Developers and investors pursuing community development projects across the United States and its territories often face confusion in distinguishing between the New Markets Tax Credit and Low-Income Housing Tax Credit programs. While both deliver substantial federal tax benefits supporting development in underserved communities, these programs serve fundamentally different purposes, target distinct property types, and operate through separate administrative structures. Understanding the critical distinctions between NMTC and LIHTC proves essential for selecting appropriate financing mechanisms, avoiding wasted application efforts on unsuitable programs, and strategically structuring projects to access optimal incentive combinations when circumstances permit.
This comprehensive analysis clarifies the significant differences between these powerful tax credit programs, examining eligibility requirements, subsidy structures, transaction mechanics, and strategic deployment considerations. Whether pursuing commercial development, affordable housing, or mixed-use projects that potentially qualify for both programs, understanding these distinctions enables informed decisions that maximize financial benefits while achieving community development objectives.
Fundamental Purpose and Program Focus
The most critical distinction involves each program’s fundamental purpose and development focus. The New Markets Tax Credit focuses on promoting economic development and job creation in low-income communities, regardless of the property type. NMTC finances commercial real estate, operating businesses, manufacturing facilities, healthcare centers, retail developments, and community facilities—essentially any productive use that creates employment or provides essential services in distressed neighborhoods. The program explicitly excludes residential rental housing as a primary use, though mixed-use projects with substantial commercial components may access NMTC for commercial space.
Low-Income Housing Tax Credits focus exclusively on affordable rental housing serving households with incomes below the area median income thresholds. LIHTC finances apartment developments, senior housing, supportive housing for special needs populations, and other residential rental properties where specified percentages of units remain affordable to low-income tenants. The program cannot finance commercial properties, operating businesses, or owner-occupied housing, regardless of community benefit or job creation potential. This clear sectoral distinction means most projects naturally qualify for only one program based on property type—commercial projects pursue NMTC while residential rental developments pursue LIHTC.
Geographic Eligibility Requirements
Geographic requirements differ substantially between programs, affecting where projects can access each incentive. NMTC restricts eligibility to qualified low-income census tracts—areas where the poverty rate exceeds 20% or the median family income falls below 80% of the area median. Approximately 25% of U.S. census tracts meet these criteria, limiting NMTC to the most economically distressed neighborhoods. Projects in moderate-income or affluent areas cannot access NMTC regardless of community benefit, with narrow exceptions for projects serving low-income populations from adjacent qualified tracts.
LIHTC imposes no specific geographic restrictions based on census tract income levels. However, competitive scoring systems administered by state housing finance agencies award preference points for projects in qualified census tracts, areas with complex development, or locations near transit and services. LIHTC projects can theoretically be located anywhere, with site selection driven primarily by market demand for affordable housing, land availability, and a strategic fit with state housing priorities, rather than rigid geographic boundaries. This broader geographic flexibility makes LIHTC accessible in contexts where NMTC would never qualify due to neighborhood income levels exceeding program thresholds.
Allocation Process and Competitive Dynamics
The allocation processes through which projects access credits differ dramatically between programs. NMTC allocation occurs through Community Development Entities that receive allocation authority from the CDFI Fund through annual competitive applications. CDEs then select projects aligning with their strategic priorities, geographic focus areas, and sector specializations through rolling evaluation processes or periodic requests for proposals. Projects work directly with CDEs, building relationships, demonstrating project readiness, and negotiating transaction terms. No formal state-level competitive scoring exists—CDE discretion determines project selection based on organizational priorities and allocation availability.
LIHTC allocation occurs exclusively through state housing finance agencies, which operate highly competitive application processes with explicit scoring criteria that evaluate project characteristics, developer experience, affordability depth, supportive services, green building features, and alignment with state housing priorities. Applications typically occur during defined periods annually or semi-annually, with agencies awarding allocations to the highest-scoring projects until available credits are exhausted. Competition proves intense, given the limited allocation relative to demand, with successful developers demonstrating track records, community support, and projects that strategically maximize scoring criteria designed to address state priorities.
Credit Structure and Subsidy Depth
Credit structures differ significantly between programs in timing, percentages, and the effective subsidy delivered. NMTC provides 39% federal tax credits over seven years to investors—5% annually for years one through three, then 6% annually for years four through seven. When accounting for investor pricing and transaction costs, projects realize an effective subsidy of approximately 20-25% of the NMTC investment amount. Credits flow to investors who purchase interests in investment funds, with projects receiving capital as below-market loans rather than equity grants.
LIHTC offers two credit types with different subsidy depths and qualification requirements. The 9% credit provides approximately 9% tax credits annually over ten years, delivering roughly 70-85% of qualifying residential costs as adequate equity when considering investor pricing. The 4% credit provides approximately 4% annually over ten years, delivering 30-40% of costs. Projects using tax-exempt bond financing must use 4% credits, while other projects compete for scarce 9% allocations. The LIHTC subsidy substantially exceeds the NMTC percentages, reflecting more extended credit periods and a more significant governmental commitment to affordable housing production compared to commercial economic development. Working with NMTC Consultants familiar with both programs helps developers understand which delivers optimal economics for specific circumstances.
Compliance Requirements and Ongoing Obligations
Compliance requirements impose different operational constraints and monitoring obligations. NMTC compliance spans seven years, requiring projects to maintain business locations within qualified census tracts, continue generating promised community benefits, including employment levels or service provision, avoid prohibited uses or activities, and satisfy ongoing CDE monitoring through annual reporting and site visits. After seven years, put-call transactions typically occur, allowing project sponsors to purchase investor interests for nominal amounts, effectively ending NMTC structures and compliance obligations beyond normal business operations.
