With the new round of New Markets Tax Credit “NMTC” allocations anticipated to be announced within the next month, a new flurry of New Markets Tax Credit transaction activity may be on the horizon. This blog entry is intended to be a primer for anyone who is new to NMTC transactions. While there are several types of NTMC transaction structures, the structure reviewed here is the “leveraged” structure.

Who are the players?

In a leveraged transaction there are typically four groups of players involved. The players are: (i) a traditional lender (think bank or other lending institution – this entity is often referred to as the “Bridge Lender”), (ii) an equity investor (which could be a specialized division of a bank, but not necessarily – no fancy name for this entity), (iii) the Community Development Entity (the “CDE” or once credits have been allocated, the “Allocatee“) that has been allocated the tax credits by the Community Development Financial Institutions Fund (“CDFI“), and (iv) the property owner/developer, which owns or is a Qualified Active Low-Income Community Business ( the “QALICB“), and typically has some common ownership or control with an entity often known as the “Leverage Lender.”

How does the money get to the QALICB?

The Bridge Lender makes a loan (often referred to as the “Bridge Loan“) to the Leverage Lender. The equity investor creates a new single purpose limited liability company or partnership (the “Investment Fund“) and makes an equity contribution to the Investment Fund. Concurrently, the Leverage Lender makes a loan to the Investment Fund, which to the confusion of many can be known as a “Leverage Loan” or a “Fund Loan.”

The Investment Fund takes the proceeds of the Leverage Loan and the equity investment and in turn makes an equity contribution to the CDE/Allocatee (or more typically, an affiliate of the CDE which is most often referred to as the “Sub-CDE“). The Sub-CDE designates the equity contribution it receives from the Investment Fund as a “qualified equity investment” or “QEI“). The Sub-CDE subsequently makes a loan to the QALICB. If all of the legal requirements are satisfied, this loan is a Qualified Low Income Community Investment or a “QLICI.” For that reason, the loan from the Sub-CDE to the QALICB is typically referred to as a QLICI Loan.

How does the Bridge Lender get repaid and the equity investor receive its credits?

The QALICB operates is business in a manner such that it is able to repay the QLICI Loan on schedule. The Sub-CDE, which is owned (typically 99.99%) by the Investment Fund, is in turn able to pay a return on the investment made by the Investment Fund. The Investment Fund uses the funds to repay the Leverage Loan (which in turn is used for repayment of the Bridge Loan) and to provide the equity investor with a return on its equity. Importantly, the Investment Fund is typically owned 100% by the equity investor and is disregarded for federal income tax purposes. The effect of being disregarded for federal tax purposes is that the tax credits that the Investment Fund is eligible to claim, as the maker of the QEI, can be directly claimed by the ultimate equity investor and the equity investor can reduce its tax liability by the amount of credits received.


It takes a bit of time to work through the mechanics of the transaction structure; however, one of the most fulfilling aspects of closing each NMTC transaction is knowing that the parties have all helped a business that has made a conscious effort to operate in a low-income community.