NEW MARKETS TAX 

CREDIT

Better Controls and 

Data Are Needed to 

Ensure Effectiveness

Report to the Ranking Member, 

Committee on Homeland Security and 

Governmental Affairs, U.S. Senate

July 2014

GAO-14-500

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-14-500, a report to the 

Ranking Member, Committee on Homeland 

Security and Governmental Affairs, U.S. 

Senate

July 2014

NEW MARKETS TAX CREDIT

Better Controls and Data Are Needed to Ensure 

Effectiveness

Why GAO Did This Study

In recent years, private investors have

claimed more than $1 billion in NMTCs

annually. The credits are combined 

with private loans and other public 

funds to support investments in lowincome communities. GAO was asked 

to review the financial structure of 

NMTCs.

This report assesses: (1) the 

complexity and transparency of NMTC 

financial structures and controls over 

the size of federal subsidies; (2) what 

is known about the types and amounts 

of fees and other costs of the financial 

structures; (3) what is known about the 

equity remaining in low-income 

community businesses after the 7-year 

credit period; and (4) what is known 

about NMTC project failure rates. GAO 

reviewed Treasury NMTC data and 

surveyed CDEs that allocated credits 

to 305 projects in 2010-2012. 

What GAO Recommends

Treasury should issue further guidance 

on how other government programs 

can be combined with NMTCs; ensure 

adequate controls to limit the risks of 

unnecessary duplication and abovemarket rates of return; and ensure that

more complete and accurate data are

collected on fees and costs, the equity 

remaining in the business after 7 

years, and loan performance.

Treasury agreed with GAO’s

recommendations to improve data 

collection on equity remaining and loan 

performance. Treasury said that a 

recently formed working group, that 

includes representatives from the 

Community Development Financial 

Institutions Fund and the Internal 

Revenue Service, is considering 

GAO’s other recommendations. 

What GAO Found

The financial structures of New Markets Tax Credit (NMTC) investments have 

become more complex and less transparent over time. The increased complexity 

is due, in part, to combining the NMTC with other federal, state, and local 

government funds. Based on GAO’s survey of Community Development Entities 

(CDEs) an estimated 62 percent of NMTC projects received other federal, state, 

or local government assistance from 2010 to 2012. While combining public 

financing from multiple sources can fund projects that otherwise would not be 

viable, it also raises questions about whether the subsidies are unnecessarily 

duplicative because they are receiving funds from multiple federal sources. In 

addition, in some cases the complexity of the structures may be masking rates of 

return for NMTC investors that are above market rates. For example, a study 

done for the Department of the Treasury (Treasury) found an investor apparently 

earning a 24 percent rate of return, which is significantly above market rates of 

return. In that case, the investor leveraged the NMTCs by using other public 

funds to increase the base for claiming the NMTC. Treasury and the Internal 

Revenue Service issued guidance about allowable financial structures in the 

early years of the NMTC program, but the guidance has not been updated to 

reflect the subsequent growth in complexity, such as the use of other public 

money to leverage the NMTC. Treasury also does not have controls to limit the 

risk of unnecessary duplication in government subsidies or above market rates of 

returns. Without such guidance and controls the impact of the NMTC program on 

low-income communities could be diluted. 

The costs of complex NMTC financial structures may not be fully reflected in fees

charged by CDEs, and they could be reflected in other costs such as higher 

interest rates. Treasury has taken steps to ensure businesses are better 

informed about fees and other costs, but is not collecting these additional data 

itself. Without these data, Treasury is limited in its ability to analyze NMTC 

program benefits. 

GAO also found that the data on equity remaining in businesses after the 7-year 

credit period were unreliable because, in part, instructions on what to report are 

unclear. As a result, at this time it is not possible to determine how much equity 

remains in low-income community businesses after 7 years.

Similarly, data on NMTC project failure rates were unavailable. GAO reviewed 

data of performance on loans from CDEs to low-income community businesses

as an indicator of whether the businesses will be viable over the long term. 

However, data on loan performance were also incomplete because some

reporting of this information by CDEs is optional. As a result, it is not possible to 

determine, at this time, the NMTC project failure rate with certainty.

View GAO-14-500. For more information, 

contact James R. White at (202) 512-9110 or 

whitej@gao.gov. 
Page i GAO-14-500 New Markets Tax Credit Update

Letter 1 

Background 3

The Financial Structures of NMTC Investments Have Become 

More Complex and Less Transparent While Treasury Guidance 

Covers Only the Simpler Structures 5

Fees and Retentions Reduce the Available NMTC Equity but Lack 

of Transparency Makes the Size of the Reduction Uncertain 15

Data on NMTC Equity Remaining in the Low-Income Community 

Businesses Are Not Sufficiently Complete or Accurate 19

CDFI Fund Data on Distressed Projects Are Not Sufficiently 

Reliable 21

Conclusions 24

Recommendations for Executive Action 25

Agency Comments and Our Evaluation 25

Appendix I: Objectives, Scope, and Methodology 27

Appendix II: Other Federal Funding Used in New Markets Tax Credit Projects 33

Appendix III: Regression Analysis of Total Fees and Retentions Associated with 

Characteristics of the Project Using CDFI Fund Data, 2011-2012 36

Appendix IV: Comments from the Department of the Treasury 37

Appendix V: GAO Contact and Staff Acknowledgments 41

Related GAO Products 42

Contents
Page ii GAO-14-500 New Markets Tax Credit Update

Tables

Table 1: Estimated Percentage of Projects Receiving Other 

Federal Funding (Projects Originating in 2010-2012) 12

Table 2: New Markets Tax Credit (NMTC) Investment Retained 

and Fees Charged by Community Development Entities 

(CDEs), 2011-2012 17

Table 3: Project Characteristics Associated with Fees and 

Retentions Charged by Community Development Entities 

(CDEs), 2011-2012 18

Table 4: Other Federal Tax Credits Used in a Sample of New 

Markets Tax Credit (NMTC) Projects, 2010-2012 33

Table 5: Tax Exempt Bond Financing Used in a Sample of New 

Markets Tax Credit (NMTC) Projects, 2010-2012 34

Table 6: Grants or Direct Payments Used in a Sample of New 

Markets Tax Credit (NMTC) Projects, 2010-2012 34

Table 7: Direct Loans or Guaranteed Loans Used in a Sample of 

New Markets Tax Credit (NMTC) Projects, 2010-2012 35

Figures

Figure 1: Simplified Example of a New Markets Tax Credit 

(NMTC) Basic Model 6

Figure 2: Simplified Example of New Markets Tax Credit (NMTC) 

Investment Leveraged with Private Funds 7

Figure 3: Simplified Example of a New Markets Tax Credit 

(NMTC) Investment Combined with (but Not Leveraged 

by) Other Public Funds 8

Figure 4: Simplified Example of New Markets Tax Credit (NMTC) 

Investment Leveraged with Both Private and Public 

Funds 9

Figure 5: Number of Projects by Total Retentions and Fees 

Charged as a Percentage of Total New Markets Tax 

Credit (NMTC) Investment, 2011-2012 19

Figure 6: Data Quality for Amounts of Equity Projected to Remain 

in the Low-Income Community Businesses, 2011-2012 21
Page iii GAO-14-500 New Markets Tax Credit Update

Abbreviations

CDE Community Development Entity 

CDFI Community Development Financial Institutions 

CIIS Community Investment Impact System 

HTC historic tax credit

IRS Internal Revenue Service 

LIC low-income community

LIHTC Low-Income Housing Tax Credit 

NMTC New Markets Tax Credit 

QEI qualified equity investment

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Page 1 GAO-14-500 New Markets Tax Credit Update

441 G St. N.W.

Washington, DC 20548

July 10, 2014

The Honorable Tom Coburn, M.D.

Ranking Member

Committee on Homeland Security and Governmental Affairs

United States Senate

Dear Dr. Coburn:

Congress established the New Markets Tax Credit (NMTC) program as 

part of the Community Renewal Tax Relief Act of 2000 to encourage 

investors to invest in impoverished, low-income communities that 

traditionally lack access to capital.1

The NMTC program is administered by the Community Development

Financial Institutions (CDFI) Fund in the Department of the Treasury 

(Treasury) which allocates tax credit authority—the amount of investment 

which investors use as the base for determining the amount of tax credits 

they are eligible to claim—to Community Development Entities (CDE) that 

apply for and obtain allocations. These CDEs in turn offer the tax credits 

to private investors in exchange for equity investments with the CDEs. 

