Understanding IRC §45D: How the New Markets Tax Credit Fuels Community Development

A permanent, powerful federal incentive for community-impact real estate.

Since its creation, the New Markets Tax Credit (NMTC) has directed billions of dollars into economically distressed communities across the United States. Although still underutilized, the program has helped finance essential projects such as grocery stores, health and dental clinics, workforce training centers, manufacturing facilities, childcare and early learning centers, nonprofit headquarters, and mixed-use developments. With recent legislative changes, the NMTC is now permanent, offering developers and investors an unprecedented level of predictability.

The NMTC provides investors with a 39% federal income tax credit for making a Qualified Equity Investment (QEI) into a certified Community Development Entity (CDE). The credit is claimed over seven years — 5% annually during the first three years and 6% annually during the final four — while the CDE deploys those funds as Qualified Low-Income Community Investments (QLICIs) into eligible businesses and real estate projects located in low-income census tracts.

In nearly every NMTC transaction, the investor is a bank or large financial institution. They participate because the program offers reliable federal tax savings, meaningful Community Reinvestment Act (CRA) credit, strong risk-mitigated structures, and visible community impact. Most transactions use the well-established leverage structure, allowing investors to receive credits on the full QEI while developers benefit from significantly more affordable financing.

Consider a simple example: an investor provides $3 million in equity, combines it with a $7 million leverage loan, and places a total of $10 million into a CDE. That full amount qualifies for the NMTC, generating $3.9 million in federal credits. Those dollars then flow into the project through two QLICI loans: a senior A-loan with favorable terms and a subordinate B-loan with extremely low interest rates, interest-only payments, and, in many cases, partial or full forgiveness after the seven-year compliance period. This structure routinely reduces the effective cost of capital by 20% to 25%, creating feasibility for projects that traditional financing cannot support.

For developers, NMTC financing often includes below-market interest rates, interest-only payments for seven years, flexible underwriting, longer lease-up periods, and soft subordinate debt. These features make the program ideal for essential but low-margin community assets such as food access projects, childcare facilities, small business incubators, and healthcare or educational spaces.

For banks, the benefit goes far beyond the tax credits themselves. Under the Community Reinvestment Act, banks are evaluated on how well they serve low- and moderate-income communities. Since NMTC projects are located in qualifying census tracts and create measurable community outcomes, banks frequently receive positive CRA credit for their participation. In many transactions, the same bank acts as both the tax-credit investor and the leverage lender, which streamlines underwriting, improves internal return, and simplifies the overall financing flow. While this is common, leverage loans may also come from CDFIs, city loan funds, or even the project sponsor depending on the capital stack.

Some smaller or mission-specific projects use an all-equity structure without leverage. While simpler, these deals usually generate a smaller net subsidy, which is why most large or complex developments still rely on the leverage model to maximize impact.

Recent legislative changes have strengthened the NMTC program significantly. The most notable change is permanency. The program no longer carries sunset dates or requires periodic renewal by Congress. Annual allocations now total $5 billion, providing more opportunities and long-term consistency. Permanency has also improved credit pricing as investor demand has increased. Although inflation indexing for credit percentages and AMT relief were not included in the latest legislation, investor appetite remains strong.

The NMTC is one of the rare areas where federal tax policy, community development, and real estate finance intersect. Developers gain access to substantially cheaper capital and improved feasibility; banks receive a blend of federal tax savings and CRA credit; and communities benefit from essential services, job creation, and long-term economic revitalization. Since the program is now permanent, NMTCs should be considered early in a project’s feasibility review and capital-stack planning, especially for mixed-use and mission-driven developments.

Finally, NMTC transactions require careful structuring and strict compliance across the seven-year credit period. They involve multi-party agreements, specific deployment and testing requirements, recapture risk, and a detailed year-seven unwind. Engaging experienced tax counsel early helps maximize available subsidy, avoid compliance pitfalls, coordinate with CDEs and investors, and ensure the transaction is built correctly from the outset.