One Friday morning in March 2003, the U.S. Department of the Treasury made a landmark announcement: Sixty-six organizations had been selected to receive a combined $2.5 billion in new markets tax credit (NMTC) allocation issuance authority.

That was nearly 20 years ago, when George W. Bush was two years into his first term as president. Two decades, 10 sessions of Congress, three presidents and 17 NMTC allocation awards announcements later, there is widespread acknowledgement that the NMTC incentive is a successful community development tool, pumping billions of dollars into low-income communities.

The NMTC is a 20-plus-year success story.

Fulfilling its Mission

From the time of the inclusion of the NMTC provisions in the Consolidated Appropriations Act of 2001 (signed into law by President Bill Clinton on Dec. 21, 2000), the incentive has been seen as an economic driver.

“The NMTC program is designed to stimulate private sector investment in the economic development of low-income communities–and we hope to see a real difference in the lives of the people in these communities,” said Treasury Secretary Paul O’Neill in a press release announcing the June 2002 opening of applications for the first round of allocations. The 18 allocation rounds since have proven him out.

The Community Development Financial Institutions Fund, which administrates the incentive, reports that it has made 1,461 allocation awards worth $71 billion in tax credit authority through the 18th round of allocations, announced in October 2022. As of the end of 2022, $64 billion had been invested as qualified equity investments in community development entities (CDEs), which use those dollars to invest in low-income communities.

According to the CDFI Fund, through 2021, the NMTC incentive had:

• created or retained 938,000 jobs,
• supported the construction of 118 million square feet of office space, 77 million square feet of retail space and 77 million square feet of manufacturing space, and
• generated more than $8 in private investment for every $1 invested by the federal government.

Meanwhile, the 18th round of allocations showed the varied geographic impact of the incentive: Approximately $2.38 billion of the calendar year 2021 round will be invested in major urban areas, $1.20 billion will go to minor urban areas and $1.16 billion will go to rural areas.

Twenty years in, there remains a healthy appetite for NMTC allocation issuance authority. In the most recent round, 199 CDEs applied for allocation authority, requesting $14.7 billion in allocations. The awards went to 54% of the applicants and provided 34% of the aggregate  amount requested by those receiving awards. Those figures (much more demand than supply) have been fairly consistent over the years. The request amount has never been less than two-and-a-half times the available allocation and is most commonly more than three times the available allocation. The peak percentage of CDEs receiving allocations is the most recent 54% total of applicants.

Since the first allocation announcement, stakeholders and the CDFI Fund have steadily adjusted the emphasis for the NMTC, encouraging more investment in rural areas, more investment in CDEs led by Black, Indigenous and People of Color, and granting awards to more organizations. With each change in the application, there is an opportunity to shift priorities by changing the scoring for the awards.

Learning Curve

Any community development tax incentive comes with a learning curve. Part of that is due to the wait for regulatory guidance from government agencies, but it also is a result of stakeholders learning recommended practices–one of the best reasons to be involved in industry groups, such as the Novogradac New Markets Tax Credit Working Group.

Over the two decades since the NMTC’s first allocation awards, practitioners learned myriad lessons to further leverage NMTC financing and magnify the effect of the investment on low-income communities and residents. NMTC subsidized businesses generally require other funding sources and from the time of the first allocation awards, CDEs, qualified low-income community businesses, and other stakeholders have worked to find complementary financing options that work well with the NMTC.

Pairing the NMTC with other community development tax incentives has proven successful. Most obvious is the historic tax credit, which pairs nicely with the NMTC and is a part of the financing of many community development projects. Other incentives, such as the renewable energy production tax credit and investment tax credit, the opportunity zones (OZ) incentive and a wide range of state and local options have also found their way into NMTC financing. Thirteen states have their own version of the NMTC, while four more introduced legislation to create a state incentive in the most recent session of their legislature.

Practitioners also recognize the importance of the NMTC application. That includes a critical look at the types of business investments and projects in their pipelines and what promises they make for using their allocation. There’s a reason Novogradac’s webinars about NMTC applications are so well-attended: Even among experienced CDEs that have won multiple allocations, there is an awareness that the application is critical and a recognition of the importance of continuing to learn.

Congressional Recognition of Value

The success of the NMTC hasn’t gone unnoticed in Washington, D.C. When economic or natural disasters happen, Congress has been eager to increase NMTC allocations to help meet economic recovery and redevelopment needs in affected areas, both immediate and long-term.

In addition to the regular allocation awards, Congress has twice added additional allocation authority. The first was an additional $1 billion in awards set aside as part of the Gulf Opportunity Zone Act of 2005 for recovery and redevelopment after Hurricane Katrina. The second was $3 billion was added as part of the American Recovery and Reinvestment Act in 2009.

While those have not been duplicated, virtually every subsequent American economic or climate crisis–most recently, the COVID-19 pandemic–prompted legislative discussion about using extra NMTC allocation to aide recovery efforts.

There have been multiple legislative efforts to expand the NMTC incentive to assist specific communities, including bills to provide extra allocation to rural areas, set asides for Native communities, extra allocation for Puerto Rico and more.

Applicable Lessons

As the CDFI Fund begins its third decade of awarding NMTC allocations, it’s worth celebrating the success, but also to highlight the lessons learned since 2003.

Importance of regulatory guidance. The NMTC community was ready to go shortly after the passage of the legislation, but there was significant guidance needed before investors and businesses were comfortable jumping on board. The first allocations came out in 2003, but temporary regulations weren’t issued by Treasury until March 2004 and final regulations weren’t issued until December 2004.

That understanding helped the OZ community have a reasonable estimate of its wait for Treasury guidance, the first of which came nearly two years after the OZ made it into the Internal Revenue Code. Knowing that guidance takes time and the importance of stakeholder feedback during that period is significant for participants in any new incentive.

Recommended practices take time. Stakeholders in the NMTC learned some lessons the hard way in the early years as it took time for a series of recommended practices to develop–for making and tracking qualified low-income community investments, for evaluating potential investments in a CDE’s pipeline, for documenting tax compliance, for reporting. There is always a learning period, which heightens the importance of communication with other stakeholders.

Predictability is helpful. The NMTC was initially authorized through 2007 and has subsequently been extended eight times, the most recent a five-year extension in 2020 that provides for the coming round and three more. Practitioners attest to the fact that the more runway you have, the easier it is to develop necessary infrastructure and make investments in the most severely distressed low-income communities–that the five-year extension was an improvement, but that making the NMTC an indefinite part of the tax code would be even better. That’s why there has been so much Congressional support for legislation to extend (and enhance) the NMTC and why there is a reasonable chance that legislation could be added to a larger bill soon.

Working groups matter. Whether it’s providing input to Treasury about potential guidance, sharing recommended practices with stakeholders, pushing for legislation to extend and enhance the NMTC or to get insight into the most recent NMTC application or allocation, it’s best to travel in a pack. The success of the NMTC incentive comes from a variety of sources–the CDFI Fund, investors, developers, low-income community residents and more. But stakeholders in groups such as the Novogradac New Markets Tax Credit Working Group also hold some responsibility. To join or learn more about the New Markets Tax Credit Working Group, email Brad Elphick at [email protected].