The CDEs then invest the capital they raise in qualified low-income 

community businesses. The resulting NMTC financial structures include 

the CDEs, investors, and qualified low-income community businesses—

as well as the transactions between them—and may also include private 

loans and funding from other government programs.

Conventional access to credit and 

investment capital for developing small businesses, creating and retaining 

jobs, and revitalizing neighborhoods is often limited in economically 

distressed communities or in communities with large low-income 

populations. The NMTC provides investors (individuals, financial 

institutions, other corporations, etc.) with a tax credit for investing in 

communities that are economically distressed or consist of low-income 

populations. The investors are able to claim a credit equal to 39 percent 

of eligible investment spread over 7 years.

 

1

Pub. L. No.106-554, § 121, 114 Stat. 2763 (2000) codified at 26 U.S.C. § 45D.
 

Page 2 GAO-14-500 New Markets Tax Credit Update

We have issued three reports on the status and initial results of the 

NMTC program.2

Our assessment criteria for objective 1 were drawn from our prior work 

evaluating tax expenditures, which discuss complexity (or simplicity), 

transparency, and duplication, as well as from internal control standards 

about the efficient use of resources.

You asked us to follow up on these reports and review 

the NMTC financial structures and the amount of equity investment 

flowing through to qualified low-income community businesses. Our 

objectives were to assess: (1) NMTC financial structures in terms of their 

complexity, transparency, and their effect on the size of the federal 

subsidies going to NMTC projects, as well as controls to ensure that 

subsidies are not larger than necessary for the investment; (2) what is 

known about the types and amounts of fees and other costs that reduce 

the amount of equity reaching low-income community businesses; (3) 

what is known about the amount of equity left in the low-income 

community businesses after the 7-year credit period; and (4) what is 

known about the NMTC projects that are at risk of failing by becoming 

economically nonviable.

3 For objective 1, we reviewed the 

NMTC literature and interviewed representatives of CDEs and 

researchers who have evaluated the program to determine how the 

financial structures have evolved, and conducted and analyzed the 

results of a survey of CDEs to determine how the NMTC has been 

combined with other federal tax benefits, grants, and other assistance.4

 

2

See list of related GAO products at the end of this report. 

Our criteria for objectives 2, 3, and 4 were GAO criteria for valid data—

that they be sufficiently accurate and complete to capture program 

performance. For objective 2, we analyzed data from the CDFI Fund on 

fees (actual and projected) that CDEs charged to projects with loans and 

investments originating in 2011 and 2012. (The CDFI Fund started 

collecting these additional data on fees in 2011 based on our 

3

For more detail on these criteria, see GAO, Tax Expenditures: Background and 

Evaluation Criteria and Questions, GAO-13-167SP (Washington, D.C.: Nov. 29, 2012); 

GAO, Understanding the Tax Reform Debate: Background, Criteria and Questions, 

GAO-05-1009SP (Washington, D.C.: Sept. 1, 2005); and GAO, Standards for Internal 

Control in the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: Nov. 1, 

1999). 

4

All estimates based on our survey are subject to sampling error. For percentage 

estimates, the 95 percent confidence intervals are within +/- 7 percentage points of the 

estimate itself.
 

Page 3 GAO-14-500 New Markets Tax Credit Update

recommendation.

5

We conducted this performance audit from May 2013 to July 2014 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives. See appendix I for more 

details about our scope and methodology.

) For objective 3, we analyzed data from the CDFI 

Fund on the projected equity remaining in the business for projects 

beginning in 2011-2012. The CDFI Fund requires CDEs to project equity 

remaining in businesses for loans and investments originating in 2011 or 

later. For objective 4, we analyzed data reported by CDEs to the CDFI 

Fund that could indicate that a project is experiencing financial distress, 

such as whether a loan on a project is delinquent, charged off, or 

restructured.

The CDFI Fund is authorized to allocate tax credit authority to CDEs that 

manage NMTC investments in low-income community development 

projects. The CDEs are domestic corporations or partnerships with a 

primary mission of providing investment capital for low-income 

communities or low-income persons. Some CDEs are established by 

other public or private entities, such as local governments or financial 

institutions. Through the CDFI Fund, Treasury awards tax credit authority 

to CDEs through a competitive application process. After CDEs are 

awarded tax credit authority, they use it to attract investments from 

investors who then claim the NMTC. CDEs use the money raised to make 

investments in projects (one or more) in low-income communities. In the 

11 rounds of allocations since 2003, Treasury, through the CDFI Fund, 

has made allocations to CDEs that total $40 billion.

The base for claiming the credit on a project is called the qualified equity 

investment (QEI). It equals the credit authority allocated to a project by a 

CDE and generally covers a portion of the total project costs. The equity 

in the QEI includes money provided by NMTC investors but may also 

 

5

GAO, New Markets Tax Credit: The Credit Helps Fund a Variety of Projects in LowIncome Communities, but Could Be Simplified, GAO-10-334 (Washington, D.C.: Jan. 29, 

2010).

Background
 

Page 4 GAO-14-500 New Markets Tax Credit Update

include money from private lenders or other government entities. The 

NMTC, which is equal to 39 percent of the QEI, is claimed over 7 years—

5 percent in each of the first 3 years and 6 percent over each of the last 4 

years. In recent years, private investors have claimed more than $1 billion 

in NMTCs annually. When the QEI does not cover the entire project cost, 

the NMTC financing is supplemented by other financing outside the 

NMTC allocation.

CDEs are required to invest the funds they receive in qualified lowincome community investments, which include, but are not limited to, 

investments in operating businesses and residential, commercial, and 

industrial projects. Although the range of activities financed by CDEs 

varies, about half of NMTC investments have been used for commercial 

real estate projects. The program expired in 2013 but legislation has been 

proposed to extend it, and the President requested a permanent 

extension in his fiscal year 2015 budget proposal.6

 

6

At the time of this report’s publication, there are many bills pending in Congress that 

would extend the expired NMTC. For example, the Senate had begun floor debate on 

S.2260, which would extend the NMTC through 2015. The House of Representatives had

yet not begun considering H.R.3939 or H.R.4365, which would permanently extend the 

credit.
 

Page 5 GAO-14-500 New Markets Tax Credit Update

NMTC investors have developed financial structures that increase the 

amount of other funding from either private or public sources that are 

used with the NMTC—a process that is called increasing the leverage on 

the investment. These structures can increase the amount of federal 

subsidy to a project and can result in projects being undertaken that 

would not otherwise have been started for lack of sufficient funding. 

However, they also increase the complexity of the financial structures by 

adding more parties and more transactions, which in turn reduces 

transparency and may increase the cost in terms of fees and other related 

transactions costs. An assessment of the NMTC program as a whole 

requires complete information on all the costs and benefits attributable to 

the NMTC, including these administrative and compliance costs.7

Figures 1-4 are simplified illustrations of these increasingly complex 

financial structures.8

 

7

For a discussion of the criteria appropriate for evaluating tax expenditures such as the 

NMTC, see GAO, Tax Expenditures: Background and Evaluation Criteria and Questions, 

 

GAO-13-167SP (Washington, D.C.: Nov. 29, 2012). 

8

The simplified examples focus on the revenue effects of the NMTC and are not intended 

to be estimates of the credit’s total revenue cost. For example, they do not reflect other tax 

liabilities that investors may incur on the credit claimed that would reduce the revenue 

cost. For estimates of NMTC revenue costs, see U.S. Congress Joint Committee on 

Taxation, Estimated Revenue Effects of the Revenue Provisions Contained in the "Family 

and Business Tax Cut Certainty Act of 2012,” as reported by the Senate Committee on 

Finance, Aug. 29, 2012, JCX-71-12.

The Financial 

Structures of NMTC 

Investments Have 

Become More 

Complex and Less 

Transparent While 

Treasury Guidance 

Covers Only the 

Simpler Structures
 

Page 6 GAO-14-500 New Markets Tax Credit Update

Figure 1: Simplified Example of a New Markets Tax Credit (NMTC) Basic Model

a

This rate of return represents the internal rate of return of the $10 million investment in terms of the 

value of the tax credits. The tax credit is 5 percent of the investment amount in each of the first 3 

years and 6 percent in each of the last 4 years during the 7-year compliance period.
 

