Understanding the eligibility for New Market Tax Credits can be the key to unlocking significant investment opportunities in underserved communities across the United States. The New Markets Tax Credit (NMTC) program has become one of the most powerful tools for economic development, providing billions of dollars in tax credits to investors who support businesses and real estate projects in low-income areas. Whether you’re a business owner, real estate developer, or investor, knowing the requirements and qualifications is essential to leveraging this valuable program.
What Are New Market Tax Credits?
Before diving into eligibility requirements, it’s essential to understand what New Markets Tax Credits are and how they function. Established by Congress in 2000 as part of the Community Renewal Tax Relief Act, the NMTC program encourages investment in distressed communities by providing tax credits to investors. The program is administered by the CDFI certification process through the Community Development Financial Institutions Fund, which is part of the U.S. Department of the Treasury.
The program allows investors to receive a credit against federal income taxes for making qualified equity investments in designated Community Development Entities (CDEs). These credits total 39 percent of the original investment amount and are claimed over seven years. This incentive has proven remarkably effective, generating billions of dollars in private investment in economically disadvantaged areas.
Geographic Eligibility Requirements
The eligibility for New Market Tax Credits starts with location. Projects must be located in designated low-income communities to qualify for NMTC financing. The CDFI Fund defines low-income communities based on specific census tract criteria established by the federal government.
A census tract qualifies as a low-income community if it meets one of the following conditions: the poverty rate is at least 20 percent, or the median family income does not exceed 80 percent of the applicable area median income. Additionally, certain census tracts with populations under 2,000 that are located within an empowerment zone and contiguous to other qualifying low-income communities may also be eligible.
Understanding NMTC eligibility criteria thoroughly is crucial for project planning. The definition of “area median income” varies depending on whether the census tract is located in a metropolitan area or outside one. For tracts in urban areas, the comparison is made to the greater of the statewide or metropolitan area median income. For tracts outside urban areas, the comparison is made to the greater of the statewide or nationwide median income.
Business Type Eligibility
Not all businesses qualify for NMTC financing. The eligibility for New Market Tax Credits extends to a wide range of commercial and industrial projects, but certain business types are explicitly excluded from the program. Understanding these restrictions is crucial before pursuing NMTC financing.
Qualified active low-income community businesses (QALICBs) must meet several criteria:
- At least 50 percent of the business’s total gross income must be derived from the active conduct of a qualified business within a low-income community
- A substantial portion of the business’s tangible property must be used within a low-income community
- A significant portion of the services performed by the business’s employees must be performed in a low-income community
However, several business types are ineligible for NMTC financing regardless of their location. These include private or commercial golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, and racetracks or other facilities used for gambling. Additionally, any store whose principal business is the sale of alcoholic beverages for off-premises consumption is excluded from the program.
Project Size and Investment Thresholds
The eligibility for New Market Tax Credits also involves consideration of project size and investment amounts. While there is technically no minimum or maximum project size, practical considerations often come into play. Most CDEs have minimum investment thresholds due to transaction costs and the complexity of structuring NMTC deals.
Typically, projects seeking NMTC financing involve investments of at least $2 million to $5 million, though some CDEs may consider smaller projects in certain circumstances. The economics of the transaction need to make sense for all parties involved, including the CDE, the investor, and the business receiving the investment.
On the upper end, larger projects may receive multiple NMTC allocations from different CDEs to meet their financing needs. Significant real estate developments or manufacturing facilities have successfully utilized $20 million or more in NMTC allocation to support their projects.
Types of Projects That Qualify
The eligibility for New Market Tax Credits extends to diverse project types, making the program remarkably flexible for community economic development:
Real Estate Projects:
- Commercial real estate
- Mixed-use developments
- Healthcare facilities
- Charter schools
- Community facilities
Manufacturing and Industrial:
- Food processing facilities
- Manufacturing plants
- Distribution centers
- Industrial operations
Operating Businesses:
- Healthcare providers
- Charter schools and childcare centers
- Grocery stores in food deserts
- Technology companies in qualifying areas
Many successful NMTCs for real estate projects have demonstrated how diverse development types can benefit from this program while creating meaningful community impact.
Job Creation and Economic Impact
While not always an explicit requirement, demonstrating job creation and positive economic impact strengthens eligibility for New Market Tax Credits. CDEs and the CDFI Fund prioritize projects that generate meaningful employment opportunities for residents of low-income communities.
Projects should be prepared to document expected job creation, both during construction and ongoing operations. The quality of jobs matters as well: full-time positions offering living wages and benefits are viewed more favorably than part-time or temporary positions.
Beyond direct employment, projects should articulate their broader economic impact. This might include supporting local suppliers, providing essential services to underserved populations, or catalyzing additional investment in the surrounding community.
Financial Stability and Creditworthiness
Like any financing program, eligibility for New Market Tax Credits requires businesses to demonstrate financial stability and creditworthiness. While NMTC financing can make deals viable that might not otherwise attract conventional financing, the program is not intended for companies with unsustainable business models or excessive financial risk.
CDEs will conduct thorough due diligence on businesses seeking NMTC financing. This includes reviewing financial statements, business plans, market analyses, and the management team’s capabilities. Working with experienced NMTC services professionals can help ensure your application meets all financial and operational requirements.
Most NMTC transactions also involve senior debt from banks or other lenders. This means businesses must meet underwriting standards for both the CDE providing NMTC financing and any senior lender participating in the capital stack.
The Application and Approval Process
Understanding the process for determining eligibility for New Market Tax Credits helps businesses prepare practical applications. The process typically begins with identifying CDEs with available allocation authority that align with the project’s industry, geography, and financing needs.
Businesses should expect to provide detailed information, including location verification in qualifying census tracts, a comprehensive business plan and financial projections, job-creation estimates, a community impact assessment, and extensive due diligence materials. The timeline from initial application to closing can range from six months to over a year, depending on the complexity of the transaction.
For those ready to begin the process, connecting with CBO financial experts who specialize in NMTC eligibility can streamline the application and improve your chances of securing financing.
Conclusion
The eligibility for New Market Tax Credits offers substantial opportunities for businesses and real estate projects in low-income communities to access capital that might otherwise be unavailable. By understanding the geographic requirements, business type eligibility, project size considerations, and other key criteria, applicants can better position themselves to utilize this powerful economic development tool successfully.
For businesses and developers considering NMTC financing, the key is to start early, work with experienced advisors, and partner with CDEs that have a track record of success. With proper planning and preparation, the New Markets Tax Credit program can be the catalyst that transforms communities and creates lasting economic opportunity in areas that need it most.
Whether you’re planning a community health center, a manufacturing facility, or a mixed-use development, understanding NMTC eligibility requirements is the first step toward securing this valuable financing. By meeting these criteria and demonstrating substantial community impact, projects can access the capital needed to succeed while revitalizing underserved communities across America.