NMTC Sees More than $4 Billion in Investments in 2023, Highest Total in Six Years

Published by Brad Elphick on Wednesday, January 10, 2024 - 9:30AM

The new markets tax credit (NMTC) incentive saw more than $4 billion in qualified equity investments (QEIs) in 2023, the fifth-best year in history. The QEI total marked the fourth straight year of increase and the highest figure since 2017, suggesting that investor demand continues to match an increasing supply.

The boost in investment–a jump of more than $1 billion over the 2022 numbers–reflects a higher annual allocation authority total and a healthy investor market. For those involved in community development, this is a positive trend, one that will be a topic of conversation at the Novogradac 24th Annual New Markets Tax Credit Conference, Jan. 25-26 in the San Diego area.

Blog Graphic: 2023 QEIs Near $4.5 Billion

According to the Community Development Financial Institutions (CDFI) Fund’s monthly QEI report, nearly $4.5 billion was invested in 2023, the most in six years. (For purposes of determining the annual amounts, Novogradac calculates annual investment by comparing each January’s QEI numbers to the previous January.) The 2023 QEI total also marked the fourth consecutive year in which the QEI total surpassed the previous year, with annual year-over-year increases ranging from $116 million in 2022 to last year’s $908 million. 

Part of the increase is due to the fact that annual NMTC allocation issuance authority increased from $3.5 billion to $5 billion for the calendar year 2020 round, announced in September 2021. Most of the allocation from that round ($3.6 billion) was invested in 2022, but nearly $1 billion of CY 2020 allocation ($915 million) rolled over and was invested in 2023. The vast majority of the QEI activity in 2023 (73.6% of the total) came from QEIs made from CY 2021 allocation, which was announced in October 2022

Looking at it from the other side, 65.5% of the CY 2021 allocation authority was deployed within 15 months, an impressive exhibition of the need for the subsidy and the ability of NMTC stakeholders to quickly close transactions.

The four straight years of annual increases in the QEI amount started in 2020, the year the Consolidated Appropriations Act passed, increasing the annual NMTC allocation amount beginning with the CY 2020 round and extending the NMTC for five years. The dual benefit–a larger allocation amount and a longer period of certainty–may be a harbinger of the positive effects of permanency for the credit, as advocated in the New Markets Tax Credit Extension Act of 2023.

QEI figures show that demand for the incentive is greater than the available allocation and the market appears strong enough to absorb additional allocation authority within a short period of time: The annual allocation amount jumped in 2021 and investment quickly followed.

As advocates, including the New Markets Tax Credit Working Group, consider the value of combining upcoming rounds (including possibly merging the CY 2024 and CY 2025 rounds into a single $10 billion round to be awarded by the end of 2025), the history of the market responding favorably to an increase in the volume of credits should reduce any concern that a single $10 billion round may be too much for the market to absorb.

When the combined $7 billion round of 2015-2016 was allocated, the market absorbed it. Same thing with the back-to-back rounds of $5 billion in 2008 and 2009 ($3.5 billion in regular allocation authority, $1.5 billion in additional authority from the American Recovery and Reinvestment Act). All of those allocation rounds resulted in subsequent years with $4 billion-plus in QEIs.

During the past year, there was a strong expectation–informed partly by the monthly QEI reports–that the QEI figures would be impressive and there was some consideration that QEIs could reach $5 billion.

An article in the December Novogradac Journal of Tax Credits provided insights from participants from an investor session I hosted at October’s Novogradac 2023 Fall New Markets Tax Credit Conference in New Orleans. Participants said it was reasonable to expect QEI numbers to continue at a rapid pace in the first quarter of this year as NMTC allocatees face a March 21 deadline to meet QEI issuance and qualified low-income community investment requirements.

“Clearly there’ll be a huge dynamic push, which is good to see, with robust appetite, generally speaking, on the investor side,” said James D. Howard, president of Dudley Ventures at the conference. “I think that’s all very positive for the industry.”

The four consecutive years of QEI increases show that the NMTC community continues to close transactions with more investment in a short period of time–when more NMTCs are injected into the market, the market responds. Increasing QEI totals are a sign of health for the NMTC world and an indication that there’s room for more allocation

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