Page 7 GAO-14-500 New Markets Tax Credit Update

Figure 2: Simplified Example of New Markets Tax Credit (NMTC) Investment 

Leveraged with Private Funds

a

The investor’s risk is largely limited to “recapture” risk where the IRS reclaims credits from prior 

years as well as future credits due to issues related to CDE compliance with IRS regulatory 

requirements. See GAO, New Markets Tax Credit: The Credit Helps Fund a Variety of Projects in 

Low-Income Communities, but Could Be Simplified, GAO-10-334 (Washington, D.C.: Jan. 29, 2010) 

for a description of the events that can trigger a “recapture” of the credit.
 

Page 8 GAO-14-500 New Markets Tax Credit Update

Figure 3: Simplified Example of a New Markets Tax Credit (NMTC) Investment 

Combined with (but Not Leveraged by) Other Public Funds
 

Page 9 GAO-14-500 New Markets Tax Credit Update

Figure 4: Simplified Example of New Markets Tax Credit (NMTC) Investment 

Leveraged with Both Private and Public Funds
 

Page 10 GAO-14-500 New Markets Tax Credit Update

In 2003, the Internal Revenue Service (IRS) confirmed the ability to use 

private funding to leverage a NMTC structure.9 Also, in 2004, Treasury 

issued final regulations generally allowing the NMTC to be combined with 

other tax credits.10 However, neither Treasury nor IRS has specifically 

confirmed the ability to use other federal or state funding to increase the 

leverage on NMTC investments. 

Many NMTC projects have financial structures that are more complex 

than the simple examples in figures 1 through 4. According to CDFI Fund 

data, 21 percent of projects originating in 2010 through 2012 had financial 

structures involving more than one CDE. In addition, 21 percent of 

projects had four or more transactions involving financial flows (such as 

loans from the CDEs to the LIC business). The NMTC financial structures 

have become more complex over time. We estimated that 41 percent of 

NMTC investments were made using one of the leveraged models in 

2006, while more recent industry estimates state that more than 90 

percent used such leverage in 2013.11

The simplified structures in our examples also do not show some of the 

complexities that are required for the purpose of acquiring the tax benefit. 

For example, when the public funds are leveraged, as in figure 4, a passthrough entity that is disregarded for tax purposes is established to route 

the flow of funds back from the low-income community business to the 

investment fund to claim the NMTC. The complexity of the structures may 

 

9

In Rev. Rul. 2003-20, the IRS ruled that for purposes of determining the NMTC allowable

under Section 45D, the amount of the QEI made by an investment fund may include cash 

from a nonrecourse loan that the investment fund invests as equity in a qualified CDE. In 

Rev. Rul. 2010-17, the IRS ruled that the amount of QEI could also include cash from a 

recourse loan.

10In Notice 2002-64, IRS allowed the NMTC to be combined with other federal programs 

except the Low-Income Housing Tax Credit (LIHTC). Treasury issued final regulations in 

2004 incorporating the guidance from the 2002 IRS Notice—see Treas. Reg. § 1.45D1(g)(3). Investors interpreted the Treasury regulations, together with the 2003 Revenue 

Ruling allowing leveraging of private debt, to permit leveraging with other federal 

programs such as historic tax credits where the value of these credits was used to 

increase the base of the NMTC by being loaned to an investment fund. Treasury has not 

amended its regulations or issued specific guidance to address this practice.

11GAO, Tax Policy: New Markets Tax Credit Appears to Increase Investment by Investors 

in Low-Income Communities, but Opportunities Exist to Better Monitor Compliance, 

GAO-07-296 (Washington, D.C.: Jan. 31, 2007); and New Markets Tax Credit Coalition, 

New Markets Tax Credit Progress Report 2014, (Washington, D.C.: June 10, 2014). 

In Practice, NMTC 

Financial Structures Are 

More Complex
 

Page 11 GAO-14-500 New Markets Tax Credit Update

reduce transparency by making it more difficult to trace the flow of private 

and public funds and the benefits from the tax subsidies. For example, 

investors can leverage other tax credits with the NMTCs to gain access to 

other tax benefits such as when the tax credit for solar equipment is 

leveraged to claim additional NMTCs and also claim accelerated 

depreciation deductions based on the solar equipment.

However, as mentioned above, this complexity can have benefits 

because it may result in projects getting financing they could not get 

otherwise. For example, combining assistance from other government 

programs with the NMTC, as in figures 3 and 4, could finance projects 

that would not be viable if they had to rely on only the NMTC and private 

lenders for financing as in figure 2.

Based on our survey of CDEs with projects originating in 2010-2012, the 

use of other public sources of funds with the NMTC is widespread (as 

shown in Table 1). An estimated

• Sixty-two percent of all NMTC projects received other public funding—

funds from federal, state or local public sources;

• Thirty-three percent of all NMTC projects received other federal 

funding; and

• Twenty-one percent of all NMTC projects received funding from 

multiple other government programs.

Among the most frequently used other federal sources by NMTC projects 

in our survey were historic tax credits (HTC) and tax-exempt bonds for 

private non-profit education facilities. In addition, for a number of NMTC 

projects in our survey, small business participants obtained loans 

guaranteed by the Small Business Administration. The other federal funds 

most often leveraged with the NMTC projects in our survey were the 

historic tax credits, Recovery Zone bonds and tax-exempt bonds for 

private non-profit education facilities. The state and local funds most 

frequently leveraged with the federal NMTC were state historic tax credits 

A Majority of NMTC Projects 

Used Other Public Funds in 

2010-2012
 

Page 12 GAO-14-500 New Markets Tax Credit Update

and state new markets tax credits12

Table 1: Estimated Percentage of Projects Receiving Other Federal Funding

(Projects Originating in 2010-2012) 

(see appendix II for additional results 

from our survey). 

Type of Federal 

Funding

Percent of 

All 

NMTC 

projects

95 percent 

confidence 

interval

Funding 

amount 

($ millions) a

95 percent 

confidence 

interval

($ millions)

Tax credits 8 5-12 353 59-647

Tax-exempt bonds 6 4-11 2,023 874–3,172

Grants 11 7-17 449 258-639

Loans 11 7-16 740 271-1,209

Total 33 27-39 3,565 2,317-4,813

Source: GAO survey of NMTC projects originating in 2010-2012. | GAO-14-500

Note: Total percent of projects receiving other federal funding does not equal sum of components 

because some projects used more than one type of federal funding. 

a

A 95 percent confidence interval means that if you were to determine an estimate for different 

probability samples, 95 out of 100 times the confidence interval would include the actual population 

value. In other words, the actual population value is between the lower and upper limits of the 

confidence interval 95 percent of the time.

The use of multiple other government programs raises questions about 

unnecessary duplication. The CDFI Fund currently asks CDEs whether 

other public funds are used to finance projects but does not ask for any 

details such as the information on specific programs providing those 

funds. Therefore, it is not possible at this time to determine whether 

unnecessary duplication is occurring because of a lack of data.

The competitive or market return should be sufficient to attract enough 

investors to fund the project because it reflects the return on comparable 

investments with similar risk. In figures 1 through 4 above, we assumed 

for illustrative purposes that the competitive market rate of return was 7 

percent. We also assumed that NMTC investors provided enough equity 

to the project (perhaps because of competition for the credits) that the 

 

12According to data from an accounting and consulting firm, 15 states currently have state 

new markets tax credit programs and 36 states have state historic tax credit programs. 

Novogradac & Company LLP, Tax Credit Resource Centers, accessed June 10, 2014, 

http://www.novoco.com/resource_center/index.php. 

Complex NMTC Financial 

Structures May Mask 

Investments with Rates of 

Return That Are Higher 

Than Necessary
 

Page 13 GAO-14-500 New Markets Tax Credit Update

credits claimed over the 7-year compliance period provided a market 

return.

NMTC industry representatives have argued that competition for credits 

by potential investors and competition between CDEs for credit 

allocations works to ensure returns on NMTC investments are kept at 

market rates commensurate with NMTC investor’s risk. The NMTC 

investor’s level of risk depends on the financial structure that the investor 

uses. For example, when the NMTC investor uses a leveraged 

investment model, the investor does not generally share in the riskiness 

of the project. Unless the investor is also the leveraged lender or has 

some other financial interest in the project, it is not exposed to any risk 

from project failure because such an event generally does not stop the 

investor from claiming the credit.