LIHTC compliance extends far longer—minimum 15 years under federal requirements, with most state allocations requiring extended use agreements of 30-50 years, maintaining affordability restrictions. Projects must continuously verify tenant incomes to confirm eligibility, enforce rent restrictions that limit charges to specified percentages of the area median income, maintain minimum occupancy percentages for qualifying households, and undergo regular state agency inspections to verify physical property conditions and compliance documentation. These extended restrictions create long-term affordable housing preservation but limit owner flexibility and potential property appreciation realization compared to unrestricted market-rate properties.
Transaction Complexity and Professional Requirements
Both programs involve substantial transaction complexity, requiring specialized professional expertise, although the specific complexities differ. NMTC transactions require legal counsel experienced in complex tax credit structures, financial advisors modeling capital stacks and investor returns, accountants ensuring tax compliance, and potentially CDFI loans coordinators when layering NMTC with CDFI debt. Legal documentation typically exceeds 1,000 pages, encompassing the establishment of investment funds, loan agreements, put-call options, and multi-party coordination mechanisms. Transaction costs generally range $200,000 to $400,000 for comprehensive legal, accounting, and advisory services.
LIHTC transactions similarly require specialized professionals, including affordable housing attorneys, tax credit syndicators who connect projects with investors, housing consultants who navigate state agency applications and scoring systems, and compliance specialists who establish ongoing monitoring systems. Legal documentation is extensive, though somewhat more standardized, given decades of LIHTC market development, which has created established precedents. Transaction costs are comparable to NMTC, ranging from $150,000 to $350,000, depending on project size and complexity. Both programs require sophisticated organizational capacity, managing complex structures, which can be challenging for inexperienced developers lacking professional support networks.
Investment Market Characteristics
Investment markets differ substantially between programs, affecting capital availability, pricing, and transaction dynamics. NMTC investors include major banks, corporations, and financial institutions seeking Community Reinvestment Act credit alongside tax benefits, creating relatively concentrated investor pools dominated by established institutions. Credit pricing typically runs 80-85% of face value in strong markets, with investor relationships and CDE reputations significantly influencing terms. Investment minimums generally exceed $5 million for direct investments, though multi-investor funds enable smaller participations.
LIHTC markets prove more mature and liquid, given the program’s more extended history since 1986, compared to NMTC’s 2000 establishment. Specialized syndicators, including Enterprise Community Partners and Boston Capital, as well as numerous regional firms, aggregate investor capital and deploy it systematically across multiple projects, creating efficient markets with transparent pricing. Credit pricing varies by credit type and market conditions, but generally ranges from 85% to 95% of face value for 9% credits and 75% to 85% for 4% credits. Market depth and liquidity typically exceed those of NMTC, although both programs maintain active secondary markets, enabling portfolio transactions.
Strategic Layering for Mixed-Use Projects
Projects that combine residential and commercial components present opportunities for strategic program layering, allowing access to both NMTC and LIHTC. Mixed-use developments can utilize LIHTC for residential rental units while deploying NMTC for ground-floor retail, office space, community facilities, or healthcare clinics. This combination requires sophisticated legal structuring, maintaining separate, qualified businesses that satisfy each program’s distinct requirements while enabling unified development and property management. Successful layering can deliver a combined subsidy of 50-70% across total project costs—extraordinary economics enabling transformative developments in challenging markets.
However, layering multiplies transaction complexity substantially, requiring coordination between separate investor constituencies, dual compliance monitoring systems, and careful attention to conflicting requirements between programs. Organizations should pursue layering only when the depth of subsidy genuinely proves necessary for project viability, and organizational capacity exists for managing increased complexity. Reviewing NMTC for healthcare projects and similar mixed-use developments provides valuable insights into successful layering approaches and common pitfalls that require attention during the structuring phases.
Making the Appropriate Program Selection
Selecting between NMTC and LIHTC typically proves straightforward given clear sectoral distinctions. Commercial projects, operating businesses, and community facilities pursue NMTC when located in qualifying low-income census tracts. Residential rental housing developments pursue LIHTC, regardless of location, but with a preference for projects in qualified census tracts or other high-priority areas. Mixed-use projects evaluate whether layering both programs delivers sufficient incremental benefits to justify the substantially increased complexity and transaction costs compared to single-program approaches.
Developers should systematically assess property type, determining the natural program fit, geographic location, establishing NMTC eligibility, aligning organizational mission with economic development and affordable housing priorities, and evaluating transaction capacity for managing program-specific complexities. When projects clearly fall within a single category, program selection follows logically from their basic characteristics. When projects span categories or offer potential for either approach, comprehensive financial modeling that compares net benefits after all costs determines the optimal structures, maximizing value while maintaining manageable implementation complexity.
Partner with CBO Financial for Expert Program Navigation
Understanding differences between NMTC and LIHTC represents just the first step—successfully accessing either program requires specialized expertise, established relationships, and proven transaction experience. CBO Financial brings comprehensive knowledge of both programs, helping organizations throughout the United States and its territories select appropriate incentives, structure optimal applications, and execute successful closings. Whether pursuing commercial economic development through NMTC, affordable housing through LIHTC, or complex mixed-use projects potentially accessing both programs, our team provides strategic guidance ensuring optimal outcomes. Contact us today to discuss your project and discover which tax credit program—or strategic combination—delivers maximum community benefit while achieving your development objectives and financial requirements.