New Markets Tax Credits (NMTC): How the Leveraged Structure Works and Why It Generates More Subsidy

Key Takeaways

What Is the New Markets Tax Credit

The New Markets Tax Credit is a federal tax incentive designed to attract private investment capital into low-income communities. Created by the Community Renewal Tax Relief Act of 2000 and codified asIRC Section 45D, the program provides investors with a 39% federal tax credit in exchange for making equity investments in Community Development Entities (CDEs) that in turn deploy capital into qualifying businesses and real estate projects in designated low-income census tracts.

The program is administered by the Community Development Financial Institutions Fund (CDFI Fund), a division of the U.S. Department of the Treasury. The CDFI Fund conducts competitive allocation rounds in which certified CDEs apply for NMTC allocation authority. Winning CDEs then use that authority to raise Qualified Equity Investments from investors and redeploy the capital as Qualified Low-Income Community Investments (QLICIs) into eligible projects.

Since the inaugural allocation round in 2002 through the end of 2025, the NMTC Program has awarded $91 billion to certified CDEs, resulting in the creation or retention of more than 950,000 jobs, according to theCDFI Fund NMTC fact sheet. The fact sheet lists manufacturing, food, retail, affordable housing, healthcare, technology, energy, education, and childcare among the business and project types the program supports. Demand for allocation exceeds supply: in the calendar year 2024-2025 round, 216 applicants requested $19.2 billion and 142 CDEs received a combined $10 billion, per the Forvis Mazars allocation announcement.

For commercial real estate practitioners, the NMTC is significant because it can supply a layer of forgivable debt to projects in qualifying census tracts. Unlike a conventional loan, the equity-funded portion of the NMTC financing (Loan B in the leveraged structure) is forgiven at the end of the compliance period rather than repaid. Unlike LIHTC equity, it does not require ongoing affordability restrictions (though it does require a seven-year compliance period). The result is a tool that can make otherwise infeasible community development projects viable. In the worked example below, the net subsidy is about 9.8 percent of the QEI.

IRC Section 45D Mechanics

Understanding the NMTC requires fluency in the statutory terms defined in IRC Section 45D. These terms are not interchangeable with general real estate terminology, and each carries specific legal requirements that determine whether a transaction qualifies for the credit.

Qualified Equity Investment (QEI)

A Qualified Equity Investment is the equity contribution an investor makes to acquire stock or a capital interest in a CDE. The QEI is the base amount on which the 39% credit is calculated. Not all investments in a CDE qualify as QEIs; the investment must be designated as a QEI by the CDE at the time of acquisition, and the CDE must have received an NMTC allocation from the CDFI Fund that covers the amount. The QEI sets the ceiling for the entire transaction: the credit, the QLICI, and the ultimate subsidy all flow from this number.

Qualified Low-Income Community Investment (QLICI)

A QLICI is the deployment of the QEI capital by the CDE into the qualifying project. QLICIs can take the form of loans, equity investments, or purchases of loans from other CDEs. In real estate transactions, the QLICI is typically structured as a loan from the CDE to the Qualified Active Low-Income Community Business (QALICB). The terms of the QLICI loan are where much of the NMTC benefit is embedded: favorable interest rates, interest-only payment structures, and (in leveraged deals) forgiveness of the equity-funded loan at the end of the compliance period.

Community Development Entity (CDE)

A CDE is a domestic corporation or partnership that has been certified by the CDFI Fund as having a primary mission of serving or providing investment capital for low-income communities. CDEs apply to the CDFI Fund for NMTC allocation authority through a competitive process. Certification alone does not carry allocation authority; a CDE must also win an award in an allocation round. CDEs can be independent nonprofit organizations, subsidiaries of banks, community development financial institutions (CDFIs), or special-purpose entities created by financial institutions.

Qualified Active Low-Income Community Business (QALICB)

The QALICB is the end user of the NMTC capital. In real estate transactions, the QALICB is typically a single-purpose entity that owns and operates the project. To qualify under IRC Section 45D(d)(2) andTreas. Reg. 1.45D-1(d)(4), the entity must meet several tests: at least 50% of its total gross income must be derived from the active conduct of a qualified business within a low-income community; at least 40% of the use of its tangible property must be within a low-income community; at least 40% of the services performed for it by employees must be performed within a low-income community; and less than 5% of the average of the aggregate unadjusted bases of its property can be attributable to nonqualified financial property (investment assets not related to the active business).

The Substantially-All Requirement

The CDE must invest "substantially all" of the QEI proceeds in QLICIs. Under the Treasury regulations (Treas. Reg. 1.45D-1(c)(5)), substantially all means at least 85%, tested for each annual period of the seven-year credit period, and the cash counts as invested only to the extent it is invested within 12 months of the date the investor pays it to the CDE. The percentage drops to 75% for the seventh year. The 85% figure is a regulatory floor, not a market norm; what the CDE keeps for fees and reserves is negotiated in each deal. The worked example below uses the 85% floor, so a $10M QEI produces an $8.5M QLICI and leaves $1.5M with the CDE. The $1.5M is an illustrative assumption.