Some evidence suggests that some investors may receive returns that 

are above-market and therefore more than the necessary subsidy 

required to attract the funds. In a case study reported by the Urban 

Institute, an investor appeared to put in about $500,000 of NMTC equity 

to claim $1.2 million of NMTCs representing a return of about 24 percent 

compounded annually.13

However, the Urban Institute study authors said that, because of the 

complex financial structure, they could not rule out the possibility that the 

investor supplied other, non-NMTC funds to the project and at a lower 

rate of return. They noted that the NMTC financing was combined with a 

conventional loan outside the NMTC structure, owner equity, and a loan 

from the local municipality. If the NMTC investor supplied some of these 

additional funds, it is possible that the investor’s overall rate of return may 

have been lower and more in-line with the market return.

The NMTC was leveraged entirely with $2.5 

million of federal and state HTCs without use of a conventional leveraged 

loan in the NMTC structure. As a result, 83 percent of the qualified equity 

investment on which an investor claimed NMTCs was provided by other 

federal and state tax credit programs.

 

13Urban Institute, New Markets Tax Credit (NMTC) Program Evaluation: Final Report, a 

report prepared for U.S. Department of the Treasury, Community Development Financial 

Institutions (CDFI) Fund, April 2013. 
 

Page 14 GAO-14-500 New Markets Tax Credit Update

Internal controls should provide reasonable assurance that operations 

and use of resources are efficient. In the context of the NMTC program, 

the resources administered by Treasury include the tax benefits claimed 

by the NMTC investors. One NMTC control has been Treasury and IRS 

guidance on allowable financial structures. The Secretary of the Treasury 

has the authority to limit how other federal tax benefits are used with the 

NMTC and the Secretary has used this authority to prohibit its use with 

the Low-Income Housing Tax Credit (LIHTC).14

Controls do not exist to monitor and prevent unnecessary use of other 

public funds to supplement the NMTC. As already noted, Treasury, 

through the CDFI Fund, does not collect information about the specifics of 

other public funding. For the CDFI Fund, Treasury does not have controls 

to limit the risk of cases like the example from the Urban Institute study 

where other public funds were used to expand the NMTC base and 

apparently generate a 24 percent rate of return for the NMTC investor.

While an IRS revenue 

ruling, issued in 2003, allowed using debt to leverage NMTC equity, the 

ruling did not explicitly address using other public funds, such as other tax 

benefits, to leverage the NMTC as in figure 4.

We believe that such controls could take a variety of forms and would 

have to be assessed relative to any added compliance and administrative 

costs. A control that would provide greater clarity about tax subsidies 

could be achieved by requiring CDEs to report the NMTC investor’s 

overall rate of return on the NMTC project. As suggested by the Urban 

Institute example, this information would allow an assessment of whether 

the NMTC investor is earning a market return commensurate with the risk 

on its entire investment. With this information, an additional control could 

be implemented that would require CDEs to justify rates of return above a 

certain threshold by explaining why this project was so risky that it 

required a greater-than-market rate of return. Other controls that could be 

considered include caps on rate of returns and mechanisms to ensure 

competition among NMTC investors sufficient to prevent above-market 

rates of return. The decision to adopt any of these controls would require 

that Treasury compare the benefits of the controls with any compliance 

costs from added complexity for taxpayers and administrative costs for 

Treasury from collection and evaluation of the data and monitoring the 

controls once they are put in place.

 

1426 U.S.C. § 45D(i)(1); Treas. Reg. § 1.45D-1(g)(3). 

Guidance and Controls Do 

Not Exist to Prevent 

Above-Market Rates of 

Return or Unnecessary 

Duplication and Costs
 

Page 15 GAO-14-500 New Markets Tax Credit Update

The complexity of the financial structures creates a lack of transparency 

for taxpayers and IRS, and can increase both the risk of higher than 

needed NMTC rates of return and investment transactions costs. 

Combining multiple investment sources may help some NMTC projects to 

obtain sufficient financing to proceed. Indeed, NMTCs are often referred 

to as “gap financing” that can be added to other financing. Some projects 

may not require NMTC funding. The Urban Institute study estimated that 

about 20 percent of projects in the first 4 years of the program showed no 

evidence of needing NMTCs to proceed while about 30-40 percent did 

with 30 percent uncertain.

However, even in the case where the NMTC funding is necessary, the 

intricate patterns of investment flows through NMTC structures, where 

multiple sources may be mingled and later dispersed, make it difficult to 

determine who is receiving subsidies and whether the return to NMTC 

investors is higher than necessary. In addition, the network of 

transactions in the NMTC financial structures increase costs both in terms 

of explicit CDE fees and other resources used to pay the legal and 

accounting costs necessary to establish the entities that make the 

transactions.15

Fees and retentions directly reduce the amount of tax subsidized equity 

investment that is available to low-income community businesses but 

these costs do not represent the only way that equity can be reduced. 

The costs associated with financial structures could also appear in the 

form of higher interest rates, especially when the investor and leveraged 

lenders are related parties. In listening sessions organized by CDFI Fund 

officials, some CDEs reported that comparison of the fees that they 

charged to the fees charged by integrated investors/lenders were 

inaccurate because of the ability of integrated investors/lenders to receive 

compensation in other ways.

The fees, interest, and other costs that can offset one another (a low fee 

may be offset by a high interest rate) also reduce transparency by making 

the net effect on the tax subsidized equity reaching the low-income 

community business hard to determine. Officials at the CDFI Fund are 

 

15These risks of higher costs led, in part, to our prior suggestion that Congress consider a 

pilot test whereby some NMTCs would be converted to grants.

Fees and Retentions 

Reduce the Available 

NMTC Equity but 

Lack of Transparency 

Makes the Size of the 

Reduction Uncertain
 

Page 16 GAO-14-500 New Markets Tax Credit Update

attempting to address this issue by requiring CDEs to provide a 

disclosure statement to low-income community businesses about the size 

of tax subsidized equity and how it is affected by fees and interest rates.16

The new requirement that CDEs disclose to the low-income community 

businesses all transactions costs, fees, and compensation could help 

those businesses understand the final net benefit to the project being 

financed with NMTCs. However, because Treasury does not require the 

CDFI Fund to collect the CDE disclosure statements itself, the CDFI Fund 

database has incomplete information about fees, interest, and other 

costs. Without such complete information the Treasury is limited in its 

ability to analyze the final net financial benefit of NMTC investments to 

low-income community businesses.

Our analysis shows that fees and retentions by the CDEs reduced the 

$8.8 billion of NMTC investment available to the businesses in 2011-2012 

by about $619 million or 7.1 percent. The initial reduction occurred as part 

of the NMTC investment that the CDEs retain to cover administrative 

costs before investing the remainder in the project. The CDEs then also 

charge fees over the course of the 7-year compliance period that further 

reduces the equity available to the project. These fees can take the form 

of front-end or origination fees at closing, on-going, or asset management 

fees during the compliance period, and closing fees at the end of the 

compliance period. Table 2 shows the fees and retentions measured as a 

percentage of NMTC investment that reduce the equity that is available to 

the businesses. In addition, the projects may also incur third-party 

transaction costs for NMTC related accounting or legal services not 

provided by the CDEs. The CDEs are not required to report these other 

third-party transaction costs to the CDFI Fund.

 

16As part of their 2012 NMTC Allocation Agreements with the CDFI Fund, CDEs are now 

required to prepare a separate stand-alone document that discloses “any and all direct 

and indirect” NMTC-related transactions costs related to the loan or investment (such as 

third-party legal and accounting costs), and any compensation (fees) that the CDE is 

assessing the low-income community business prior, to, during, and at the conclusion of 

the 7-year NMTC term. The CDFI Fund provided a sample disclosure statement to CDEs 

based on commonly-used leverage model transactions and typical costs identified with 

NMTC transactions. The CDEs are required to provide the low-income community 

businesses a final disclosure statement at closing.

