What Are New Markets Tax Credits?

New Markets Tax Credits (NMTC) are a powerful tool to attract investments into low-income communities with the goal of revitalizing the local economy. A project receives an investment of cash from a business looking to a double bottom line: to lower its taxes and directly assist in economic development.

Projects must be in qualified census tracts, or otherwise have a high proportion of clients, employees or owners must be low-income people.

Functional Components

The chart below provides an overview of the components involved in NMTC funding. Click on the chart for a large view.

NMTC explained. Click for full-size.

Loan Guarantees

The Alaska Legislature passed HB12/SB66, which allows the Alaska Industrial Development and Export Authority (AIDEA) to provide loan guarantees for NMTC projects. AIDEA will not provide loans directly, however this guarantee should drastically improve the terms on which lenders will engage in NMTC transactions.

Lenders do not hold a direct security interest in the NMTC project, so their ability to participate in an NMTC transaction can be limited due to their fiduciary obligations. The surety of an AIDEA guarantee should allow lenders to provide more advantageous loans to economic development projects.

What Can NMTC Money Be Used For?

New Markets Tax Credits are an incredibly flexible financing tool. Nearly everything that spurs economic development can be financed: for-profit businesses, medical clinics, real estate development, non-profit service centers, and more. New Markets Tax Credits are often times used to fill the “gap” left when traditional financing falls short.

Exclusions

There are restrictions on “sin” and luxury businesses such as alcohol sales, gambling houses, massage parlors, golf courses and country clubs which are among the main excluded businesses. Other exclusions include investment businesses as well as farming and housing businesses.