The Four Parties

Every NMTC transaction involves at least four distinct entities, each playing a specific role. Understanding who does what is essential before examining how the leveraged structure works.

1. The Investor (Tax Credit Investor). Typically a large financial institution, insurance company, or corporate entity with substantial federal tax liability. The investor provides equity in exchange for the 39% tax credit. In a leveraged structure, the investor's equity contribution is only a portion of the QEI (31.2 percent in the worked example below; 40 percent in the example in GAO-07-296), and the rest comes from the leverage loan. The investor's primary return is the tax credit itself, which reduces federal income tax liability dollar for dollar over seven years. The NMTC is part of the general business credit (Treas. Reg. 1.45D-1(a)), so credits that cannot be used in a year are carried under section 39.

2. The Leverage Lender. In a leveraged structure, the leverage lender provides a loan to the Investment Fund (the entity through which the investor makes the QEI). GAO describes the structure as one the IRS approved in Rev. Rul. 2003-20, and explains that it separates the economic benefits (the lender's interest and principal) from the tax benefits (the investor's credits). According to Community Reinvestment Associates, typical sources of the leverage loan include an affiliate of the tax credit purchaser or the allocatee, traditional loans, donations, grants, bonds, and owner funds. The loan requires interest-only payments during the compliance period and is repaid, not forgiven: in the GAO example, the bank receives interest and, after seven years, principal.

3. The Community Development Entity (CDE). The CDE receives the QEI from the Investment Fund, designates it as a QEI under its NMTC allocation, and redeploys the capital as QLICIs to the QALICB. The CDE is the intermediary that makes the tax credit mechanics work, and it is responsible for ensuring compliance with NMTC requirements throughout the seven-year period. In the CRA description, the CDE's upfront sub-allocation fee and its ongoing asset management, monitoring, and overhead reimbursement are paid out of the investor's purchase price. In the worked example, the CDE retains $1.5M of the $10M QEI for its fees and costs (an illustrative assumption).

4. The QALICB (the Project). The entity that owns and operates the real estate project. It receives the QLICI (loans from the CDE) and uses the proceeds for construction, rehabilitation, or acquisition of qualifying property in a low-income community. The QALICB is the ultimate beneficiary of the NMTC subsidy: the leverage-funded loan (Loan A) is repaid, the equity-funded loan (Loan B) is forgiven at the end of the compliance period, and the net effect is a permanent reduction in the project's capital cost.

Leveraged vs. Direct Structure

There are two primary ways to structure an NMTC transaction: the direct (non-leveraged) structure and the leveraged structure. According to CRA, the leverage structure is used in the vast majority of NMTC financings, and GAO reported that about 41 percent of all NMTC investment through December 2006 was made using the leveraged approach. The leveraged structure delivers more benefit to the QALICB because it converts the investor's payment for the credits into forgivable debt.

Direct (Non-Leveraged) Structure

In a direct structure, the investor makes the full QEI with its own equity. There is no leverage loan. The investor pays $1.00 for every $1.00 of QEI, and the CDE deploys that full amount as QLICIs to the QALICB. The investor receives the 39% credit over seven years, which provides a return on its equity, but the QALICB does not receive any forgiveness beyond favorable loan terms on the QLICI itself.

The benefit to the QALICB in a direct structure is the difference between the QLICI interest rate and the rate on a market-rate loan, plus any other favorable terms the CDE offers. Its size depends on the market rate at closing and on the loan terms, and the QALICB repays the QLICI principal. While this is helpful, it does not create a forgiven principal balance.

Leveraged Structure

The leveraged structure separates the tax benefit from the economic benefit. The Investment Fund borrows part of the QEI from a leverage lender and contributes the rest from the investor's equity. The combined amount becomes the QEI, and the investor claims credits on all of it. The leverage loan is repaid out of Loan A, the QLICI that the leverage loan funded. The investor's equity pays the CDE's fees and funds Loan B. At the end of the seven-year compliance period, the investor puts its interest in the Investment Fund for a nominal price, Loan A is paid off or assigned to the leverage lender, and Loan B is forgiven. In the worked example the credits ($3.9M) exceed the investor's equity ($3.12M), so the investor has little economic reason to keep its interest after the credit period.

The result is that the QALICB receives a permanent, non-repayable benefit equal to the forgiven Loan B less the costs and interest it bears. In the worked example that is $981,600, about 9.8 percent of the QEI. The figure depends on credit pricing, CDE fees, transaction costs, and loan terms, so it is calculated deal by deal rather than quoted as a market range.

Table 1. Comparison of direct and leveraged NMTC structures. The percentages for the leveraged structure come from the illustrative worked example below, not from a market survey.

Leveraged Structure Step by Step

The leveraged structure unfolds in a specific sequence. Each step must occur in order for the transaction to generate credits and deliver subsidy to the QALICB.

Step 1: The CDE secures an NMTC allocation. The CDE applies to the CDFI Fund during the annual allocation round and receives authority to designate a certain dollar amount of investments as QEIs. Without allocation authority, no QEI can be designated and no credits can be generated.