CDE Fees and Retentions 

Reduce the NMTC Equity 

Available to the LowIncome Community 

Businesses
 

Page 17 GAO-14-500 New Markets Tax Credit Update

Table 2: New Markets Tax Credit (NMTC) Investment Retained and Fees Charged by 

Community Development Entities (CDEs), 2011-2012

Fee Types 

Average 

fees 

($ millions)

Total fees for 

all projects 

($ millions)

Total fees

as a percent

of total NMTC 

investment

NMTC investment retained by CDEs

a

0.2 170 1.9

CDE professional fees charged

at or prior to close (front-end) 0.2 183 2.1

during compliance period (on-going) 0.2 198 2.3

at or after investment exit (back-end) 0.1 67 0.8

Subtotal 0.6 448 5.1

Total 0.8 619 7.1

Source: GAO analysis of CDFI Fund data. | GAO-14-500

Notes: Components may not sum to totals due to rounding. Dollar amounts are not adjusted for 

inflation. The fees contain both actual and projected amounts. The earlier in the project’s history the 

fees are paid, the more likely the payments are to be actual rather than planned. The totals and 

subtotals include $2,000 in average fees and $1.4 million in total fees in a fourth category of CDE 

professional fees called “other” fees by the CDFI Fund not listed separately in this table.

a

The total qualified equity investment (QEI) for all projects originating in 2011-2012.

Our analysis also shows that the amount of fees and retentions charged 

is strongly associated with the amount of NMTC investment in the project: 

the amount of NMTC investment accounts for about 50 percent of the 

variation in fees across projects. Although the CDFI Fund does not 

currently collect data that directly measure the complexity of investment 

structures, it does collect data on the number of investment transactions 

that occur on a NMTC project. These transactions often represent loans 

and investments to the business from different entities such as multiple 

CDEs, and can therefore be used as a proxy for more direct measures of 

complexity. Our regression analysis of these data shows that higher fees 

and retentions are associated with more complex structures as indicated 

by the number of transactions (see table 3 for details of this association 

between fees and retentions and financial structure, and other 

characteristics of the NMTC project). Fees and retentions are generally 

described by NMTC participants as reflecting mostly fixed costs, which 

would be more consistent with fees decreasing in proportion to the total 

size of the NMTC investment. 

Higher CDE Fees and 

Retentions Are Associated 

with More Complex 

Financial Structures
 

Page 18 GAO-14-500 New Markets Tax Credit Update

Table 3: Project Characteristics Associated with Fees and Retentions Charged by Community Development Entities (CDEs), 

2011-2012

Project characteristics

Effect on

fees and retentions

Size of the effect: Change

in dollar value of fees and retentions

Amount of NMTC qualified equity investment Increased $7,800 per $100,000 of additional NMTC-qualified equity 

investment 

Number of transactions as a proxy for 

financial structure complexity

Increased $4,800 per additional transaction

Average interest rate Increased $9,600 per 1.0 percentage point increase in the interest rate

on NMTC-related loans to the project 

Purpose: business Increased $29,000 more in fees and retentions charged on transactions 

for business purposes than those for rehabilitation, or other 

purposes

Amount of non-public funds used on project Decreased $90 less in fees and retentions per $100,000 of private funds 

invested in the project

Poverty rate greater than 30 percent 

indicating distressed low-income community 

Decreased $3,000 less in fees and retentions for projects in communities 

with poverty rates exceeding 30 percent

Legend: NMTC = New Markets Tax Credit.

Source: GAO analysis of CDFI Fund data. | GAO-14-500

Notes: The table summarized results for selected variables of a regression analysis of the relationship 

of total fees and retentions with other project characteristics.

For about 20 percent of projects originating in 2011-2012, CDEs reported 

to the CDFI Fund that they charged zero fees or retentions on these 

projects (see figure 5). However, it seems unlikely that the services 

provided by the CDEs were uncompensated. While the payment may 

have come in different forms, a lack of transparency makes it hard to 

readily determine how much of the NMTC investment is being reduced 

and by what means. For example, NMTC program participants have 

suggested that these projects with no fee costs may be more integrated 

investments where banks or other large institutions may be lenders as 

well as investors. In this case, low fees may be offset by higher interest 

rates. We found some indirect evidence of this in another regression 

where the projects with no fees or retentions were analyzed relative to all 

the projects that had fees and retentions. Here, the analysis showed that 

the projects with higher average interest rates were more likely to charge 

no fees and retentions. For this subgroup of projects, the positive 

relationship between fees and interest rates that we found when we 

analyzed all the projects (as shown in table 3) is reversed.

CDEs That Reported They 

Charged No Fees or 

Retentions Illustrates the 

Program’s Lack of 

Transparency
 

Page 19 GAO-14-500 New Markets Tax Credit Update

Figure 5: Number of Projects by Total Retentions and Fees Charged as a Percentage of Total New Markets Tax Credit (NMTC) 

Investment, 2011-2012

Projects that have considerable equity are more likely to have better loanto-value ratios and are generally more likely to obtain loans with better 

terms than projects without their own equity. For this reason, the larger 

the amount of equity remaining in the project, the greater is the likelihood 

that the project will continue on its own without any further government 

subsidies. However, the data available from the CDFI Fund reflect only 

the equity left by NMTC investors and may not give a complete picture of 

the economic viability of the business because it does not include other 

forms of equity, such as those from retained earnings for a successful 

business. Furthermore, the CDFI data on equity left in the business are

not sufficiently reliable because they are incomplete and not accurate 

enough to capture program performance. According to our standards for 

measuring program performance, several elements should be considered 

when examining the quality of agency performance data including 

accuracy and completeness.

Data on NMTC Equity 

Remaining in the 

Low-Income 

Community 

Businesses Are Not 

Sufficiently Complete 

or Accurate
 

Page 20 GAO-14-500 New Markets Tax Credit Update

However, our review showed that about 60 percent of projects originating 

in 2011-2012 had inconsistencies that made these data unreliable. 

Examples of these inconsistencies are:

• Incomplete data: One or more CDEs involved in the project did not 

report any values making it impossible to calculate an amount for the 

entire project.

• Inaccurate data: Equity remaining was projected to equal or exceed 

100 percent of all NMTC investments in the project. These amounts 

are not valid because they exceed the amounts of the original equity 

loan.

• Zero values: Some CDEs may be reporting a zero value because 

they do not intend to leave equity in the project. But according to CDFI 

Fund officials, other CDEs may intend to leave equity in the project, 

but reported zero value for accounting reasons because the charge 

would not be recorded until a later date. Thus, the zero values may be 

understating the equity available to the low-income community 

businesses.

We determined that one cause of data unreliability was the unclear 

instructions in the manual for entering data into the CDFI Fund’s systems. 

The manual does not clearly explain the time period for which information 

should be reported, which may have led to the CDEs reporting according 

to different accounting rules. Incomplete and inaccurate data result in an 

inability to use the data to track an important indicator of the likely 

performance of the NMTC projects after the compliance period ends. As a 

result, it is not possible to determine from these data the amount of equity 

to remain in the low-income community businesses after the 7-year credit 

period.
 

Page 21 GAO-14-500 New Markets Tax Credit Update

Figure 6: Data Quality for Amounts of Equity Projected to Remain in the LowIncome Community Businesses, 2011-2012

Note: CDFI Fund does not require data on equity remaining for any loans of investments originating 

before December 31, 2010. The figure is based on 842 projects with loans or investments originating 

in 2011-2012, the most recent available data.

CDFI Fund data on projects experiencing financial distress, such as the 

number of days a loan is delinquent, track program performance in that 

they indicate how likely a project is to continue in business during and 

after the credit period. These indicators of financial distress must be 

weighed against other NMTC program goals. Another program goal is to 

encourage investors to invest in projects that may be more risky because 

they are located in low-income communities. Regardless, reliable 

performance data are needed to administer the program. 

Our review of CDFI Fund data on the current status and performance of 

loans to NMTC projects showed inconsistencies that made these data not 

sufficiently reliable to determine the number and extent of projects 

experiencing financial distress. Examples of these inconsistencies 

include:

CDFI Fund Data on 

Distressed Projects 

Are Not Sufficiently 

Reliable
 

Page 22 GAO-14-500 New Markets Tax Credit Update

• Incomplete data: Ninety-nine percent of projects reported current 

loan status (a mandatory field), but approximately 30 percent of 

projects omitted additional information for the other potential 

indicators of distress such as the number of times a loan has been 

restructured, the number of days the loan is currently delinquent, and 

the dollar amount of any loan that has been charged off (optional or 

conditionally-required fields).

• Inaccurate data: Potential inaccuracies appear when we compared 

CDEs’ descriptions of troubled projects from their NMTC allocation 

applications with indicators of distress for those same projects in CDFI 

Fund databases. In their 2012 applications, CDEs described 193 

projects with delinquent, defaulted, or impaired loans in sufficient 

detail that we could identify those projects in the CDFI Fund data. But 

49 of these projects showed no indications of distress in the data.

