Maximizing the financial feasibility of community development projects often requires layering multiple incentive programs to bridge funding gaps that no single source can address alone. New Market Tax Credits (NMTCs) represent one of the most powerful tools available, but their true potential emerges when strategically combined with complementary federal and state incentives. Understanding which programs can work alongside NMTCs, how to structure compatible arrangements, and what limitations exist enables project sponsors to assemble comprehensive financing packages that transform projects from marginally feasible to financially robust.
The Fundamental Framework for Incentive Stacking
Federal tax law and regulatory guidance establish rules governing how various incentive programs interact. Some programs explicitly prohibit combining with other benefits, while others encourage layering to maximize community impact. The Internal Revenue Code, Treasury regulations, and program-specific guidelines from administering agencies provide the legal framework determining compatibility.
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 regardless of NMTC permissiveness. Successful incentive layering therefore requires examining compatibility from multiple perspectives, ensuring compliance with all applicable requirements rather than focusing solely on NMTC rules.
Can New Market Tax Credits Be Combined With Other Federal or State Incentives?
The answer is generally yes, though specific combinations require careful structuring and certain limitations apply. Understanding which programs work well together and how to structure compliant arrangements enables optimal project financing.
Historic Tax Credits: A Powerful Combination
Historic Tax Credits (HTCs) provided under Internal Revenue Code Section 47 represent one of the most common and complementary programs combined with NMTCs. Projects rehabilitating historic buildings in low-income communities can potentially access both incentives, dramatically improving financial feasibility for adaptive reuse developments.
The HTC program offers credits equal to 20 percent of qualified rehabilitation expenditures for certified historic structures, while NMTCs provide credits worth 39 percent of the equity investment over seven years. Together, these incentives can cover a substantial portion of total project costs, making economically challenging historic preservation financially viable.
Structuring combined NMTC-HTC transactions requires careful attention to several technical requirements. The same expenditures cannot generate both HTC and NMTC benefits—doing so would constitute impermissible double-dipping. Typically, the building owner claims HTCs on rehabilitation costs, while a separate entity receives NMTC financing for tenant improvements, equipment, and working capital needs. This separation ensures distinct cost bases for each credit type.
Legal opinions addressing the proper allocation of costs between HTC-eligible rehabilitation and NMTC-financed improvements provide essential documentation supporting the layered structure. Experienced counsel can structure ownership arrangements that allow both credits to flow to appropriate parties while maintaining compliance with all requirements.
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, while 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—perhaps ground-floor retail, office space, or community facilities—can receive NMTC financing, while the residential component accesses LIHTCs. Careful structuring ensures each program finances distinct project elements without overlap.
Separate legal entities typically own the commercial and residential components, with each entity accessing the appropriate credit program. The property might be subdivided, or condominium structures might allocate specific spaces to each entity. Partnership agreements and operating documents must clearly delineate responsibilities, cash flows, and exit strategies for each component.
Some community facilities serving affordable housing residents—childcare centers, community rooms, service coordination offices—might qualify for NMTC financing even within predominantly residential developments if they meet the active business requirements and serve broader community populations beyond just the building’s residents.
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 potential for combining these geographically targeted incentives.
OZ benefits accrue to investors through capital gains tax deferral, step-up in basis, and potential elimination of gains on OZ investments held for ten 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, capturing both OZ gains treatment and NMTC credits.
Structuring such arrangements requires sophisticated tax planning to ensure compliance with both programs’ timing requirements, holding period rules, and investment restrictions. OZ regulations specify what constitutes qualified opportunity zone property and qualified opportunity zone business property, while NMTC rules define Qualified Equity Investments and Qualified Low-Income Community Investments. Structuring that satisfies both sets of requirements enables powerful incentive combinations.
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, a community facility incorporating wind power, or a business focused on renewable energy production might access both programs.
The key consideration involves ensuring that the same 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. Energy credits apply to qualified property placed in service, while NMTCs benefit the overall business or project, creating natural separation that facilitates combination.
Some community development projects specifically focus on renewable energy as their core business—solar installation companies serving low-income communities, energy efficiency contractors, or renewable energy equipment manufacturers. These businesses can fully leverage both NMTC financing for business development and energy credits for the renewable energy installations they produce or deploy.
