The Basic Structure of NMTCs

Community Ventures is a certified Community Development Entity by the CDFI Fund division of the US Treasury. This allows Community Ventures to use New Markets Tax Credits (NMTCs) to provide subsidized financing for qualifying businesses or real estate projects. In order to borrow NMTC funds, prospective borrowers must meet the Federal definition of a Qualified Active Low-Income Community Business (QALICB) as set forth in the NMTC statutes to be eligible for NMTC financing. In basic terminology, QALICBs are business that are predominantly or wholly located in low-income communities.

Community Ventures obtains funds to invest in QALICBs through private investors. The NMTC program provides these investors with federal income tax credits based on equity investments made in CDF’s subsidiaries. This investment is known as a Qualified Equity Investment (QEI). Investors receive a tax credit for 39% of a QEI, which is claimed over a seven-year schedule. A QEI must remain fully invested in CV for seven years in order for an investor to meet NMTC compliance requirements. CV then uses the QEI capital to provide below-market rate equity or debt capital to qualifying businesses or real estate projects. The capital that a CDE provides to a qualifying project is known as a Qualified Low-Income Community Investment (QLICI). CV typically structures its QLICIs as interest-only loans with a seven-year or greater term in order to mirror the NMTC compliance period for QEIs. Because the NMTC benefit is defined as a percentage of the equity investment CDF receives, the amount of subsidy a project can receive is dependent upon size and cost of the project itself.

The NMTC structure differs from that of many other federal tax credits because the NMTC investor indirectly finances a project through the CDE. Typically, with programs such as the Low Income Housing Tax Credit or the Historic Tax Credit, the investor receives a tax benefit for investing directly in a project. In NMTCs, the tax credit investor invest money with CV, not the project. CV in turn provides below-market financing to the project, most commonly in the form of debt.