The causes of data unreliability were unclear instructions and optional 

reporting. CDEs enter their data into the CDFI Fund’s electronic 

database. How they enter the data is determined by instructions provided 

by the CDFI Fund. We found a lack of clarity in these instructions that 

prevented us from being confident that the data provided an accurate 

measure of distress. For example, the instructions did not clearly 

distinguish restructured loans from refinanced loans. However, 

refinancing may not be an indicator of distress. It can occur for a variety 

of economic reasons. In addition, the data were incomplete because 

reporting some information was optional. Without accurate and complete 

data, the CDFI Fund does not have sufficient information to track program 

performance related to the future viability of the NMTC funded projects. 

CDFI Fund officials told us that they are changing all the loan 

performance data points to make them mandatory.

Project failures could significantly affect program performance by limiting 

its social and economic outcomes in low-income communities. However, 

determining when a project has failed is difficult. Projects that seem to be 

in difficulty based on the indicators of financial distress can become 

financially sound again. Some CDEs in their 2012 applications described 

successful restructurings of projects experiencing financial difficulty. But 

other projects are in situations where recovery seems unlikely or the 

CDEs have in fact written off the projects (see text boxes 1 and 2 for 

details of examples of both types of outcomes).

Difficulties in Determining 

Whether or Not a Project 

Has Failed
 

Page 23 GAO-14-500 New Markets Tax Credit Update

The CDFI Fund is developing additional tools to collect better information 

on failed projects. As discussed above, their current measures of financial 

distress are inaccurate or incomplete. However, even if the data are 

improved, the financial distress measures may not accurately identify 

project failures because the projects can recover from distress. The CDFI 

Fund is attempting to rectify this measurement problem with a close-out 

report which is intended to collect additional information on the status of 

the business at the end of the 7-year compliance period, such as whether 

a business continues to operate or a real estate project has been put into 

service.

Text Box 1: Meat processing plant investment that failed.

• An $8 million NMTC investment in a meat processing company 

involving two loans and one equity investment from one CDE.

• According to news accounts, the investments were needed to address 

liquidity problems created by an expansion of this ongoing business 

that employed about 300 people.

• According to the CDE’s 2012 reapplication, the investments became 

impaired soon after the CDE made the investments when the 

leveraged lender limited the company’s ability to borrow from its credit 

line, which forced the company into bankruptcy.

• The CDE unsuccessfully sought alternative financing for the company 

but still suffered a loss of $5.2 million.

• In the CDFI Fund data, one loan and one equity investment are 

reported as “charged off” for the full dollar amounts. The other loan is 

reported as “closed” but no amount charged off.

Source: GAO analysis of CDFI Fund data and public sources. | GAO-14-500

Examples Illustrating 

Difficulties in Determining if a 

Project Has Failed
 

Page 24 GAO-14-500 New Markets Tax Credit Update

Text Box 2: Troubled college construction project that recovered.

• A college construction project involving three CDEs and several NMTC 

loans.

• In their 2012 reapplications for NMTC allocations, two of the CDEs 

reported that their loans for the project became delinquent for as much 

as 480 days because of construction delays and the economic 

recession of 2008.

• The two CDEs reported that they worked with the borrower to 

rebalance the budget and bring in additional sources of financing.

• At the time of their applications, the two CDEs reported that all the 

previous interest was paid and all subsequent interest payments had 

been on time.

• The loans from the two CDEs show indications of poor performance 

(periods of delinquency) in CDFI Fund data.

• The third CDE did not report any delinquent or impaired loans in its 

2012 reapplication, and its loans do not show any indications of poor 

performance in CDFI Fund data.

Source: GAO analysis of CDFI Fund data. | GAO-14-500

The potential impact of the NMTC in promoting economic development in 

designated low-income communities is diluted if the NMTC provides an 

above-market rate of return. Similarly, the impact of a combination of 

assistance from government programs is diluted if in the same cases the 

combination of assistance is unnecessarily duplicative. Treasury 

guidance and controls that are designed to limit these risks can help 

ensure the NMTC program realizes the greatest possible impact on lowincome communities.

Complete and reliable information is a vital component of assessing 

program effectiveness. While the complexity of the NMTC financial 

structures makes gathering information a challenge, there are several 

aspects of these structures where better information would aid in 

understanding the effectiveness of the program. These include the extent 

to which fees, interest rates, and other costs reduce the NMTC equity 

flowing to low-income community businesses, the amount of equity 

available to the low-income community businesses at the end of the 7-

Conclusions
 

Page 25 GAO-14-500 New Markets Tax Credit Update

year compliance period, and the number of projects that failed or are at 

risk of failing.

We recommend that the Secretary of the Treasury take the following 

actions: 

• Issue guidance on how funding or assistance from other government 

programs can be combined with the NMTC including the extent to 

which other government funds can be used to leverage the NMTC by 

being included in the qualified equity investment.

• Ensure that controls are in place to limit the risk of unnecessary 

duplication at the project level in funding or assistance from 

government programs and to limit above market rates of return, i.e., 

returns that are not commensurate with the NMTC investor’s risk.

• Ensure that the CDFI Fund reviews the disclosure sheet that CDEs 

are required to provide to low-income community businesses to 

determine whether it contains data that could be useful for the Fund to 

retain.

• Ensure that the CDFI Fund clarifies the instructions for reporting the 

amount of any equity which may be acquired by the low-income 

community business at the end of the 7-year NMTC compliance 

period.

• Ensure that the CDFI Fund clarifies the instructions it provides to 

CDEs about reporting loan performance and make the reporting of 

that data mandatory.

We provided a draft of this product to Treasury for comment on June 11, 

2014. In its written comments, reproduced in appendix IV, Treasury 

concurred with two of our recommendations and reported that the other 

recommendations are under consideration. The CDFI Fund also provided 

technical comments that were incorporated, as appropriate.

Treasury said that it is considering our recommendations to issue further 

guidance on how other government programs can be combined with 

NMTCs, and to ensure that adequate controls are in place to limit the 

risks of unnecessary duplication and above-market rates of return. 

Treasury reported that our recommendations would be reviewed in 

consultation with a recently formed working group that includes 

representatives from the IRS and the CDFI Fund to discuss potential 

administrative or regulatory changes. 

Recommendations for 

Executive Action

Agency Comments 

and Our Evaluation
 

Page 26 GAO-14-500 New Markets Tax Credit Update

Treasury said that it is considering our recommendation about reviewing 

data presented in the disclosure sheets that CDEs are required to provide 

low-income community businesses. As our report states, not all 

information on the disclosure sheets, such as third-party transactions 

costs, is reported to the CDFI Fund. This additional information on the 

disclosure sheets could be useful for the CDFI Fund to retain.

Treasury agreed with our recommendation to clarify instructions for 

reporting any equity amounts that may be acquired by the low-income 

community business at the end of the compliance period. Treasury also 

agreed with our recommendation to clarify instructions to CDEs about 

reporting loan performance and make this data reporting mandatory. 

As agreed with your office, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies to the appropriate 

congressional committees, the Director of the CDFI Fund, and other 

interested parties. In addition, the report will be available at no charge on 

the GAO website at http://www.gao.gov. 

If you or your staff have questions about this report, please contact me at 

(202) 512-9110 or at whitej@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this report. GAO staff who made key contributions to this report are 

listed in appendix V.

Sincerely yours, 

James R. White

Director, Tax Issues

Strategic Issues
Appendix I: Objectives, Scope, and 

Methodology

Page 27 GAO-14-500 New Markets Tax Credit Update

The objectives of this report were to assess: (1) New Markets Tax Credit 

(NMTC) financial structures in terms of their complexity, transparency, 

and effect on the size of the federal subsidies going to NMTC projects as 

well as controls to ensure that subsidies are not larger than necessary for 

the investment; (2) what is known about the types and amounts of fees 

and other costs that reduce the amount of equity reaching low-income 

community businesses; (3) what is known about the amount of equity left 

in the low-income community businesses after the 7-year credit period; 

and (4) what is known about NMTC projects that are at risk of failing by 

becoming economically nonviable.

