Developers and organizations pursuing adaptive reuse projects in historic buildings located within distressed communities across the United States and its territories face strategic decisions about tax credit program selection. Both the New Markets Tax Credit and Historic Tax Credit programs offer substantial federal incentives, which reduce capital costs and improve project feasibility. However, these programs serve different primary purposes—NMTC emphasizes economic development in low-income communities, regardless of their historic status. At the same time, HTC focuses on architectural preservation for certified landmark buildings, irrespective of the neighborhood’s income levels. Understanding which program delivers superior benefits for specific circumstances requires a comprehensive analysis of eligibility requirements, subsidy depth, transaction complexity, and strategic alignment with project objectives.
This detailed comparison examines the strengths and limitations of both programs, identifies optimal use cases for each, and explores strategic layering opportunities for projects that qualify under both programs. The analysis reveals that neither program proves universally “better”; instead, optimal selection depends on project location, building characteristics, development objectives, and organizational capabilities, which determine which incentive structure delivers maximum value for specific circumstances.
Fundamental Program Distinctions
The New Markets Tax Credit provides 39% federal tax credits over seven years to investors who deploy capital through Community Development Entities into businesses or real estate projects located in qualified low-income census tracts. The program focuses on economic revitalization in distressed communities, prioritizing job creation, essential service provision, and catalytic neighborhood transformation. NMTC eligibility focuses on geographic location meeting poverty or income thresholds rather than building characteristics, making it accessible for both new construction and renovation projects in qualifying areas.
Historic Tax Credits offer a 20% federal tax credit on qualifying rehabilitation expenses for income-producing properties that are either individually listed on the National Register of Historic Places or contribute to a registered historic district. Many states provide an additional 10-40% state HTCs, creating combined incentive packages potentially reaching 50-60% of rehabilitation costs. HTC emphasizes architectural preservation, requiring adherence to the Secretary of the Interior’s Standards, which ensures that renovations maintain the historic character while adapting buildings for contemporary use. The program applies regardless of neighborhood income levels, making it accessible in affluent areas where NMTC would not qualify.
Geographic Eligibility Comparison
Geographic requirements create the most fundamental distinction determining program accessibility. NMTC restricts eligibility to qualified low-income census tracts—approximately 25% of U.S. census tracts where poverty rates exceed 20% or median family income falls below 80% of the area median. Projects outside these designated areas are ineligible to access NMTC, regardless of project merit, economic impact, or community benefit. This limitation excludes many worthy projects in moderate-income or affluent neighborhoods that, although they create jobs and provide services, fail geographic tests.
HTC requires certified historic buildings but imposes no income-based geographic restrictions. Properties throughout the nation qualify if they meet historic significance criteria—an individual National Register listing or contributing status within registered historic districts. This broader geographic accessibility makes HTC available in approximately 15% of the building stock nationwide, including properties in wealthy neighborhoods, suburban locations, and rural areas where NMTC would never qualify. However, HTC’s building-specific requirements exclude projects in non-historic structures regardless of location within distressed communities.
The geographic distinction creates a clear program selection logic for projects that meet only one criterion. Historic buildings outside low-income areas pursue HTC exclusively as their only available tax credit option. Modern construction or non-contributing buildings in distressed neighborhoods pursue NMTC as their sole alternative. Approximately 3-4% of buildings that are both historic and located in low-income areas can potentially access both programs, creating extraordinary combined subsidy opportunities that justify complex layering structures coordinated by experienced NMTC consultants familiar with both program requirements.
Subsidy Depth and Financial Impact
Comparing subsidy depth requires distinguishing between gross credit percentages and actual capital cost reduction realized by projects. HTC provides 20% federal credits on qualifying rehabilitation expenses, with many states adding 10-40% state credits. Combined federal-state credits can deliver a 30-60% subsidy on rehabilitation costs—an extraordinary benefit that enables transformative renovations. However, this subsidy applies only to qualifying rehabilitation expenses, excluding new construction components, equipment acquisition, or soft costs such as legal and architectural fees, which often comprise 20-30% of total project costs.
