New Markets Tax Credit.

What NMTC does

The New Markets Tax Credit (NMTC), codified at Internal Revenue Code Section 45D, provides a 39% federal income tax credit to investors who make qualified equity investments through Community Development Entities (CDEs) into Qualified Active Low-Income Community Businesses (QALICBs). The credit is taken over 7 years (5% in years 1-3, 6% in years 4-7), yielding a 39% total credit.

NMTC is administered by the Community Development Financial Institutions (CDFI) Fund within the U.S. Department of the Treasury. The CDFI Fund holds an annual competitive allocation round; CDEs apply for allocation authority, then deploy that authority to specific QALICB transactions.

For affordable housing finance, NMTC is most relevant in mixed-use deals where the housing component takes LIHTC and a commercial, retail, community facility, or services component takes NMTC. NMTC does not directly fund affordable rental housing (the statute specifically excludes residential rental property as a QALICB), but it can fund the non-residential portions of mixed-use development.

Program history

NMTC was authorized by the Community Renewal Tax Relief Act of 2000. Initial allocation rounds began in 2003. The program operated as a temporary credit requiring periodic reauthorization for over two decades, with annual allocation authority varying from $1.0 billion (the 2001 authority deployed in the first award round) to $5.0 billion per year in recent rounds — including a $7.0 billion combined allocation across the 2015–2016 round — depending on legislative action.

The most consequential program change in NMTC's history came with the One Big Beautiful Bill Act, which made NMTC permanent at a $5 billion annual allocation. After two decades of cyclical extensions, the community development tax credit field now operates with budget certainty.

How NMTC works

The credit structure

An investor purchases a Qualified Equity Investment (QEI) in a CDE for $1.00. The CDE invests at least 85% of that amount in QALICBs. The investor claims a 39% tax credit on the QEI over 7 years:

• Year 1: 5% of QEI
• Year 2: 5% of QEI
• Year 3: 5% of QEI
• Year 4: 6% of QEI
• Year 5: 6% of QEI
• Year 6: 6% of QEI
• Year 7: 6% of QEI
• Total: 39%

The CDE structure

A Community Development Entity is an entity certified by the CDFI Fund to issue NMTC investments. CDEs are partnerships, LLCs, or corporations that have a primary mission of serving low-income communities. CDEs apply for allocation authority in an annual competitive round; allocation awards in recent rounds have ranged from approximately $35M to $80M per CDE.

The QALICB requirement

A Qualified Active Low-Income Community Business must:

• Be located in a qualifying census tract (poverty rate ≥20% or median family income ≤80% area MFI); or serve targeted populations under IRC §45D(e)(2) — entities qualify under this alternative if: (a) ≥50% of total gross income is derived from transactions with low-income persons, (b) ≥40% of employees are low-income persons, or (c) ≥50% of owners are low-income persons. This path is administered by Treasury/CDFI Fund; no separate HUD designation is involved.
• Derive at least 50% of gross income from active conduct of a qualified business
• Have at least 40% of tangible property and at least 40% of services performed in the low-income community
• Not be "residential rental property" as defined by IRC § 168(e)(2)(A). The NMTC statute reaches this definition through two steps: IRC §45D(d)(3) cross-references §1397C(d) for the "qualified business" definition, and §1397C(d)(2)(A) in turn excludes property that is "residential rental property (as defined in section 168(e)(2))." Under that definition, a building qualifies as residential rental property only when 80% or more of gross rental income comes from dwelling units. Mixed-use buildings where dwelling-unit income is below 80% of gross rental income do not meet the definition and can therefore qualify as a QALICB — this is the operative definitional threshold, not an NMTC-specific exception.

The 7-year compliance period

The QALICB must maintain its qualifying status throughout the 7-year credit period. Recapture is triggered if compliance is lost. Most NMTC transactions are structured to ensure compliance through the full 7 years; at year 7, the structure typically "unwinds" with the investor exiting at a nominal value (the credit having been monetized).