For our first objective, we reviewed the NMTC literature and interviewed 

representatives of community development entities (CDEs) and 

researchers who have evaluated the program to determine how the 

financial structures have evolved. To assess the complexity and 

transparency of NMTC investment structures, we applied criteria from our 

prior work on evaluating tax expenditures.1 We also applied criteria from 

federal government internal control standards to assess whether controls 

are present to ensure that subsidies are not larger than necessary for a 

NMTC project.2

To report on the number, types, and funding amounts of other federal 

programs used on NMTC projects, we designed and implemented a webbased survey to gather information on how projects were financed from 

the CDEs responsible for the project. Our survey population consisted of 

randomly selected NMTC projects with all loans and investments closing 

on or after January 1, 2010. Restricting the survey population to NMTC 

projects within our study’s time period left us with a total of 1,265 projects 

in the population. We selected a stratified sample of 305 projects. From 

the first strata, defined as those projects for which there is an indication 

on the underlying population file that at least one of the funding sources 

was public dollars, we selected 126 projects. From the second strata, 

defined as all other projects, we selected 179 projects. Although some 

projects in the second strata could actually have public dollars, this 

 

1

GAO, Tax Expenditures: Background and Evaluation Criteria and Questions, 

GAO-13-167SP (Washington, D.C.: Nov. 29, 2012) and Understanding the Tax Reform 

Debate: Background, Criteria and Questions, GAO-05-1009SP (Washington, D.C.: Sept. 

1, 2005). 

2

GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1

(Washington, D.C.: Nov. 1, 1999).

Appendix I: Objectives, Scope, and 

Methodology
Appendix I: Objectives, Scope, and 

Methodology

Page 28 GAO-14-500 New Markets Tax Credit Update

stratification helps ensure that our sample has enough of these cases to 

produce estimates of that domain.

The survey asked the CDEs a combination of questions that allowed for 

open-ended and close-ended responses with regard to federal, state, 

local, and private funding sources. We pre-tested the content and format 

of the questionnaire with four knowledgeable CDEs and made changes 

based on pre-test results. The survey was a web-based survey. We sent 

an activation e-mail for the survey on March 7, 2014, and closed the 

survey on April 4, 2014.

The practical difficulties of conducting any survey may introduce errors, 

commonly referred to as non-sampling errors. For example, differences in 

how a particular question is interpreted, the sources of information 

available to respondents, how the responses were processed and 

analyzed, or the types of people who do not respond can influence the 

accuracy of the survey results. We took steps in the development of the 

survey, the data collection, and the data analysis to minimize these nonsampling errors and help ensure the accuracy of the answers that were 

obtained. A second independent analyst checked all the computer 

programs that processed the data. In instances where multiple CDEs 

responded about the same project, we manually merged the data 

together into a representative single project following the Community 

Development Financial Institutions (CDFI) Fund’s practices, such as 

reporting the highest value as the default estimate.

We obtained responses for 214 of the 305 projects in our sample for an 

overall response rate of about 70 percent. Population estimates were 

produced by weighting the sample data from the responding projects to 

account for differing sampling rates for projects funded with public dollars 

and those funded without public dollars. We have treated the respondents 

as a stratified random sample and calculated sampling errors as an 

estimate of the uncertainty around the survey estimates. All percentage 

estimates based on this sample have 95 percent confidence intervals of 

within +/- 7 percentage points of the estimate itself. For other numeric 

estimates, the 95 percent confidence intervals are presented along with 

the estimates themselves. We are 95 percent confident that each of the 

confidence intervals in this report will include the true values in the study 

population.

To address the last three objectives, we analyzed data from the CDFI 

Fund on NMTC investments in low-income community businesses from 

2003 through 2012. The CDFI Fund requires all CDEs that have been 
Appendix I: Objectives, Scope, and 

Methodology

Page 29 GAO-14-500 New Markets Tax Credit Update

awarded NMTC allocations to submit an annual report detailing how they 

invested the qualified equity investment (QEI) proceeds in low-income 

communities. These reports must be submitted to the CDFI Fund by the 

CDEs, along with their audited financial statements, within 6 months after 

the end of their fiscal years. CDEs are required to report their NMTC 

investments in the CDFI Fund’s Community Investment Impact System 

(CIIS) for a period of 7 years. Due to a time lag in reporting, NMTC 

investments reported in CIIS are less than the total amount allocated for 

the NMTC program.3 Given that the CDFI Fund requires CDEs to report 

information on project characteristics and financing once a year, CIIS 

data may not capture the most current information for all existing projects. 

However, the CIIS data that we used represent the most current available 

information as of December 2, 2013 on the status of the program. We 

interviewed CDFI Fund officials with knowledge of CIIS about the steps 

they take to ensure its accuracy. Based on GAO’s criteria for valid data—

that they be sufficiently accurate and complete to capture program 

performance—we also determined the data on fees and retentions we 

used in this report were sufficiently reliable for our purposes (see below 

for discussion of the data we found unreliable for our purposes).4

To describe the types and amounts of fees and other costs, we analyzed 

data that CDEs reported to the CDFI Fund on the NMTC investment 

proceeds they retained and fees they charged to investors, low-income 

community businesses, and others. We analyzed the fee data at the 

project level for 794 projects with loans and investments originating in 

2011 and 2012. The CDFI Fund began requiring that CDEs report data on 

QEI proceeds that the CDEs retained and their other fees starting with the 

2011 reporting period, and only for loans and investments originating after 

December 31, 2010.5

 

3

U.S. Department of the Treasury, Community Development Financial Institutions Fund, 

“New Markets Tax Credit Public Data Release: 2003-2011 Summary Report,” July 2, 

2013.

We used fees data reported in basis points and 

data on the qualified low-income community investment (QLICI) amounts 

4

GAO, Managing for Results: Assessing the Quality of Program Performance Data, 

GAO/GGD-00-140R, (Washington, D.C.: May 25, 2000).

5

Seventy-three projects were excluded because they had loans and investments 

originating both before and after December 31, 2010, and 49 projects were excluded 

because one or more CDEs appeared to have reported fees data incorrectly by reporting 

fees as a percentage of the QEI rather than as basis points as instructed by the CDFI 

Fund.
Appendix I: Objectives, Scope, and 

Methodology

Page 30 GAO-14-500 New Markets Tax Credit Update

to calculate the total dollar amounts of fees. We compared our final 

results to other data on fees submitted by CDEs when applying for NMTC 

allocations in 2010 and 2011.

We attempted to compare these costs to costs on non-NMTC 

investments by reviewing industry data and academic studies on fees, 

and interviewing industry and tax credit experts. We also reviewed written 

and oral comments made by CDEs and industry experts to the CDFI 

Fund in response to a November 7, 2011, Federal Register notice 

soliciting comments on several possible NMTC program changes. The 

CDFI Fund specifically requested comments on whether additional rules, 

restrictions, and requirements should be imposed related to fees and 

expenses charged by CDEs. The CDFI Fund also held three listening 

sessions in December 2012 and January and February 2013 with a total 

of 45 CDE and industry experts. We reviewed the transcripts of these 

listening sessions and concluded from these reviews that the types of 

projects funded by the NMTC are so varied that we could not conduct a 

valid comparison of fee costs with those on non-NMTC projects.

We attempted to determine the amount of equity that remains in lowincome community businesses by analyzing data reported by CDEs to the 

CDFI Fund on equity projected to remain in NMTC projects at the end of 

the 7-year credit period. We analyzed these data at the project level for 

842 projects with loans and investments originating in 2011 and 2012. 

Starting with the 2011 reporting period, the CDFI Fund began requiring 

that, if applicable, CDEs report the projected amount of any equity or debt 

investment which may be acquired by the low-income community 

business as the result of a put/call option or other arrangement for loans 

and investments originating after December 31, 2010. After reviewing all 

2,249 transactions for all 842 projects, we determined that data were 

usable for only 363 projects (about 40 percent), and therefore the data 

could not be used to give sufficiently reliable descriptions of the equity 

remaining in the project for our purposes. We found the following 

problems with the data that made the values unreliable for our report.

• For 201 projects, no data were reported by one or more of the CDEs 

involved in those projects. We concluded that in these cases we could 

not determine: (1) how many of these projects were non-leveraged 

where the failure to project a residual value might be expected; (2) 

how many indicated a true intention not to leave any equity in the 

project; and (3) how many were simply errors or omissions.
Appendix I: Objectives, Scope, and 

Methodology

Page 31 GAO-14-500 New Markets Tax Credit Update

• For another 143 projects, one or more CDEs involved reported a total 

projected residual value of $0. We concluded in these cases that the 

implications of zero for equity remaining were ambiguous. According 

CFDI Fund officials, some CDEs may in fact do not intend to leave 

any residual equity for the business to obtain at the end of the 7-year 

period. However, other CDEs may project $0 remaining now when in 

fact they intend to designate the amount of equity at a later date. 