State Tax Credit Programs: Varies Significantly by Jurisdiction
Numerous states operate their own tax credit programs supporting various policy objectives including economic development, historic preservation, affordable housing, film production, 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 structures that allocate costs between different project elements. States offering their own versions of new markets or opportunity zone credits generally permit combining with federal NMTCs, viewing layered incentives as appropriate for the most distressed communities or challenging projects.
Some states offer enterprise zone credits, targeted job creation credits, or investment credits for businesses locating in designated areas. These programs frequently overlap geographically with NMTC-eligible communities and generally permit stacking. However, individual state program rules vary significantly, requiring case-by-case analysis.
State real property tax abatements, exemptions, or credits represent another common incentive compatible with NMTCs. These property tax benefits reduce operating costs rather than providing capital, creating natural complementarity with NMTC financing that provides upfront capital. Tax Increment Financing (TIF) districts, where property tax increases fund project infrastructure, similarly combine effectively 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, Department of Agriculture (USDA) rural development grants, and Health Resources and Services Administration (HRSA) grants for healthcare facilities all potentially 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 basis for claiming other federal benefits. Many grants explicitly prohibit using grant-funded improvements to generate tax credits, requiring clear separation of uses.
Typically, grant funds might cover specific project components like infrastructure, site preparation, equipment, or training, while NMTC financing supports building construction or renovation, additional equipment, and working capital. This separation ensures compliance with both grant terms and NMTC requirements while maximizing total project resources.
Grant-funded technical assistance, planning, or capacity building activities clearly separate from capital investments create no conflicts with NMTC financing. Similarly, grants supporting ongoing operating expenses don’t conflict with NMTC capital deployment.
Small Business Administration Programs: Complementary Lending
Small Business Administration (SBA) loan programs including 7(a) loans, 504 loans, and microloans can combine 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, loan terms, and cross-default provisions. SBA lenders typically require first lien positions on assets, while CDE lenders also need adequate security to protect their investments. Intercreditor agreements negotiated between SBA lenders and CDEs establish each party’s rights, remedies, and priorities.
The SBA programs’ focus on small businesses aligns well with NMTC objectives of supporting businesses in underserved communities. Many NMTC recipients qualify as small businesses under SBA size standards, creating natural compatibility.
Department of Treasury CDFI Program Awards
CDEs often themselves qualify as CDFIs and may receive financial assistance or technical assistance grants from the CDFI Fund’s separate CDFI Program. These awards support CDE capacity, enabling them to deploy NMTC allocations more effectively. While not directly benefiting specific NMTC-financed projects, CDFI Program awards strengthen the organizations deploying NMTC capital.
Some CDFIs structure transactions where CDFI Program loan funds and NMTC financing both support the same business, with each funding source supporting distinct project elements or phases. This layering maximizes total capital available while leveraging the CDFI’s multiple program relationships.
New Markets Tax Credit Program Restrictions
While NMTCs combine with many incentive programs, certain combinations face prohibition or 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. Similarly, businesses deriving substantial income from tax-exempt bonds face limitations that can complicate incentive stacking.
The substantial all requirement—mandating that 85 percent of QEI proceeds be deployed into qualified investments—limits how much of an NMTC-financed project can consist of non-qualifying uses or property. This restriction affects how much of a mixed-use development can be residential or how much property can be located outside low-income communities.
Structuring Considerations for Successful Incentive Layering
Successfully combining multiple incentive programs requires sophisticated structuring, experienced legal counsel, and careful coordination among all transaction parties. Several best practices increase the likelihood of compliant, successful incentive stacking:
Engage legal and tax advisors experienced in multiple incentive programs early in project planning. These professionals identify potential conflicts, design compliant structures, and provide opinions supporting the layered approach.
Document cost allocation clearly, showing precisely which expenditures generate which tax benefits or use which funding sources. Detailed cost tracking throughout project implementation prevents inadvertent double-dipping and facilitates audit defense if questions arise.
Structure separate legal entities where necessary to segregate different incentive programs, avoiding conflicts and clearly delineating which entity claims which benefits.
Sequence funding and project phases strategically, recognizing that some programs have specific timing requirements or placed-in-service dates that affect credit eligibility.
Maintain comprehensive records documenting compliance with all program requirements, including project descriptions, cost certifications, photographs, financial records, and impact metrics.
Conclusion
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 deep understanding of individual program rules, sophisticated structuring to avoid conflicts, and experienced guidance throughout transaction development. For projects in the nation’s most distressed communities facing the most challenging financing environments, effectively combining NMTCs with complementary incentives often means the difference between transformative investment and continued disinvestment.