Step 2: The QALICB is identified and qualified. The CDE identifies a qualifying project in a low-income census tract and confirms that the project entity meets all QALICB requirements. Due diligence at this stage covers census tract eligibility, the active business tests, and the nonqualified financial property limitation.

Step 3: The leverage lender makes a loan to the Investment Fund. The leverage lender lends part of the planned QEI to the Investment Fund; in the worked example the loan is $6.88M, or 68.8 percent of the QEI. The loan requires interest-only payments during the compliance period, with principal due at maturity (GAO describes a balloon payment after seven years). The lender's only collateral is typically the equity in the Investment Fund (GAO-07-296; CRA).

Step 4: The investor contributes equity to the Investment Fund. The tax credit investor contributes the remaining part of the QEI as equity into the Investment Fund ($3.12M, or 31.2 percent, in the worked example). The investor receives a membership interest in the Investment Fund and, through it, an indirect interest in the QEI. In the CRA description, the Investment Fund holds a 99.99% interest in the CDE and the allocatee retains 0.01%.

Step 5: The Investment Fund makes the QEI in the CDE. The Investment Fund combines the leverage loan proceeds and the investor equity and contributes the full amount to the CDE as a Qualified Equity Investment. The CDE designates this investment as a QEI under its NMTC allocation. This designation triggers the seven-year credit period.

Step 6: The CDE makes QLICIs to the QALICB. The CDE deploys substantially all (at least 85%) of the QEI as Qualified Low-Income Community Investments to the QALICB. In real estate transactions, the QLICI is typically structured as two loans: Loan A, a senior loan funded by the leverage loan proceeds, and Loan B, a forgivable loan funded by investor equity. Per CRA, Loan A is interest-only during the compliance period at a rate equal to the weighted average of the rates on the leverage loan, so that Loan A interest pays the leverage loan's interest. In the worked example, Loan A is $6.88M and Loan B is $1.62M. Loan B's rate and forgiveness terms are negotiated.

Step 7: The QALICB uses the QLICI proceeds. The QALICB uses the loan proceeds for qualifying purposes: construction, rehabilitation, or acquisition of real property; equipment; and eligible working capital. The funds are deployed into the project.

Step 8: The investor claims credits over seven years. Beginning in the year the QEI is made, the investor claims the NMTC credit on its federal tax return. The credit is 5% of the QEI in each of the first three years and 6% in each of the remaining four years, totaling 39% of the QEI over the seven-year period.

Step 9: Exit at Year 7. After the seven-year compliance period expires, the investor exercises a put option to sell its interest in the Investment Fund for a nominal price to one of the borrower's affiliates, which usually acts as the leverage lender or is created for this purpose, and the allocatee redeems its small interest in the CDE. Loan A is generally assigned to the leverage lender and paid off or amortized as required by the sources that funded the leverage loan. Loan B is forgiven. The net effect: the QALICB keeps the Loan B proceeds, less the costs and interest it bore. That retained amount is the net subsidy.

Worked Example: $10M QEI

The following example walks through a $10M QEI leveraged NMTC transaction to illustrate the dollar flows and the net subsidy calculation. The $10M QEI, the $3.9M of credits, and the $0.80 credit price follow the example in theCRA description of the leverage structure. Every other input is an illustrative assumption chosen for this example, not a market benchmark.

Transaction Assumptions

• Qualified Equity Investment: $10,000,000
• Credit price (investor cost per credit dollar): $0.80, so the investor pays $3,120,000 for $3,900,000 in credits
• Investor equity: $3,120,000 (31.2% of QEI)
• Leverage loan: $6,880,000 (68.8% of QEI), interest-only at 2.5%, repaid at exit
• QLICI to QALICB: $8,500,000 (85% of QEI, the "substantially all" minimum)
• CDE retained for fees and reserves: $1,500,000 (15% of QEI), funded from investor equity
• QLICI Loan A (leverage-funded, senior): $6,880,000, interest-only at 2.5% (the same rate as the leverage loan), repaid at exit
• QLICI Loan B (equity-funded, forgivable): $1,620,000, interest-only at 1.0%, forgiven at exit
• QALICB transaction costs: legal $350,000 and accounting/audit $175,000 over the compliance period, $525,000 in total, paid by the QALICB

Credit Generation

Table 2. Credit schedule for a $10M QEI. The investor receives $3.9M in federal tax credits over seven years, equal to 39% of the QEI. Against $3.12M of equity contributed, the credits equal 125% of the equity, an undiscounted gain of $780,000. On the credits alone, the investor's IRR is about 5.7% if each credit is realized at the end of years 1 through 7 and about 7.7% if the first credit is realized at closing; other tax and cash items from the investment are not modeled.

Sources and Uses at Closing

• Investment Fund sources: leverage loan $6,880,000 + investor equity $3,120,000 = $10,000,000 QEI
• CDE uses: QLICI Loan A $6,880,000 + QLICI Loan B $1,620,000 = $8,500,000 QLICI, plus $1,500,000 retained by the CDE
• Tie-out: investor equity $3,120,000 = Loan B $1,620,000 + CDE retained $1,500,000

Investment Fund Interest Cash Flows

The Investment Fund receives Loan A interest of $172,000 per year (2.5% x $6,880,000) and Loan B interest of $16,200 per year (1.0% x $1,620,000), a total of $188,200. It pays leverage loan interest of $172,000 per year (2.5% x $6,880,000). Because Loan A carries the same rate as the leverage loan, Loan A interest exactly covers the leverage loan interest, and the $16,200 per year of Loan B interest stays in the Fund. Over seven years the QALICB pays $1,204,000 of Loan A interest and $113,400 of Loan B interest.

