Community development finance encompasses a range of tools designed to direct resources toward economically distressed areas. Among these tools, federal and philanthropic grants, as well as the New Markets Tax Credit (NMTC) program, represent two fundamentally different approaches to channeling capital into underserved communities. While both mechanisms aim to promote community development, they operate through distinct structures, create different incentives, and generate varied outcomes. Understanding which approach proves more effective requires examining how each mechanism mobilizes resources, sustains impact, and addresses the complex challenges facing low-income communities.
Capital Mobilization and Leverage Potential
The most striking difference between NMTCs and grants lies in their ability to mobilize capital. The NMTC program leverages private investment capital by providing tax credit incentives to investors who make qualified equity investments in Community Development Entities (CDEs). This structure converts $1 of federal tax expenditure into approximately $8 to $10 of total project financing, accounting for the private capital that the tax credit attracts. The 39% tax credit, claimed over seven years, incentivizes investors to provide capital that CDEs then deploy to qualified active low-income community businesses (QALICBs).
This leverage mechanism enables the NMTC program to mobilize substantially more total capital than its federal cost would suggest. If Congress appropriates $5 billion in NMTC allocation authority, this generates approximately $40 to $50 billion in total community development investment when including private capital leveraged through the tax credit structure. This multiplication effect generates substantial capital flows into low-income communities, surpassing what direct federal spending alone could achieve.
Grants, conversely, provide dollar-for-dollar benefits without comparable leverage. A $5 million federal grant delivers $5 million of project support but doesn’t inherently mobilize additional private capital. While grants can catalyze other funding sources and some grant programs require matching funds, they generally don’t achieve the multiplication effect that tax credit structures enable. From a federal budget perspective, NMTCs mobilize more total capital per dollar of federal cost.
Transaction Costs and Administrative Efficiency
Grant programs typically involve straightforward application processes where organizations submit proposals describing their projects, budgets, and expected outcomes. Once awarded, grantees receive funding directly and deploy it in accordance with the approved budgets. Administrative costs exist but remain proportional to grant sizes and manageable for most recipients.
NMTC transactions involve substantially higher transaction costs reflecting the program’s complexity. Legal fees, accounting costs, compliance monitoring, and CDE fees commonly total $250,000 to $500,000 or more for a typical NMTC transaction. These costs cover structuring multi-party investment arrangements, drafting extensive documentation, and establishing seven-year monitoring systems. The fixed nature of these costs creates practical minimum project size thresholds, typically ranging from $5 million to $10 million.
Grant programs can efficiently serve projects of virtually any size. A $50,000 community development grant might require several thousand dollars in administrative costs, creating reasonable cost ratios even for small projects. This scalability makes grants accessible to small community organizations and grassroots initiatives that would not otherwise justify NMTC transaction costs. Working with experienced NMTC advisory professionals helps larger projects navigate transaction complexity efficiently.
Sustainability and Revolving Capital
The NMTC program creates revolving capital mechanisms that grants typically don’t replicate. CDEs that successfully deploy NMTC allocations build track records that improve their competitiveness for subsequent allocations. The capital deployed through NMTC financing generates returns—through interest payments, loan repayments, or equity appreciation—that CDEs can recycle into new community development investments beyond the initial NMTC allocation.
This revolving structure creates sustainability advantages. A CDE, receiving a $50 million NMTC allocation, may deploy that capital to ten businesses over three years. As those businesses repay loans over subsequent years, the CDE accumulates capital for reinvestment in additional community development projects. The initial NMTC allocation thus generates ongoing community investment capacity that persists well beyond the seven-year compliance period.
Grants, being non-repayable by design, don’t create comparable recycling mechanisms unless specifically structured as revolving loan funds. Once a grant is expended for its designated purpose, those resources are fully utilized. Additional community development activities require securing new grants rather than redeploying capital from prior grants.
Risk Allocation and Market Discipline
The NMTC program’s investment structure creates market discipline that grants don’t impose. CDEs must underwrite projects, assess credit risk, structure appropriate debt service requirements, and monitor business performance throughout the compliance period. This investment discipline ensures that NMTC capital flows to financially viable projects capable of sustaining operations and repaying financing.
Investors who provide qualified equity investments to CDFI organizations and CDEs bear risk related to credit performance and compliance. If businesses fail or violate compliance requirements, investors face potential credit recapture and financial losses. This risk allocation incentivizes careful project selection, thorough due diligence, and active monitoring—activities that improve project success rates.
Grant programs allocate risk differently. Grantor organizations bear the primary risk that funded projects won’t achieve intended outcomes, but grantees don’t face financial penalties for underperformance beyond potential loss of future funding eligibility. This risk allocation can encourage innovation and support higher-risk initiatives that market-based financing wouldn’t serve, but it may also reduce the financial discipline that promotes long-term sustainability.
Eligible Activities and Flexibility
Grant programs often demonstrate greater flexibility regarding eligible activities than NMTC financing. Grants can support planning activities, capacity building, technical assistance, program operations, advocacy work, research, and other non-capital activities that community development requires. This flexibility enables grant funding to address the full spectrum of community needs, extending beyond physical investments and business financing.
The NMTC program focuses specifically on deploying investment capital to businesses and real estate projects in low-income communities. While this focus delivers substantial capital for economic development activities, it doesn’t address many community development needs that don’t involve business investment or real estate development. Community organizing, policy advocacy, social service program operations, and similar activities fall outside NMTC eligibility even though they contribute significantly to community development.
The NMTC program’s substantial capital deployment capacity makes it highly effective for financing job-creating businesses, commercial real estate, community facilities, and revenue-generating projects, as demonstrated by successful economic revitalization projects. Grants serve better for supporting capacity building, program operations, policy work, and initiatives where financial returns don’t justify investment structures.
Timeline and Deployment Speed
Grant programs typically operate on shorter timelines than NMTC transactions. Once grants are awarded, funds can be disbursed relatively quickly, allowing grantees to begin implementing their projects. While grant applications and review processes take time, actual fund deployment occurs rapidly once awards are finalized.
NMTC transactions involve extended timelines spanning competitive CDE allocation rounds, project selection and due diligence, complex transaction structuring, and multifaceted closings. From initial CDE allocation application to final project closing, NMTC processes commonly span 12 to 24 months or longer. For communities facing immediate challenges, the deployment speed of grant funding provides significant advantages. For planned economic development initiatives with long development timelines, the extended process of NMTC financing poses fewer problems.
Combining Mechanisms for Maximum Impact
The most effective community development strategies often combine NMTCs and grants rather than choosing between them. Grants might support predevelopment activities, capacity building, and planning that prepare projects for eventual NMTC financing. NMTC financing then provides substantial investment capital for implementation. Additional grants may fill financing gaps or fund activities that fall outside NMTC eligibility.
Layering these mechanisms leverages each one’s strengths while compensating for weaknesses. Grants’ flexibility and lower transaction costs serve planning and capacity building. NMTC financing’s capital leverage and sustainability support significant investments. Together, they create more comprehensive community development capacity than either mechanism alone provides.
Community development practitioners should view NMTCs and grants as complementary tools rather than competing alternatives. Large-scale economic development initiatives with strong business fundamentals benefit from NMTC financing’s capital leverage. Smaller projects, capacity-building initiatives, and innovative but higher-risk activities benefit from the grant funding’s flexibility and accessibility. To determine which approach or combination best serves your community development goals, request a consultation with experienced community development finance professionals.