NMTC delivers 39% federal tax credits to investors, translating into an effective subsidy of 20-25% on the total NMTC investment amount when accounting for investor pricing and transaction costs. This subsidy applies to broader project components, including new construction, equipment, soft costs, and working capital—not just rehabilitation expenses. For projects involving substantial new construction alongside historic rehabilitation, NMTC’s broader applicability may result in a greater total subsidy despite lower percentage rates.
Consider a $10 million adaptive reuse project with $6 million qualifying rehabilitation and $4 million new construction, equipment, and soft costs. HTC at 20% federal plus 25% state credits delivers $2.7 million subsidy on the $6 million rehabilitation ($6M x 45% = $2.7M). An NMTC investment of $7 million, with an effective subsidy of 22%, yields $1.54 million. HTC provides a deeper subsidy in this scenario. However, if rehabilitation costs decline to $4 million, with $6 million in other expenses, the HTC subsidy decreases to $1.8 million, while the NMTC remains at $1.54 million, narrowing the gap. Projects should model actual cost allocations, determining which program delivers superior net benefit given specific circumstances.
Eligible Project Types and Restrictions
Both programs maintain restrictions on eligible project types, though limitations differ substantially. NMTC excludes residential rental housing as its primary use, although mixed-use projects with substantial commercial components qualify for NMTC on the commercial space. The program also prohibits golf courses, country clubs, massage parlors, hot tub facilities, tanning facilities, and racetracks—entertainment or leisure activities deemed inconsistent with the community development mission. Beyond these specific exclusions, NMTC applies broadly across manufacturing, healthcare, retail, office, mixed-use, and community facility projects.
HTC requires income-producing properties, excluding owner-occupied residences (though rental housing qualifies). The program requires substantial rehabilitation, meeting tests that require qualified expenses exceeding the greater of the adjusted basis or $5,000, with standards ensuring meaningful preservation rather than cosmetic improvements. All work must satisfy the Secretary of the Interior’s Standards for Historic Preservation, which limit design flexibility and potentially increase costs compared to conventional renovations that are unconstrained by preservation requirements. Projects must secure State Historic Preservation Office approvals through Part 1-2-3 application processes, introducing regulatory approval risks not present in NMTC transactions.
Transaction Complexity and Timeline Considerations
Transaction complexity represents a crucial selection criterion given different organizational capacity levels and timeline constraints. NMTC involves complex multi-party structures including investment funds, CDE relationships, tax credit investors, senior lenders, and project sponsors. Legal documentation typically exceeds 1,000 pages, transaction costs range from $200,000 to $ 400,000, and closing timelines span 12-18 months from the initial CDE engagement through funding. Organizations must maintain compliance throughout seven-year credit periods, including annual reporting, financial statement submissions, and adherence to ongoing operational requirements.
HTC transactions prove somewhat simpler structurally, though preservation compliance adds distinct complexities. Legal documentation remains substantial but typically less voluminous than NMTC. Transaction costs range $100,000 to $250,000, depending on project size and state credit components. However, HTC requires State Historic Preservation Office approvals at multiple stages of the project—Part 1 (building certification), Part 2 (proposed work approval), and Part 3 (completed work certification). These approvals introduce regulatory uncertainty and potential delays if preservation officials require design modifications or reject proposed approaches as inconsistent with preservation standards.
Timeline considerations favor neither program definitively. NMTC’s 12-to 18-month transaction periods prove to be lengthy but predictable once CDE commitments are secured. HTC’s approval processes can extend timelines unpredictably if preservation review identifies issues requiring redesign. Projects with tight completion deadlines might find either program challenging, while those with patient timelines can accommodate whichever program delivers superior subsidy. Working with experienced professionals familiar with both NMTC and HTC approval processes helps manage timelines effectively, avoiding common pitfalls that cause delays.