Net Subsidy Calculation

The net subsidy is the permanent benefit the QALICB keeps after exit: the forgiven Loan B less the costs and Loan B interest the QALICB bears. It excludes the interest-rate savings on Loan A compared with a market-rate loan, which depend on the market rate at closing. Here is the waterfall:

1. QLICI received by QALICB: $8,500,000
2. Less: QLICI Loan A, repaid at exit (it retires the leverage loan): ($6,880,000)
3. Equals: QLICI Loan B, forgiven at exit: $1,620,000
4. Less: QALICB legal and transaction costs: ($350,000)
5. Less: QALICB accounting and audit costs over the compliance period: ($175,000)
6. Less: Loan B interest paid over 7 years (1.0% x $1,620,000 x 7): ($113,400)
7. Net subsidy to QALICB: $981,600 (9.8% of the QEI)

The $1,500,000 retained by the CDE is not deducted again: it never reaches the QALICB, and the $8,500,000 QLICI is already net of it. The $1,204,000 of Loan A interest is the cost of borrowing Loan A, which is repaid, and is not netted against the subsidy. The exact figure depends on credit pricing, CDE fees, transaction costs, and loan terms. In the example, the credit price sets the size of the investor's equity and so the amount available for Loan B: at $0.75 per credit dollar the net subsidy is $800,250 (8.0% of the QEI), and at $0.85 it is $1,162,950 (11.6%), holding the $8.5M QLICI and the other inputs constant.

The 39% Credit Schedule

The NMTC credit accrues on a statutory schedule. Under IRC Section 45D(a)(2), the credit rate is 5% of the amount paid to the CDE for the QEI in each of the first three credit allowance dates and 6% in each of the remaining four credit allowance dates. The credit allowance dates are the date of the QEI and each of the six anniversaries thereafter.

This schedule produces the following cumulative pattern:

• Years 1 through 3: 5% + 5% + 5% = 15% cumulative
• Years 4 through 7: 6% + 6% + 6% + 6% = 24% additional
• Total: 15% + 24% = 39% of QEI

Several characteristics of this schedule are worth noting for underwriting purposes. First, the schedule is mildly back-weighted: the first three years carry 15% of the QEI (38.5% of the total credit amount) and the last four years carry 24% (61.5%), against 42.9% and 57.1% if the 39% were spread evenly over seven years. Second, the credit is calculated on the amount paid to the CDE at original issue throughout the seven-year period (IRC Section 45D(a)(1)). Third, the seven-year recapture period begins on the date of original issue of the QEI (IRC Section 45D(g)(1)). If a recapture event occurs during that period, the investor's tax is increased by the credits previously allowed plus interest (IRC Section 45D(g)(2)), limited to credits that actually reduced tax liability (IRC Section 45D(g)(4)(A)). That creates a significant risk for investors and a strong incentive for compliance monitoring.

From the investor's perspective, the credit schedule and the price paid for the credits determine the return on the equity investment. An investor who contributes $3.12M in equity and receives $3.9M in credits over seven years earns an IRR of about 5.7 percent on the credits alone if each credit is realized at the end of years 1 through 7, and about 7.7 percent if the first credit is realized at closing. Those figures exclude any other tax or cash items from the investment. Because the credit offsets tax dollar for dollar rather than acting as a deduction, its value does not depend on the investor's marginal tax rate: a $600,000 credit reduces the tax bill by $600,000 whether the investor is in a 21% or a 37% bracket. The NMTC is part of the general business credit (Treas. Reg. 1.45D-1(a)), and credits that cannot be used in a year are carried under section 39.

QALICB Qualification Requirements

The QALICB requirements are the gateway test for any real estate project seeking NMTC financing. Because the CDE must keep its QLICIs in qualifying investments to satisfy the substantially-all requirement, a project that fails these tests puts the investor's credits at risk. Understanding them is essential at the earliest stage of deal screening.

The Active Business Tests

A QALICB must satisfy three location-based tests, each measured at the entity level (IRC Section 45D(d)(2)(A); Treas. Reg. 1.45D-1(d)(4)(i)). At least 50% of the entity's total gross income must be derived from the active conduct of a qualified business within a low-income community. At least 40% of the use of the tangible property (by value) must be within a low-income community. And at least 40% of the services performed for the entity by its employees (by compensation) must be performed within a low-income community.

For a single-asset real estate entity, these tests are straightforward: if the building is in a qualifying census tract and the entity operates or leases the property, all three tests are met automatically. Complications arise when the QALICB operates across multiple locations, has employees who work remotely, or generates income from activities outside the low-income community.

