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A tax credit is a dollar-for-dollar reduction in the amount of tax a person or company owes. In many cases, governments use tax credits to encourage certain activities or investments that benefit the public. For individuals, a familiar example was the federal electric vehicle tax credit, which allowed buyers of qualifying electric cars to reduce their federal taxes by up to $7,500.
"The New Markets Tax Credit (NMTC) is a federal tax credit program created in 2000 to encourage private investment in economically distressed communities."
For companies, tax credits often come from investing money in approved projects or businesses. In the context of real estate projects, their investment helps lower the cost for the project developer, and in return the company receives tax credits that it can use over several years. In community development, some of the most common tax credit programs include the Low-Income Housing Tax Credit (LIHTC), the Historic Tax Credit (HTC), and the New Markets Tax Credit (NMTC). These programs help finance affordable housing, preserve historic buildings, and support investment in underserved communities.
The New Markets Tax Credit (NMTC) is a federal tax credit program created in 2000 to encourage private investment in economically distressed communities. Administered by the U.S. Treasury’s Community Development Financial Institutions (CDFI) Fund, it provides investors with a tax credit in exchange for making equity investments in Community Development Entities (CDEs). These CDEs then use the capital to finance projects that stimulate economic growth, job creation, and access to essential services in underserved areas. After years of being a temporary program, NMTC was made a permanent provision in the tax code in mid-2025, with $5 billion in tax credits available annually. As with many federal programs, funding priorities and program provisions may evolve with changing administrations.
CDEs must apply to the CDFI Fund to receive an allocation of NMTCs. Once awarded an allocation, a CDE focuses on financing projects that deliver significant community benefits and that would have faced substantial barriers to securing capital without NMTC support. CDEs frequently engage with project sponsors early in the development process to help structure the full capital stack and clearly define the project’s anticipated community impacts. They also collaborate with sponsors to identify NMTC equity investors—most often banks.
Project sponsors can generally expect NMTC equity to cover roughly 20%–28% of total project costs, requiring them to secure additional debt, grants, or equity to complete the financing. NMTC equity is combined with these other sources and delivered to the project through a series of below-market loans. In exchange for their equity investment, investors receive tax credits equal to 39% of their investment, claimed over a seven-year period. After year seven, the investment is typically unwound, resulting in a permanent subsidy to the project.
NMTCs can fund business expansions, commercial real estate developments, and community facilities such as healthcare centers, schools, and childcare centers. Projects must be located in a qualified census tract and must be able to demonstrate that they will be able to create jobs or provide essential community services. The primary purpose of the NMTC program is to increase investment in low-income and distressed communities and spur economic growth, job creation and neighborhood revitalization.
Because CDEs are the only organizations that can apply for and deploy New Markets Tax Credits, anyone interested in using the NMTC program—whether a local government, economic development agency, nonprofit or for-profit developer, operating business, or community institution—must partner with a CDE to advance a potential project. A practical first step is to identify which census tracts in your community qualify for NMTC investment and begin assessing projects that could deliver meaningful, measurable benefits to local residents.
Early engagement with CDEs is essential. CDEs must demonstrate a strong pipeline of eligible projects in their applications to the CDFI Fund, and connecting with them early increases the likelihood that your project will be considered for inclusion. It also gives CDEs the opportunity to provide feedback on project design, community impacts, and financing structure—insight that can significantly strengthen your project’s competitiveness with both CDEs and potential investors. Keep in mind that NMTC projects typically take several years to move from concept to completion. However, when well-aligned with community needs and supported by the right partners, the long-term benefits can be transformative.
The Eastern Shore Conservation Center brings new life to a complex of long-vacant historic buildings in Easton, Maryland. The 23,000 sq. ft. campus is a hub for environmental nonprofit organizations, anchored by Eastern Shore Land Conservancy. ESLC’s mission is to preserve and sustain the vibrant communities of Maryland’s Eastern Shore and the lands and waters that connect them. Along with its headquarters, the center also houses the Chesapeake Bay Foundation, Nature Conservancy and several other nonprofit organizations, as well as public gathering space, a café and four workforce rental apartments. The renovated buildings meet both historic and green building standards. The project was well-aligned with the Town of Easton’s smart growth strategy and connects to other efforts to revitalize the west side of town, home to several low-income neighborhoods. The project received a $6 million NMTC allocation from a national CDE. The allocation was an important part of the capital stack, providing resources in the face of challenges posed by an appraisal gap and leasing concerns.
Nancy Wagner-Hislip serves as Chief of Consulting at Neighborworks. She has more than 30 years of community development experience, including a long tenure at Reinvestment Fund where she most recently served as its Chief Investment Officer. Nancy managed a $700 million loan and investment portfolio and drove annual originations in excess of $200 million. In this role, she was responsible for all aspects of the lending business, including business planning, new business development, loan origination, asset management, lending enterprise risk management, and capitalization.
This resource was created for educational purposes only as part of the Rural & Small Cities Program, with the support of the Robert Wood Johnson Foundation. The views and perspectives presented in this resource are those of the author and the Public Finance Initiative team. The Public Finance Initiative acknowledges staff members Katy Hansen, Lourdes German, Peter Hamlin, and Haley Mulligan for their contributions to this resource.
