Understanding the best practices for leveraging NMTC transforms program participation from merely acceptable outcomes into exceptional returns that maximize value for all stakeholders. The New Markets Tax Credit (NMTC) program offers substantial benefits, including 39 percent federal tax credits for investors and below-market financing for businesses, but capturing maximum value requires strategic approaches that go beyond basic eligibility and compliance throughout the United States and its territories.
Begin With Thorough Preparation
The foundation of best practices starts with comprehensive preparation before approaching any Community Development Entity (CDE). Document organization represents the first critical step. Compile three years of financial statements and tax returns, organize legal documents, gather site control documentation, and create digital folders enabling quick information retrieval.
Eligibility verification using official tools prevents wasted effort on ineligible projects. Use the CDFI Fund NMTC Mapping Tool to confirm your address falls within a qualifying low-income census tract and review prohibited business categories. Compelling narrative development distinguishes applications. Quantify job creation with specific numbers, document community impact using authoritative data, obtain letters of support, and articulate how businesses will maintain Qualified Active Low-Income Community Business (QALICB) status throughout compliance periods.
Strategic CDE Selection and Relationship Building
Strategic CDE identification creates partnerships supporting successful transactions. Targeted research identifies CDEs whose investment criteria align with project characteristics, including geographic alignment, sector specialization, allocation availability, and transaction size fit. Competitive positioning involves soliciting proposals from multiple CDEs. Submit inquiries to five to ten target CDEs simultaneously and compare terms, fees, and value propositions. Competition among CDEs often yields significantly better rates and costs than single-party negotiations.
Optimize Transaction Structures
Sophisticated best practices include careful transaction structure optimization that maximizes financial benefits while managing risk. Leverage ratio optimization balances NMTC allocation with senior debt to maximize total capital while maintaining manageable debt service. Model various capital stack scenarios with different NMTC-to-senior-debt ratios, calculate blended interest rates and debt service requirements, and assess debt service coverage ratios, ensuring adequate cushions.
Fee structure negotiation addresses transaction costs that can consume significant portions of NMTC benefits. Request detailed fee schedules from all parties, including CDEs, legal counsel, and NMTC consultants; negotiate comprehensive fee caps to prevent cost overruns; and consider success-based fee structures. Businesses that negotiate strategically often save 20 to 30 percent on fees compared to those who accept the first proposal.
Exit-provision planning establishes clear paths for unwinding NMTC structures after the seven-year compliance period. Negotiate favorable put or call option terms that allow the business to purchase investor interests for nominal amounts, ensure exit mechanisms are clearly documented in the initial transaction agreements, and budget for exit costs. Clean exits that return full ownership to businesses are hallmarks of well-structured transactions.
Maintain Exemplary Compliance
Establishing and maintaining robust compliance systems prevents credit recapture that would destroy transaction value. Compliance monitoring systems track ongoing QALICB status throughout seven-year periods. Implement quarterly reviews documenting continued satisfaction of substantial use tests for gross income derived from low-income communities, tangible property located in low-income communities, and employee services performed in low-income communities.
Documentation maintenance preserves evidence supporting ongoing compliance. Retain financial statements, employee location records, lease agreements, and operational documentation throughout compliance periods, organize materials systematically, enabling quick retrieval during CDE reviews or potential IRS audits, and document any business changes that might affect compliance status.
Proactive communication with CDEs prevents minor issues from becoming major problems. Submit required annual reports on time with complete information, disclose significant business changes promptly, cooperate fully with CDE site visits and monitoring activities, and request guidance when uncertain about compliance implications of planned changes.
Strategic Integration With Other Programs
Advanced best practices involve integrating program benefits with complementary tax incentives that multiply returns and community impact. Historic Tax Credit (HTC) layering creates powerful synergies for qualifying properties. Combined NMTC and HTC can total 59-69% of eligible costs, creating extraordinary economics.
Opportunity Zone coordination enables sequential benefit capture. Consider whether NMTC projects are located in Opportunity Zones that offer benefits, structure ownership to allow for Zone qualification at appropriate times, and plan for the NMTC compliance period followed by potential Opportunity Zone disposition benefits.
Low-Income Housing Tax Credit (LIHTC) combinations work for mixed-use projects with both commercial and residential components. Utilize NMTC for commercial portions and LIHTC for residential units, structure entities to maintain clear separation between program components, and coordinate compliance obligations.
Plan Comprehensive Exits
Thoughtful exit planning ensures transactions conclude cleanly after seven-year compliance periods. Begin exit planning 6 months before the seventh-anniversary dates, coordinate with CDEs, investors, and senior lenders on exit procedures, and prepare documentation to support compliance and satisfaction throughout the full period.
Relationship maintenance beyond exit supports potential future NMTC financing. Stay connected with CDEs after exits, communicating business success and community impact, consider CDEs for future expansion financing, and provide references supporting CDEs’ ongoing allocation efforts. Completed transactions create reputations, opening doors to future opportunities.
Achieve Maximum Returns
The best practices for leveraging NMTC encompass thorough preparation, strategic CDE selection, transaction structure optimization, exemplary compliance, complementary program integration, and comprehensive exit planning. By implementing these proven approaches developed through thousands of successful transactions, participants maximize returns for investors, businesses, and communities while supporting the program’s broader mission of revitalizing underserved areas through patient, affordable capital.
Success in NMTC requires more than meeting minimum requirements—it demands strategic excellence across all phases from application through exit.
Ready to maximize your NMTC returns with proven best practices? Contact CBO Financial today for expert guidance that helps you implement strategic approaches and achieve exceptional outcomes for your project.