Nonqualified Financial Property Limitation

Less than 5% of the average of the aggregate unadjusted bases of the QALICB's property can be attributable to nonqualified financial property (IRC Section 45D(d)(2)(A)(v); Treas. Reg. 1.45D-1(d)(4)(i)(E)). The term covers debt, stock, partnership interests, options, futures, and similar property, but excludes reasonable amounts of working capital held in cash, cash equivalents, or debt instruments with a term of 18 months or less. The regulations also treat the proceeds of a CDE investment or loan that will be expended for construction of real property within 12 months as reasonable working capital. Excess cash reserves, investment securities, and other financial assets count toward the 5% limit.

This test is particularly important for real estate entities that accumulate cash from operations. A QALICB that collects rent and holds large cash balances without a clear operational purpose risks breaching the 5% threshold. Practitioners typically address this by distributing excess cash, prepaying obligations, or investing in tangible property improvements.

Excluded Activities

Certain business types are excluded from QALICB status regardless of location. These include residential rental property (as defined in IRC Section 168(e)(2)(A)), golf courses, country clubs, massage parlors, hot tub and suntan facilities, racetracks, gambling facilities, and liquor stores. The residential rental exclusion is the most significant for CRE practitioners (Treas. Reg. 1.45D-1(d)(5)(ii)): a purely residential rental project cannot be a QALICB, which is why NMTC real estate financing focuses on commercial, community facility, and mixed-use projects rather than multifamily housing.

Residential rental property is a building or structure for which 80 percent or more of the gross rental income comes from dwelling units (IRC Section 168(e)(2)(A)). The test applies building by building, on gross rental income. A mixed-use building with ground-floor retail and upper-floor apartments is outside the definition only if dwelling units produce less than 80 percent of the building's gross rental income, so the commercial space must produce more than 20 percent. Projects that do not meet that test are typically split so that the commercial component sits in its own entity.

Ongoing Qualification

QALICB status is not a one-time determination. The regulations treat an entity as a QALICB for the duration of the CDE's investment if the CDE reasonably expects, when it invests, that the entity will satisfy the QALICB requirements throughout the investment (Treas. Reg. 1.45D-1(d)(6)(i)). If the CDE controls the entity, the entity must satisfy the requirements throughout the period of control (Treas. Reg. 1.45D-1(d)(6)(ii)). A change in business operations, a shift in employee location, or an accumulation of nonqualified financial property can cause the entity to fail a test, and for a controlled entity that puts the QLICI's qualification at risk. This ongoing requirement creates a monitoring burden that must be built into the project's operating procedures and budget.

Census Tract Eligibility

An NMTC investment must be deployed in a low-income community as defined by IRC Section 45D(e). The primary definition: a population census tract where the poverty rate is at least 20%, or where the median family income does not exceed 80% of the applicable area median income (for tracts within a metropolitan area, 80% of the greater of the metropolitan area median or the statewide median; for tracts outside a metropolitan area, 80% of the statewide median).

The CDFI Fund maintains an online mapping tool that allows practitioners to verify census tract eligibility by entering a street address. The tool maps addresses to census tracts and reports whether each tract qualifies under the income or poverty tests. This is the first step in any NMTC feasibility analysis: if the site is not in a qualifying tract, the deal cannot proceed regardless of the project's merits.

Targeted Populations

In addition to geographic eligibility, the program recognizes "targeted populations" that may be treated as low-income communities (IRC Section 45D(e)(2); Treas. Reg. 1.45D-1(d)(9)). A business that serves or employs low-income persons (family income not more than 80% of area median family income, with separate metropolitan and non-metropolitan rules) can qualify even if it is not physically located in a qualifying tract, but it must meet separate tests: for example, at least 50% of its gross income from transactions with low-income persons, at least 40% of its employees who are low-income persons, or at least 50% ownership by low-income persons. The regulations also include a 120-percent-income restriction that generally bars an entity located in a census tract with median family income above 120% of the applicable median. In real estate transactions, the physical location of the property is typically the qualifying factor.

Timing of the Tract Test

According to Community Reinvestment Associates, the requirement that the project be predominantly located in a low-income census tract only has to be satisfied on the date the NMTC financing is funded. If the tract is later disqualified as a low-income community, that does not matter as long as the borrower or project remains in that tract (or relocates to another low-income community) during the compliance period.

CDE Allocation Process

The NMTC allocation process is the competitive bottleneck of the entire program. A project's eligibility and a CDE's certification are necessary but not sufficient; the CDE must also win allocation authority through the CDFI Fund's annual allocation round. Understanding the competitive dynamics helps practitioners evaluate whether NMTC financing is realistic for a given project.

Application Mechanics

The CDFI Fund runs competitive allocation rounds in which CDEs submit detailed applications describing their investment strategy, target communities, management capacity, track record, and pipeline of proposed investments. The application is scored on multiple criteria including community outcomes, business strategy, management capacity, and capitalization strategy.

The most recently awarded round covered calendar years 2024 and 2025 together. The CDFI Fund announced the awards on December 23, 2025: 142 CDEs received a combined $10 billion in allocation from a pool of 216 applicants that requested $19.2 billion in total (Forvis Mazars). Requests were about 1.9 times the amount awarded, so even well-qualified CDEs may not receive allocation in a given round.