Strategic Layering Opportunities
Projects meeting both NMTC and HTC eligibility requirements—historic buildings in low-income communities—should seriously consider strategic layering, combining both programs despite the substantially increased complexity. Combined federal NMTC (20-25% subsidy), federal HTC (20% of rehab costs), and state HTCs (10-40% of rehab costs) can deliver a total subsidy of 50-65% across the entire project costs. This extraordinary subsidy enables transformative adaptive reuse projects that single programs could never support, justifying the incremental complexity and transaction costs that result from layering.
Successful layering requires careful legal structuring, maintaining separate, qualified businesses that satisfy each program’s distinct requirements while enabling unified development and management. Specialized legal counsel experienced in both NMTC and HTC transactions proves essential, as generalist attorneys unfamiliar with either program often lack the expertise necessary to navigate the complex coordination requirements. Organizations should model layered versus single-program scenarios, comparing net benefits after accounting for all costs. This evaluation should assess whether the incremental subsidy from layering justifies the doubled transaction costs and substantially increased compliance burdens over seven-year NMTC periods and five-year HTC recapture periods.
Organizational Fit and Strategic Alignment
Beyond financial and regulatory considerations, program selection should align with an organization’s mission, capabilities, and strategic objectives. Nonprofits focused on historic preservation naturally gravitate toward HTC as mission-aligned financing supporting architectural conservation. Community development organizations that emphasize economic revitalization and job creation find the NMTC more consistent with their programmatic goals. For-profit developers might prioritize whichever program delivers the maximum subsidy, regardless of its programmatic emphasis, while mission-driven organizations weigh mission alignment alongside financial benefits.
Organizational capacity proves critical for program selection. Organizations with limited transaction experience or modest administrative capabilities may find NMTC’s complexity overwhelming, despite its superior subsidy, while HTC’s preservation compliance requirements create distinct burdens that require specialized knowledge. Honest capacity assessment prevents organizations from pursuing programs that exceed their capabilities, regardless of the theoretical benefits. Accessing support from CDFI program specialists or historic preservation consultants helps build capacity; however, professional fees increase total project costs, necessitating an evaluation against the benefits of the subsidy.
Making the Optimal Choice
Determining which program proves “better” requires project-specific analysis rather than universal conclusions. Projects should systematically evaluate: geographic location determining NMTC eligibility and building historic status determining HTC accessibility; cost composition between qualifying rehabilitation and other expenses affecting subsidy calculations; organizational capacity for managing program-specific compliance requirements; timeline flexibility accommodating program approval processes; and mission alignment between organizational objectives and program emphases.
For most projects, eligibility constraints determine selection—projects qualifying for only one program pursue that option by necessity. Projects potentially accessing both should conduct rigorous financial modeling that compares net benefits after all costs, assesses organizational capacity honestly, and evaluates mission-alignment considerations beyond pure financial calculations. In some cases, the additional complexity of layering both programs proves worthwhile given the extraordinary combined subsidy. Other situations favor single-program simplicity despite foregoing incremental benefits that coordination complexities and costs would essentially consume.
Partner with CBO Financial for Expert Program Selection
Choosing between NMTC and Historic Tax Credits—or determining whether strategic layering delivers optimal results—requires specialized expertise, comprehensive financial analysis, and honest organizational assessment. CBO Financial brings extensive experience helping developers and organizations throughout the United States and its territories evaluate program options, model comparative outcomes, and execute successful transactions across both NMTC and HTC. Our team has structured numerous NMTC for real estate projects utilizing both programs individually and in strategic combination, consistently delivering superior results through rigorous analysis and expert execution.
We provide objective evaluation, prioritizing client interests over transaction volume incentives, comprehensive modeling that captures all costs and benefits rather than oversimplified analyses, honest organizational capacity assessments ensuring appropriate program selection, and expert transaction management when proceeding with either single-program or complex, layered structures. Our approach enables clients to make informed decisions based on complete information, pursue programs that match their organizational capabilities, and achieve maximum benefits through optimal structuring and efficient execution. CBO Contact Number today to discuss your adaptive reuse project and discover which tax credit program—or strategic combination—delivers optimal results for your specific circumstances, organizational capacity, and community development objectives.