Maximizing the financial feasibility of community development projects often requires layering multiple incentive programs to bridge funding gaps. New Market Tax Credits (NMTCs) are among the most potent tools available, but their true potential emerges when strategically combined with complementary federal and state incentives. Understanding which programs can work alongside NMTCs enables project sponsors to assemble comprehensive financing packages.
The Fundamental Framework for Incentive Stacking
Federal tax law and regulatory guidance establish rules governing how various incentive programs interact. For NMTCs specifically, the governing statute contains limited restrictions on combining with other incentives, creating substantial flexibility for creative financing structures. However, each potential complementary program carries its own rules that may limit or prohibit stacking.
Historic Tax Credits: A Powerful Combination
Historic Tax Credits (HTCs) under Internal Revenue Code Section 47 are among the most common programs combined with NMTCs. Projects rehabilitating landmark buildings in low-income communities can access both incentives, dramatically improving the financial feasibility of adaptive reuse developments.
The HTC program offers credits equal to 20% of qualified rehabilitation expenditures, while NMTCs provide credits worth 39% of the equity investment over seven years. Together, these incentives can cover a substantial portion of total project costs. The same expenditures cannot generate both HTC and NMTC benefits. Typically, the building owner claims HTCs on rehabilitation costs, while a separate entity receives NMTC financing for tenant improvements, equipment, and working capital needs.
Low-Income Housing Tax Credits: Limited but Possible Integration
Low-Income Housing Tax Credits (LIHTCs) authorized under Internal Revenue Code Section 42 finance affordable housing development and generally focus on residential projects. At the same time, NMTCs target commercial activities and prohibit most purely residential projects. This fundamental difference limits but doesn’t eliminate potential combinations.
Mixed-use developments with substantial commercial components alongside affordable housing represent the primary opportunity for combining LIHTCs and NMTCs. The commercial portion can receive NMTC financing, while the residential component accesses LIHTCs. Separate legal entities typically own the commercial and residential components, with each entity accessing the appropriate credit program.
Opportunity Zones: Geographic Overlap With Distinct Benefits
Opportunity Zones (OZs) created by the Tax Cuts and Jobs Act of 2017 offer capital gains tax incentives for investments in designated distressed communities. Many census tracts qualify as both NMTC-eligible low-income communities and designated OZs, creating the potential to combine these geographically targeted incentives.
OZ benefits accrue to investors through capital gains tax deferral, a step-up in basis, and the potential elimination of gains on OZ investments held for 10 years. These benefits differ fundamentally from NMTC credits, creating complementary rather than overlapping advantages. An investor might defer capital gains by investing in an Opportunity Fund that then makes equity investments in Community Development Entities (CDEs), deploying NMTC capital.
Renewable Energy Tax Credits: Compatible in Appropriate Contexts
Investment Tax Credits (ITCs) and Production Tax Credits (PTCs) supporting renewable energy projects can potentially combine with NMTCs when projects involve renewable energy installations in low-income communities. A manufacturing facility installing solar panels or a community facility incorporating wind power might access both programs.
The key consideration involves ensuring that the exact costs don’t generate both NMTC and energy credit benefits. Typically, this requires allocating equipment costs to energy credits while using NMTC financing for building improvements, land acquisition, non-energy equipment, or working capital.
State Tax Credit Programs: Vary Significantly by Jurisdiction
Numerous states operate their own tax credit programs supporting various policy objectives, including economic development, historic preservation, affordable housing, renewable energy, and job creation. Compatibility with NMTCs depends entirely on specific state program rules and how transactions are structured.
State historic tax credits often work alongside both federal HTCs and NMTCs, using similar cost-allocation structures for different project elements. States offering their own versions of new markets or opportunity zone credits generally permit combining with federal NMTCs. State real property tax abatements, exemptions, or credits represent another common incentive compatible with NMTCs. Tax Increment Financing (TIF) districts also effectively combine with NMTCs.
Federal Grant Programs: Generally Compatible With Restrictions
Federal grant programs administered by various agencies can potentially layer with NMTCs, though specific grant terms determine compatibility. Programs like Community Development Block Grants (CDBG), Economic Development Administration (EDA) grants, USDA Rural Development grants, and HRSA grants for healthcare facilities can complement NMTC financing.
The critical consideration involves whether grant funds will be used for the same purposes as NMTC proceeds and whether grant terms prohibit using the funded activities as a basis for claiming other federal benefits. Typically, grant funds cover specific project components, such as infrastructure or equipment, while NMTC financing supports building construction and working capital.
Small Business Administration Programs: Complementary Lending
Small Business Administration (SBA) loan programs, including 7(a), 504, and microloans, can be combined with NMTC financing to create comprehensive capital stacks for eligible businesses. The SBA programs provide conventional debt at favorable terms, while NMTCs provide effectively subsidized debt through the tax credit mechanism.
Coordinating SBA loans with NMTC transactions requires careful attention to lien priority and loan terms. Intercreditor agreements negotiated between SBA lenders and CDEs establish each party’s rights and priorities. The SBA programs’ focus on small businesses aligns well with NMTC objectives.
NMTC Program Restrictions
While NMTCs can be combined with many incentive programs, certain combinations are prohibited or face practical limitations. The NMTC statute explicitly prohibits CDEs from investing in other CDEs, preventing “pyramiding” of NMTC benefits through multiple layers of CDEs.
Projects primarily consisting of residential rental property generally don’t qualify for NMTCs except in limited mixed-use circumstances, effectively preventing combination with LIHTC in most cases. The substantial all requirement—mandating that 85% of Qualified Equity Investment (QEI) proceeds be deployed into qualified investments—limits the extent to which an NMTC-financed project can consist of non-qualifying uses or property.
Structuring Considerations for Successful Incentive Layering
Successfully combining multiple incentive programs requires sophisticated structuring, experienced legal counsel, and careful coordination. Best practices include engaging legal and tax advisors experienced in various incentive programs early in project planning, documenting cost allocation clearly, structuring separate legal entities where necessary to segregate different incentive programs, and sequencing funding strategically.
Maximizing Project Resources Through Strategic Layering
NMTCs’ compatibility with numerous federal and state incentive programs enables creative financing solutions that aggregate resources sufficient to close funding gaps and achieve project feasibility. From historic tax credits to opportunity zones, renewable energy incentives to state economic development programs, strategic layering multiplies resources available for community development projects.
Success requires a deep understanding of individual program rules, sophisticated structuring to avoid conflicts, and experienced guidance throughout transaction development. For expert assistance navigating incentive layering opportunities, explore our NMTC advisory services, review successful multi-incentive projects in our project portfolio, or request a free project analysis to identify optimal incentive combinations for your project.