Competitive Dynamics

The most successful CDEs tend to share several characteristics. They have strong track records of deploying prior allocations within the required timeframes. They demonstrate measurable community outcomes (jobs created, services provided, community facilities built). They have deep pipelines of identified, qualifying projects that are ready to proceed. And they have the organizational capacity to manage complex leveraged transactions and monitor compliance over the seven-year period.

For project sponsors, the implication is clear: securing NMTC financing requires partnering with a CDE that has allocation authority or a strong likelihood of receiving it. Experienced sponsors maintain relationships with multiple CDEs and begin discussions well before the project needs NMTC capital. Waiting until allocation is awarded to approach a CDE typically means waiting another year for the next round.

Sub-Allocation and Deployment Timelines

Once a CDE receives allocation, it must deploy the capital within specific timeframes. Cash counts as invested in a QLICI only to the extent it is invested within 12 months of the date the investor pays it to the CDE (Treas. Reg. 1.45D-1(c)(5)(iv)), and a QEI cannot be issued more than five years after the CDE's allocation agreement. If the proceeds later cease to meet the substantially-all requirement, that is a recapture event for investors. This deployment pressure means that CDEs strongly prefer projects that are "shovel-ready" and can absorb NMTC capital quickly.

The Forvis Mazars announcement also reports that the CDFI Fund has conducted 21 allocation rounds and issued 1,809 awards, representing a total of $91 billion in tax credit allocation authority.

Compliance Period and Monitoring

The NMTC compliance period runs for seven years from the date of the QEI. During this period, multiple requirements must be continuously satisfied. A recapture event increases the investor's tax by the credits previously allowed plus interest, to the extent those credits reduced tax liability (IRC Section 45D(g)(2) and (4)(A)). The recapture risk is the primary concern that shapes how NMTC transactions are structured and monitored.

Recapture Events

Credit recapture is triggered by any of the following events during the seven-year period beginning on the original issue date of the QEI (IRC Section 45D(g)(3); Treas. Reg. 1.45D-1(e)(2)):

• The CDE ceases to be a CDE. Loss of CDE certification (through decertification by the CDFI Fund or voluntary termination) triggers recapture for all QEIs in that CDE.
• The CDE fails the substantially-all requirement. If the proceeds of the investment cease to be used as required (the QLICI percentage falls below 85%, or 75% in the seventh year), recapture is triggered. Capital returned to the CDE must be reinvested in a QLICI within 12 months to be treated as continuously invested.
• A QLICI stops counting as qualified. An entity keeps its QALICB status for the duration of the CDE's investment if the CDE reasonably expected at closing that it would qualify throughout, but an entity the CDE controls must actually satisfy the tests throughout the period of control. A QLICI in an entity that does not qualify cannot count toward the substantially-all requirement, which is the route to recapture.
• The QEI is redeemed. If the investment is redeemed or otherwise cashed out by the CDE before the end of the seven-year period, recapture is triggered.

Monitoring Requirements

CDEs are required to report annually to the CDFI Fund on the status of their NMTC investments. This reporting includes financial statements, community impact data (jobs created, services provided), and compliance certifications. Most CDEs also require the QALICB to submit quarterly or annual certifications confirming continued compliance with the QALICB tests.

The monitoring burden is not trivial. The QALICB must track its gross income by source, its tangible property by location, its employee services by location, and its nonqualified financial property as a percentage of total property. These calculations must be documented and available for review. In the CRA description, the CDE's ongoing asset management, monitoring, and overhead reimbursement are paid out of the investor's purchase price; in the worked example they fall within the $1.5M the CDE retains.

Practical Compliance Issues

The most common compliance challenges in real estate NMTC transactions are cash accumulation (breaching the 5% nonqualified financial property limit as the property generates operating income), changes in tenant mix that affect the active business tests, and construction delays that push back the deployment of QLICI proceeds. Experienced NMTC counsel builds compliance covenants into the operating agreement that require the QALICB to distribute excess cash, maintain qualifying tenant mixes, and report compliance metrics on a defined schedule.

Exit and Unwind at Year 7

The exit and unwind at the end of the seven-year compliance period is the event that crystallizes the NMTC subsidy for the QALICB. Until exit, the leverage loan is outstanding, the investor holds its interest in the Investment Fund, and the CDE holds the QLICI notes. After exit, the structure collapses: the investor departs, Loan A is paid off or assigned to the leverage lender, Loan B is forgiven, and the QALICB keeps the permanent subsidy.

The Put/Call Option

Leveraged transactions use an unwind built on option agreements, according to CRA. At the end of the seven-year compliance period, the tax credit investor has the option to put its interest in the Investment Fund for a nominal amount (CRA's example is $1,000 plus exit taxes and legal fees) to one of the borrower's affiliates, which usually acts as the leverage lender or is created for this purpose. The allocatee has the right to redeem its small managing member interest in the CDE for a nominal amount (CRA's example is $100). CRA lists the investor's reasons to follow through: it has earned its return on the credits, it receives Community Reinvestment Act credit and goodwill, and an investor that refused to put would damage its standing in the NMTC marketplace.

