Understanding the qualifying entities for the New Markets Tax Credit (NMTC) program is fundamental to successfully accessing this powerful financing mechanism. The NMTC program involves multiple entity types, each with specific qualification requirements and roles in the transaction structure. From Community Development Entities and investor organizations to businesses receiving financing and real estate holding companies, the program’s effectiveness depends on properly structured entities that meet strict federal requirements.
Community Development Entities: The Central Qualifying Entity
At the heart of the NMTC program are Community Development Entities (CDEs), which represent the most critical qualifying entities for tax credits in the entire transaction structure. CDEs serve as intermediaries between tax credit investors and the businesses or projects receiving financing.
To qualify as a CDE, an entity must be a domestic corporation or partnership organized under United States federal or state law. The entity must have a primary mission of serving or providing investment capital for low-income communities or low-income persons. This mission must be documented explicitly in the entity’s charter, articles of incorporation, bylaws, partnership agreement, or other organizational documents.
CDEs must maintain accountability to residents of low-income communities by being represented on any governing or advisory board with authority over investment decisions. This accountability mechanism ensures community voices influence how NMTC capital is deployed and that investments genuinely serve local needs.
The certification process for becoming a CDE involves submitting a comprehensive application to the CDFI certification authority, demonstrating that all qualification requirements are satisfied. Once certified, CDEs can compete for NMTC allocation authority through periodic application rounds.
Business Entity Structures as Qualifying Entities
Various entity structures can receive NMTC financing provided they meet Qualified Active Low-Income Community Business (QALICB) requirements. Understanding which business entities qualify and how structure affects eligibility is essential for applicants.
Corporations: Both C corporations and S corporations can qualify as QALICBs if they satisfy the substantial use tests for income, tangible property, and employee services in low-income communities.
Limited Liability Companies (LLCs): LLCs represent the most common entity structure for NMTC transactions, particularly in real estate projects, offering flexibility in management structure and favorable tax treatment.
Partnerships and Nonprofits: General partnerships and limited partnerships can qualify as QALICBs. 501(c)(3) organizations can receive NMTC financing for their operating facilities—healthcare facilities, charter schools, and community centers have successfully utilized new markets tax credit financing.
Investor Entity Qualifications
Tax credit investors must have sufficient federal income tax liability to utilize the credits effectively.
Banks and Financial Institutions: These entities represent the largest category of NMTC investors, with substantial tax liability and the added benefit of Community Reinvestment Act (CRA) credit.
Insurance Companies: Life insurance companies and property and casualty insurers generate significant tax liabilities, making NMTC credits valuable, with investment horizons that align well with the seven-year compliance period.
Corporations and Investment Funds: Corporations across various industries participate as NMTC investors. Special-purpose vehicles (SPVs) often serve as direct investor entities, with banks, insurance companies, or corporations as the ultimate beneficial owners.
Real Estate Entity Structures
Real estate projects utilizing NMTC financing typically involve complex entity structures, making it particularly important to understand which entities qualify.
Single-Purpose Entities (SPEs): SPEs dedicated to individual properties represent common structures. An SPE might be an LLC or corporation specifically formed to own and operate a single property, providing risk isolation and clear QALICB status.
Master Tenant Structures: A qualifying entity leases property from an owner and operates it as a QALICB, receiving NMTC financing for improvements while the underlying real estate has separate funding.
Condominium Structures: These allow multiple QALICBs to occupy portions of a larger development, enabling mixed-use projects where different entities operate separate commercial spaces.
Subsidiary and Affiliate Entity Considerations
Wholly-Owned Subsidiaries: These can qualify independently as QALICBs if they maintain separate operations, financial records, and distinct business activities in low-income communities.
Sister Companies: Companies under common ownership must each independently satisfy QALICB requirements —genuine operational separation and independent management support — treating sister companies as separate QALICBs.
Joint Ventures and Partnership Entities
Joint venture entities created specifically for NMTC project financing represent important qualifying entities, particularly for large or complex developments. These structures allow multiple parties to collaborate while creating an entity that clearly meets QALICB requirements.
Development joint ventures typically involve a real estate developer partnering with a community-based organization, municipality, or other stakeholder to create a qualifying entity. Operating joint ventures combine expertise from multiple parties to operate qualifying businesses, such as a national healthcare provider partnering with a local community health organization.
Entity Documentation and Governance Requirements
All qualifying entities must maintain proper documentation and governance structures throughout the NMTC transaction. Organizational documents, operating agreements, partnership agreements, bylaws, and shareholder agreements must clearly establish the entity’s structure, management authority, decision-making processes, and compliance obligations.
Boards of directors or managers must be properly constituted with documented meetings, resolutions, and minutes. For CDEs, community accountability requirements necessitate specific board composition and advisory structures. Working with experienced new markets tax credit consultants ensures proper structuring and compliance throughout the seven years.
Conclusion
Understanding the qualifying entities for tax credits across the NMTC program reveals a sophisticated ecosystem of entity types, each with specific qualification requirements and functional roles. CDEs must be certified and allocated, QALICBs must satisfy substantial use tests, investors must have adequate tax liability, and all entities must maintain proper legal structure and documentation.
Success in NMTC transactions depends on properly structuring entities from the outset, ensuring each entity qualifies for its intended role, and maintaining compliance throughout the seven years. Working with experienced legal and financial advisors who understand entity qualification requirements helps ensure proper structuring. It maximizes the likelihood of successful NMTC transactions that benefit businesses, investors, and communities alike.