Business owners exploring financing options for projects in low-income communities quickly encounter the New Markets Tax Credit (NMTC) Program as a potentially valuable resource. However, one of the most common questions concerns the actual amount of funding available through this program. Understanding the percentage of project costs that can be covered by NMTC financing is essential for determining whether this program is suitable for your specific situation and for planning the overall capital stack that will bring your project to fruition.
The Fundamental NMTC Financing Structure
Before answering what percentage of project costs NMTCs can cover, it’s crucial to understand that NMTCs are not grants or direct subsidies. Instead, they are tax credits provided to investors who make Qualified Equity Investments (QEIs) in certified Community Development Entities (CDEs). These CDEs then use the invested capital to make Qualified Low-Income Community Investments (QLICIs) in operating businesses or real estate projects located in designated low-income census tracts.
The tax credits equal 39 percent of the QEI amount, claimed over seven years by investors. This credit structure incentivizes investors to accept below-market returns, effectively subsidizing the cost of capital for qualifying businesses. The economic benefit comes from accessing financing at significantly reduced interest rates compared to conventional alternatives.
Typical NMTC Coverage Percentages
In most NMTC transactions, the program can cover approximately 20 to 40 percent of the total project costs, although this range varies significantly based on the transaction structure, project characteristics, and market conditions. A standard NMTC transaction involves a leveraged structure where the CDE receives a QEI from an investor, then combines that investment with a leveraged loan to create the total investment.
For example, consider a $10 million project. The business might receive a $5 million NMTC allocation structured as a $3.75 million leveraged loan at market rates and a $1.25 million equity-equivalent investment at zero or minimal interest during the seven-year compliance period. However, the usable proceeds, after accounting for transaction costs, reserves, and investor compensation, might be approximately $4 million to $4.5 million, representing 40 to 45 percent of the total project cost.
The remaining 55 to 60 percent of project funding must come from other sources, which might include conventional bank financing, equity contributions from owners, other public incentives, or subordinated debt. Capital stacking is a standard practice in NMTC transactions and requires careful coordination among multiple financing sources.
Factors Affecting Coverage Percentages
Several factors influence what percentage of project costs can be covered by NMTCs in any specific transaction. Project location significantly affects NMTC availability and terms. Projects in highly distressed areas often receive more favorable treatment, potentially accessing larger NMTC allocations relative to project size.
The type of project matters considerably. Real estate development projects, particularly those involving commercial or mixed-use properties, often achieve higher NMTC coverage percentages than equipment purchases or working capital needs. This stems partly from the ability to secure additional collateral and from CDE’s preferences for projects that create lasting community assets.
Business financial strength and creditworthiness have a significant impact on leverage ratios and the overall economic structure. Stronger businesses with solid financial projections can support higher leverage, potentially allowing larger total NMTC investments relative to project costs. Transaction size plays a role, with larger projects often achieving economies of scale. Projects under $3 million usually struggle due to disproportionate transaction costs.
The Leverage Loan Component
The leveraged loan portion of NMTC financing typically represents 70 to 80 percent of the total NMTC investment. This loan carries market or near-market interest rates and must be repaid according to negotiated terms, usually over 20 to 30 years. While the leverage loan provides significant capital, its market-rate pricing means it contributes less to the economic benefit than the equity-equivalent investment.
The Equity-Equivalent Investment
The equity-equivalent investment, typically representing 20-30% of the NMTC allocation, provides the core economic benefit. This investment generally carries zero or minimal interest during the seven-year compliance period, significantly reducing debt service requirements and enhancing cash flow.
At the end of the compliance period, most transactions include put-call provisions that allow the business to purchase the investor’s interest for a nominal amount, typically $1,000 or less. This structure effectively converts the equity-equivalent investment into a zero-interest loan that disappears after seven years, maximizing the financial benefit.
Transaction Costs and Net Proceeds
A critical consideration involves accounting for substantial transaction costs that reduce net usable proceeds. NMTC transactions typically include fees for legal counsel, accounting advisors, CDE services, syndication, and various other expenses, which can total $750,000 to $1.5 million or more.
These costs are usually paid from the NMTC proceeds before funds reach the operating business. For a $5 million NMTC allocation with $1 million in transaction costs, only $4 million remains for actual project funding, representing 80 percent of the nominal allocation amount. When calculating coverage percentages, businesses should focus on net proceeds after all costs rather than gross allocation amounts.
Realistic Capital Stack Examples
Consider an $8 million mixed-use development project in a low-income community. A realistic capital stack might include:
NMTC financing: $3.5 million (44 percent of project cost), consisting of a $2.6 million leveraged loan at 6 percent interest and a $900,000 equity-equivalent investment at zero interest. Conventional senior debt: $2.5 million (31 percent). Owner equity: $1.5 million (19 percent). Historic tax credit equity: $500,000 (6 percent).
After accounting for $800,000 in NMTC transaction costs, net NMTC proceeds available for project expenses are $2.7 million, representing 34 percent of total project costs. Combined with historic tax credits, public incentives cover 40 percent of the project.
Maximizing NMTC Coverage Percentages
Businesses seeking to maximize coverage percentages should right-size projects to align with available NMTC allocation while maintaining operational viability. Demonstrating a substantial community impact through job creation, blight remediation, or the provision of essential services makes projects more attractive to CDEs, potentially enabling larger allocations.
Combining NMTC financing with other public incentives, such as historic tax credits, opportunity zone benefits, state tax credits, or economic development grants, can significantly enhance overall project economics. Working with experienced NMTC advisors helps identify optimal structuring approaches.
Conclusion
Understanding the percentage of project costs that can be covered by NMTCs requires recognizing that typical coverage ranges from 20% to 40% of total expenses, varying depending on the transaction structure and project characteristics. The economic benefit stems from accessing below-market financing that reduces debt service and improves cash flow throughout the seven-year compliance period. Successful NMTC-financed projects typically require multiple funding sources carefully coordinated into comprehensive capital stacks. Review successful project examples or request a free project analysis to evaluate your specific coverage potential.