Loan A Repayment and Loan B Forgiveness

When the investor exits, the borrower's affiliate controls the Investment Fund. Per CRA, the senior QLICI loan (Loan A) is generally assigned to the leverage lender and then paid off or amortized as required by the sources of funds used for the leverage loan. The forgivable QLICI loan (Loan B) is forgiven. In the worked example, the QALICB still owes the $6.88M of Loan A, which retires the leverage loan, and the $1.62M of Loan B is cancelled.

Because the leverage loan is repaid, the leverage lender needs a source of repayment. CRA describes one arrangement: the providers of the leverage funds lend directly to the borrower's affiliate, which acts as the leverage lender, and lease payments from the QALICB together with the leverage loan interest service that financing.

Post-Exit Ownership

After exit, the QALICB's remaining obligation is Loan A, which is paid off or amortized under the terms of the sources that funded the leverage loan. The CDE's role ends, and the QALICB sponsor controls the project free of NMTC compliance requirements. The property can then be operated, sold, or refinanced without NMTC restrictions. The permanent subsidy is embedded in the capital stack: the project was built or rehabilitated with capital that was partially funded by Loan B, and that loan no longer exists.

OBBBA Permanence: What Changed

Before the One Big Beautiful Bill Act (OBBBA) was signed on July 4, 2025, the $5 billion annual allocation limitation in IRC Section 45D(f)(1)(H) applied only to calendar years 2020 through 2025, so the program's allocation authority had a fixed end date and needed Congressional action to continue.

Section 70423 of the OBBBA (Pub. L. 119-21) struck "for each of calendar years 2020 through 2025" from Section 45D(f)(1)(H) and inserted "for each calendar year after 2019," which keeps the $5 billion annual limitation in place with no end date. It applies to calendar years beginning after December 31, 2025. The CDFI Fund fact sheet likewise states that the program was made permanent in 2025. The section also changed the carryover rule in Section 45D(f)(3): unused limitation can be carried forward no later than the fifth calendar year after the year in which the excess occurred. This change has practical implications for deal structuring:

Deal Pipeline Stability

Because the $5 billion annual limitation no longer has an end date, CDEs can plan multi-year deployment strategies without the allocation authority itself expiring before their pipelines mature. This is particularly relevant for large community facility projects that require extended predevelopment periods.

Annual Allocation Continuity

The statutory limitation of $5 billion per calendar year continues. When the CDFI Fund holds allocation rounds, and how many calendar years each round covers, is the CDFI Fund's decision: the calendar year 2024-2025 round awarded $10 billion, covering two calendar years, and requests were about 1.9 times the amount awarded. What has changed is that the annual limitation no longer has an end date.

Stacking with Other Credits

One of the most frequent questions in community development finance is whether NMTCs can be combined with other federal tax credits on the same project. The answer depends on the specific credit being considered.

NMTCs and LIHTCs: Not on the Same Residential Rental Property

NMTC financing cannot be used for the residential rental portion of a project. Under the Treasury regulations, the rental of real property in a low-income community is a qualified business only if the property is not residential rental property as defined in IRC Section 168(e)(2)(A) (Treas. Reg. 1.45D-1(d)(5)(ii); see also IRC Section 45D(d)(3)). Because LIHTC housing is residential rental property, NMTC cannot finance it. CRA states the rule in square-footage terms: NMTC financing cannot finance any square feet to the extent LIHTCs finance those square feet. The exclusion is limited to residential rental use; the CDFI Fund fact sheet lists affordable housing among the project types the program supports.

The practical consequence is that the residential rental component of a project uses LIHTC, while commercial, community facility, manufacturing, healthcare, and education projects use NMTC. Mixed-use projects can use NMTC for the non-residential components, usually in a separate entity from the LIHTC housing entity, but this requires careful structuring and separate compliance regimes for each entity.

NMTCs and Historic Tax Credits: Stackable

NMTCs and Historic Tax Credits (HTCs) can be used on the same project. This combination is common in the rehabilitation of historic commercial buildings in low-income census tracts, and CRA lists historic tax credit financing among the subsidies used with NMTC financing. The HTC provides a 20% credit on qualified rehabilitation expenditures, claimed ratably over a five-year period (IRC Section 47(a)), while the NMTC provides the 39% credit on the QEI. The two credits operate independently: the HTC is calculated on rehabilitation costs, while the NMTC is calculated on the QEI.

NMTCs and Renewable Energy Credits

NMTCs can also be combined with renewable energy tax credits, such as the Investment Tax Credit (ITC) for solar installations. If a qualifying NMTC project includes a rooftop solar installation, the solar component can generate ITC credits while the overall project generates NMTC credits. Each credit is calculated on a different cost basis: the ITC is calculated on the cost of the solar equipment, and the NMTC is calculated on the QEI. The solar rules changed in 2025. The OBBBA added IRC Section 48E(e)(4), under which the clean electricity investment credit does not apply to qualified property placed in service after December 31, 2027 that is part of a wind or solar facility, for facilities whose construction begins after July 4, 2026 (12 months after enactment) (Pub. L. 119-21 Section 70513). The complexity of the resulting transaction structure also increases significantly.