The leveraged loan structure

The most common NMTC structure is the "leveraged loan" structure, which allows the project to attract substantially more capital than the investor's equity alone:

1. An Investor (typically a bank seeking CRA credit) commits equity equal to the present value of the future 39% credit
2. A Leverage Lender (often the project sponsor or an affiliated entity) provides a loan to a special-purpose "Leverage Loan" pass-through entity
3. The Leverage Loan entity, together with the Investor, becomes the partner in an Investment Fund that contributes the combined funds (Investor equity + Leverage loan proceeds) to the CDE
4. The CDE then makes a Qualified Low-Income Community Investment (QLICI) loan to the QALICB
5. The QALICB uses the QLICI proceeds for its qualified business expenditures

The economic result: the Investor receives 39% credit on the entire QEI (including the leverage loan amount), while bearing only the present-value cost of the equity portion. The leverage loan effectively multiplies the credit's impact on the project.

Twinning NMTC with LIHTC (mixed-use deals)

NMTC and LIHTC can be combined in mixed-use deals, with each credit applied to its eligible portion of the project:

• LIHTC: Applied to the residential rental basis of the project
• NMTC: Applied to the commercial, retail, community facility, or services portion (must remain ≤80% residential rental income to qualify as a QALICB)

Common mixed-use NMTC+LIHTC structures:

• Ground-floor retail or community space with LIHTC apartments above
• Affordable housing with a federally-qualified health center or daycare on site
• Mixed-income, mixed-use developments with workforce housing + commercial
• Adaptive reuse of historic buildings where HTC + LIHTC + NMTC stack three credits on different basis components

The structural complexity of triple-stacked credits (HTC + LIHTC + NMTC) is significant. Practitioners typically need specialized counsel and accounting support for these deals.

Recent program developments

OBBBA permanent extension

The One Big Beautiful Bill Act, enacted July 4, 2025, made NMTC permanent at the $5 billion annual allocation level. This eliminated the recurring legislative uncertainty that had characterized NMTC since its 2000 enactment and is expected to stabilize the field of CDE allocation applicants and investor demand.

CDFI Fund rural set-aside

Recent allocation rounds have included specific set-asides for CDEs serving rural areas, severely distressed census tracts, and Native American communities. These set-asides are administered through the annual CDFI Fund Notice of Allocation Authority (NOAA) Availability.

How NMTC connects to your deal

1. Confirm census tract eligibility: Use the CDFI Fund's NMTC eligibility mapping tool to verify the project site is in a qualifying low-income community
2. Confirm QALICB eligibility: Verify the mixed-use project meets the residential rental cap, geographic test, and income test
3. Engage a CDE: Identify CDEs with allocation authority and a mission alignment with your project. Most large projects need a $5M-$20M QLICI; CDEs typically commit allocation in $5M-$20M increments
4. Engage NMTC counsel: The structure requires specialized federal tax counsel and CDFI Fund-experienced lawyers
5. Coordinate closing with LIHTC: If twinning, the NMTC investor admission and LIHTC investor admission are typically coordinated at one closing
6. Plan the 7-year exit: NMTC structures unwind at year 7; plan refinancing or buy-out at the front end

Labor standards — Davis-Bacon

NMTC itself does not trigger federal Davis-Bacon prevailing-wage requirements — it is a federal income-tax credit, not direct federal financial assistance, so the trigger conditions for Davis-Bacon coverage under the Davis-Bacon Act and HUD's labor-standards regulations are not met by NMTC alone. However, NMTC deals frequently layer HUD funds (HOME, CDBG, CDBG-DR) or other federally-assisted financing on the residential or community-facility component of mixed-use projects, and those federal sources do trigger Davis-Bacon at their own program thresholds. State and local prevailing-wage laws apply independently of federal status.

Pairing with other programs

• LIHTC: Mixed-use deals where LIHTC funds the residential floors and NMTC funds the commercial / community-facility component. See LIHTC Deal Structures Guide for stack mechanics.
• HTC: Historic adaptive reuse — particularly common triple-stack of HTC + LIHTC + NMTC for historic mixed-use buildings.
• HOME / CDBG: Gap-fill on the residential side of mixed-use deals (where the LIHTC equity and NMTC equity together still don't cover total development cost).
• Opportunity Zones: NMTC sites located in OZ tracts can layer OZ deferral benefits for some investor types.
• State NMTCs: 15+ states offer state-level New Markets credits stacking with federal NMTC.

Practitioner resources

• Community Development Financial Institutions (CDFI) Fund — NMTC program page
• Annual NMTC Notice of Allocation Authority (NOAA)
• NMTC eligibility census tract mapping tool
• List of CDEs with available allocation authority
• Industry resources: NMTC Coalition, Novogradac NMTC coverage, CohnReznick