- Design a transaction structure that is compliant with
- NMTC regulations
- Analyze community impact
- Prepare an executive summary to present to prospective CDEs
- Identify CDEs to approach for allocation using our knowledge of the current market
- Obtain term sheets and negotiate terms
- Discuss NMTC structure implications with lenders
- Source the NMTC investor as needed
- Prepare financial model needed for closing
- Assist with closing as needed
Learn more about our advisory services for CDEs >