New Markets Tax Credit-A Proven Community Economic Development Tool Credit Unions Can Use to Revitalize Low-Income Communities

Published by Bob Ibanez on Tuesday, December 11, 2018 - 12:00am

The New Markets Tax Credit (NMTC) program was authorized as part of the Community Renewal and Tax Relief Act of 2000. Since then, the Community Development Financial Institutions (CDFI) Fund has made 1,105 awards totaling $54 billion in tax credit authority. Out of the pool of successful allocatees, only 12 awards or approximately 1 percent have gone to either an affiliate of a credit union (Self Help Ventures Fund) or the sponsor of a credit union (Hope Enterprise Corporation).

What Credit Unions should know about the NMTC

In an effort to encourage credit unions to participate more in the NMTC, the leadership of inclusiv, formerly the National Federation of Community Development Credit Unions, chose to include a session on NMTCs at its annual conference held in October in Clearwater, Fla. This panel was an opportunity for inclusiv’s more than 200 member community development credit unions, the vast majority of which are certified CDFIs, to better understand the program and the community economic development potential it holds.

The session provided attendees with an introduction to NMTCs as a program jointly administered by the CDFI Fund and the Internal Revenue Service where investments made through the NMTC Program must comply with regulations outlined in Section 45D of the Internal Revenue Code. This was an important distinction to make, as all other programs administered by the CDFI Fund are monetary award programs. Being awarded tax credit allocation authority to raise capital by providing investors (typically banks) with tax credits (to reduce their federal tax liability over a seven-year period) is not something most CDFIs associate with CDFI Fund programs.

One common characteristic of all CDFI Fund programs is that they require the funds to be deployed in low-income communities (LICs). LICs are defined as census tracts where the poverty rate is at least 20 percent; or where the median family income does not exceed 80 percent of the area median family income; or where the median family income does not exceed 85 percent of the area median family income provided the census tract is located in a high migration rural county; or where the census tract has a population of less than 2,000 and is contained within a federally designated empowerment zone and is contiguous to at least one other LIC. Novogradac’s NMTC Mapping Tool indicates whether a business is located in an eligible LIC census tract.

Businesses not located in LICs but that otherwise serve targeted populations may also qualify for NMTC-enhanced loans/investments. Targeted populations include low-income persons (e.g., family income no greater than 80 percent of the applicable area median family income) to the extent the business is located in a census tract with a median family income at or below 120 percent of the median family income.

Another characteristic that all CDFI Fund programs have in common is that they are extremely competitive. Historically, only approximately one out of three applications is awarded NMTC allocation authority. As such it was important for attendees of the session to realize they could also participate in NMTCs as either a leverage lender or as the borrower in a NMTC transaction. Notwithstanding the benefits associated with these roles, the way in which NMTC investments are typically structured was important to convey to credit union representatives in the session to ensure they had an appreciation for the inherent complexity of NMTCs regardless of which path their credit union decided to pursue.

Steps for Credit Unions to Pursue NMTCs

In deciding to pursue NMTCs, a credit union would want to ensure it does not violate any National Credit Union Administration (NCUA) rules or regulations. For example, member business loans must comply with Part 723 of NCUA’s rules and regulations containing guidance on commercial lending, along with addressing the statutory cap on member business loans. One method of obtaining guidance from NCUA would be through an opinion letter. Utilizing a credit union service organization (CUSO) may be the preferred vehicle to participate in the NMTC program for credit unions that already have this organizational structure in place.

Applying for certification is another necessary step to access the NMTC program. While the typical route is by applying for certification as a community development entity (CDE), an organization that is currently certified as a CDFI by the CDFI Fund automatically qualifies as a CDE.

What’s Possible

For those credit unions that have thus far successfully participated in the NMTC program, the outcomes have been very impactful in the LICs in which the investments were made. For example, Self Help Ventures Fund, in the role of NMTC allocatee and leverage lender, converted a deteriorating textile factory into a mixed-use commercial, arts and residential space. Another NMTC project in which Self Help Ventures Fund participated as both a leverage lender and qualified active low-income community business (QALICB) resulted in the redevelopment of an historic school building into a new charter school serving low-income students of color. St. Louis Community Credit Union, in the role of QALICB, built two new full service branches and a Wealth Accumulation Center, a multi-use facility that provides financial capability, affordable alternatives to payday lending and financial education.


These examples merely scratch the surface in terms of the kinds of businesses that can be financed with NMTCs. The most recent data published by the CDFI Fund reflects investments in the following sectors per the North American Industry Classification System (NAICS): single and mixed-use real estate; health care and social services; manufacturing; educational services; accommodation and food services; arts, recreation and entertainment; retail goods and services; and agriculture, forestry, fishing and hunting.

 While credit unions have not historically participated in the NMTC program, the data provides ample evidence that the NMTC has had a demonstrable impact on residents and businesses located in LICs. The data also clearly demonstrates the flexibility of the NMTC to support a myriad of debt and equity investments. For these reasons, it would be worthwhile for credit unions to revisit whether or not the time is right to add this community economic development tool for revitalizing the LICs they are serving. For those credit unions that are interested in gaining a better understanding of NMTCs, Novogradac holds three NMTC conferences a year, the next of which is the Novogradac 2019 New Markets Tax Credit Conference, Jan. 24-25 in San Diego, Calif.