Key Stacking Rule

The general principle: NMTC can finance only a qualified business, and the rental of real property is a qualified business only if the property is not residential rental property. LIHTC housing is residential rental property, so NMTC cannot finance that portion. HTCs require rehabilitation of historic structures (not an excluded activity), so they can be combined with NMTC. Solar installations are not an excluded activity either, subject to the OBBBA changes above. The analysis always returns to the QALICB exclusion list.

How to Model It

Modeling an NMTC leveraged transaction requires a different approach than modeling a conventional acquisition or development deal. The capital stack includes parties and flows that do not exist in market-rate transactions, and the net subsidy calculation depends on assumptions about CDE fees, leverage ratios, and exit mechanics that must be negotiated for each deal.

Sources and Uses

The sources side of an NMTC capital stack includes the QLICI proceeds (split into Loan A and Loan B), any conventional senior debt not funded through the NMTC structure, QALICB sponsor equity, and potentially other subsidies (state or local grants, historic tax credit equity if stacking). The uses side includes land, hard construction costs, soft costs, NMTC transaction costs (legal, accounting, CDE fees), reserves, and developer fee.

A common modeling error is to show the full QEI as a source. The QEI is not a source to the QALICB; the QLICI is. The QEI flows from the Investment Fund to the CDE, and the QLICI flows from the CDE to the QALICB. In the worked example the QLICI is 85% of the QEI (after the CDE's retained amount). Showing the QEI as a direct source overstates the capital available to the project by $1.5M, about 18% of the $8.5M QLICI.

Net Subsidy Waterfall

The net subsidy waterfall should be a separate tab in the model that calculates the permanent benefit to the QALICB. Start with the gross QLICI received. Subtract QLICI Loan A, the leverage-funded portion, which is repaid at exit and retires the leverage loan. The remainder is Loan B, the forgivable portion. Subtract the QALICB's own transaction costs (legal, accounting, structuring) and the interest paid on Loan B. The remainder is the net subsidy. Do not deduct the CDE's retained fees a second time: they are already excluded from the QLICI. Treat leverage loan interest as an Investment Fund item and confirm that the Fund's cash flows balance, with Loan A interest covering the leverage loan interest.

Sensitivity Analysis

The key variables to stress-test in an NMTC model are: the credit price (which sets the investor's equity and so the size of Loan B), the amount the CDE retains, the QLICI percentage above the 85% floor, the QALICB's transaction costs, the Loan B interest rate, and the Loan A rate relative to the leverage loan rate (the Fund has an interest shortfall if the leverage loan costs more than Loan A pays). In the worked example, each $0.05 change in the credit price changes the investor's equity by $195,000 (1.95% of the QEI) and the net subsidy by $181,350 (about 1.8% of the QEI) after the change in Loan B interest.

Integration with Conventional Debt

Most NMTC real estate projects also carry conventional senior debt outside the NMTC structure. The model must show how the QLICI interacts with the senior loan: the QLICI is typically subordinate to the senior loan, and the QLICI terms (interest rate, repayment schedule) must be structured so that the project's cash flow can service both the senior debt and the QLICI interest during the compliance period. After exit, when Loan B is forgiven, the project's debt burden decreases by the forgiven amount, and the property's debt service coverage ratio improves.

Related Articles

This article is part of the tax credits series within the deal structures knowledge base. Each article covers a specific credit program or structuring technique:

• Historic Tax Credits and Qualified Rehabilitation Expenditures. The 20% HTC for certified historic structures, including how to calculate QREs and layer with NMTCs.
• Layering Multiple Credits: LIHTC, HTC, and NMTC. Which credits stack, which are mutually exclusive, and how to structure multi-credit transactions.
• Solar ITC and Investment Tax Credits for Real Estate. How renewable energy credits interact with real estate development and other tax credit programs.
• Section 45L Energy Credits for Multifamily. Energy-efficient new construction credits and their role in the affordable and market-rate capital stack.
• LIHTC 101: 4% vs 9% Credits. The foundational LIHTC guide, including credit calculation, allocation process, and when to use each credit type.

Sources

• 26 U.S.C. Section 45D, New markets tax credit (2024 edition, U.S. Government Publishing Office)
• 26 CFR Section 1.45D-1, New markets tax credit (eCFR)
• 26 U.S.C. Section 168(e)(2)(A), residential rental property (Cornell LII)
• 26 U.S.C. Section 47, Rehabilitation credit (Cornell LII)
• Pub. L. 119-21, Sections 70423 and 70513 (U.S. Government Publishing Office)
• U.S. Government Accountability Office, GAO-07-296, New Markets Tax Credit Appears to Increase Investment by Investors in Low-Income Communities, but Opportunities Exist to Better Monitor Compliance (January 2007)
• Community Reinvestment Associates, NMTC Financing for Borrowers
• CDFI Fund, New Markets Tax Credit Program Fact Sheet
• CDFI Fund, New Markets Tax Credit Program
• Forvis Mazars, New Markets Tax Credit Program Allocation Announcement (January 2026)