These CDEs may be reporting a zero value at this time due to an 

individual CDE’s internal practices or accounting rules particular to the 

CDE’s form of incorporation. That is, the CDEs would not report a 

projected or final residual value until the put/call option was exercised 

by the business.

• Of the remaining 498 projects, 135 projects had data showing that the 

total projected residual value for these projects appeared to be 

overstated. Some data showed that one or more CDEs reported 

projected residual values greater than or equal to the original equity 

investment values. In most of these cases, the CDEs appeared to 

have incorrectly reported a projected residual value for both leveraged 

loans and equity investments. Based on the typical leveraged model 

structure, the CDEs should have only reported the residual value of 

the equity investments. In other cases, one or more CDEs involved in 

a project reported the projected residual value of the equity 

investment twice—once as value for the equity investment, and then 

repeated it as a value for the leveraged loan. As a result of these 

reporting errors or inconsistencies, the total projected residual value 

for these projects appeared to be overstated.

To determine the NMTC projects at risk of failing by becoming 

economically nonviable, we analyzed data reported by CDEs to the CDFI 

Fund that could indicate that a project is experiencing financial distress. 

We used indicators of financial distress that are available from CDFI Fund 

data, such as whether a loan on a project is delinquent, charged off, or 

restructured that could show increased risk of business failure. These 

indicators, in most cases, could not be used to conclude that a business 

has failed in the sense of being economically nonviable as the CDFI Fund 

does not currently have data on the ultimate disposition of NMTC 

projects. We analyzed the number of projects that showed indications of 

financial distress between 2003 and 2012, and the dollar amounts 

invested in these financially distressed projects. We tested the reliability 

of these optional fields by reviewing CDEs applications for 2012 NMTC 

allocations. In the application instructions, CDEs were asked to discuss 

any delinquent, defaulted, or impaired loans or equity investments from 
Appendix I: Objectives, Scope, and 

Methodology

Page 32 GAO-14-500 New Markets Tax Credit Update

prior NMTC investments. In the 2012 applications, we counted 281 

projects with delinquent, defaulted, or impaired loans or investments. Of 

these, 193 projects were described in sufficient detail that we could then 

match those projects to transaction-level data in CIIS. However, 49 of 

those projects did not show any indications of financial distress in CIIS. 

For some projects involving multiple CDEs, one or more CDEs may have 

described the project in their 2012 applications as having delinquent, 

defaulted, or impaired investments, but only one CDE then reported any 

of the optional distress indicator data in CIIS. In other cases, CDEs 

described several projects in the 2012 applications as having delinquent, 

defaulted, or impaired investments, but then those CDEs did not report 

any distress indicators for these projects in CIIS. In the end, we 

concluded that the CDFI Fund CIIS data on indicators of financial distress 

were insufficient for our purposes, largely due to the fact that nearly all of 

the distress indicators were optional data fields.

We conducted this performance audit from May 2013 to July 2014 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.
Appendix II: Other Federal Funding Used in 

New Markets Tax Credit Projects

Page 33 GAO-14-500 New Markets Tax Credit Update

In our survey of New Markets Tax Credit (NMTC) projects, we asked 

Community Development Entities (CDEs) what other federal sources of 

assistance were used (in addition to the NMTC) to fund the project.1

Table 4: Other Federal Tax Credits Used in a Sample of New Markets Tax Credit (NMTC) Projects, 2010-2012

CDEs could select from a pre-populated list of federal sources comprised 

of federal tax credits, public bond financing exempt from federal tax, 

grants or direct payments from federal agencies, and direct or guaranteed 

loans from federal agencies. Our survey also permitted CDEs to write in 

other federal sources not included in the pre-populated list. CDEs were 

also asked if the NMTC was “twinned” or “enhanced” with any of these 

federal sources inside the NMTC structure, i.e., did NMTC investors claim 

NMTCs based on these additional amounts of federal assistance. The 

NMTC investor community often refers to this practice as “twinning” the 

NMTC with other tax credits or other public assistance, but for purposes 

of this report, we define this as leveraging other public sources with the 

NMTC. The four tables below list the types of other federal assistance 

(from our pre-populated list of federal assistance and write-in 

descriptions) that CDEs reported as being used to finance our sample of 

NMTC projects, and whether these other federal sources were leveraged 

with the NMTC.

Federal source was leveraged 

with NMTC one or more times 

10 percent credit for rehabilitation of structures (other than historic)

20 percent credit for rehabilitation of historic structures (Historic Tax Credit) yes 

Business Energy Investment Tax Credit (ITC) yes 

Credit for qualified school construction bonds yes 

Brownfield credits

Source: GAO survey of NMTC projects originating in 2010-2012. | GAO-14-500

 

1

As noted in appendix I, our survey population consisted of randomly selected NMTC 

projects with all loans and investments closing on or after January 1, 2010. Restricting the 

survey population to NMTC projects within our study’s time period left us with a total of 

1,265 projects in the starting population from which we drew our sample.

Appendix II: Other Federal Funding Used in 

New Markets Tax Credit Projects
Appendix II: Other Federal Funding Used in 

New Markets Tax Credit Projects

Page 34 GAO-14-500 New Markets Tax Credit Update

Table 5: Tax Exempt Bond Financing Used in a Sample of New Markets Tax Credit (NMTC) Projects, 2010-2012

Federal source was leveraged 

with NMTC one or more times 

Exclusion of interest for airport, dock, and similar bonds

Exclusion of interest on bonds for private nonprofit educational facilities yes

Exclusion of interest on bonds for private nonprofit hospital facilities yes

Exclusion of interest on Gulf Opportunity Zone Revenue Bonds

Exclusion of interest on Recovery Zone Bonds yes

Federal Energy 179D (tax deduction)

Various public purpose state and local bonds yes a

Source: GAO survey of NMTC projects originating in 2010-2012. | GAO-14-500

a

A number of survey respondents indicated receiving project financing from a variety of state and 

locally-issued bonds.

Table 6: Grants or Direct Payments Used in a Sample of New Markets Tax Credit (NMTC) Projects, 2010-2012

Federal source was leveraged 

with NMTC one or more times 

Department of Housing and Urban Development (HUD)

Community Development Block Grants/Entitlement Grants (CDBG) yes 

HUD Economic Development Initiative

HUD Financial Grant

HUD Capital Fund Education and Training Community Facilities Program yes 

Neighborhood Stabilization Program (NSP) yes 

Public Housing Development Funds yes 

Department of Energy

Energy Efficiency and Conservation Block Grant (EECBG)

Department of Health and Human Services

Grants to Health Center Programs yes 

Office of Head Start (OHS)

Department of the Treasury

1603 Program: Payments for Specified Energy Property in Lieu of Tax Credits

U.S. Treasury - Neighbor Works

Department of Education

Impact Aid grant yes 

Department of Education unspecified grant

Department of Defense

Department of Defense unspecified grant
Appendix II: Other Federal Funding Used in 

New Markets Tax Credit Projects

Page 35 GAO-14-500 New Markets Tax Credit Update

Federal source was leveraged 

with NMTC one or more times 

Environmental Protection Agency (EPA)

EPA Grant

Federal Communications Commission (FCC)

FCC Grants for Rural Healthcare

Federal Home Loan Bank

Federal Home Loan Bank grants

Department of Veterans Affairs (VA)

VA tenant improvement payment

Unspecified 

Rural Community Assistance Partnership (RCAP)

American Recovery Reinvestment Act (ARRA) 

Source: GAO survey of NMTC projects originating in 2010-2012. | GAO-14-500

Table 7: Direct Loans or Guaranteed Loans Used in a Sample of New Markets Tax Credit (NMTC) Projects, 2010-2012

Federal source was leveraged 

with NMTC one or more times

Department of Agriculture

Business and Industry Loans

Community Facilities Loans

Department of Housing and Urban Development

Section 108 Community Development Loan Guarantees

Supplemental Loan Insurance Multifamily Rental Housing

Small Business Administration (SBA) 

SBA 7(a) Guaranteed Loan

SBA 504 loan program

SBA unspecified guaranteed loan

Department of Education

Charter School Credit Enhancement Grant

Department of Energy

ARRA Energy Loan Program—Green Energy Loan Fund

Other

Department of Housing and Community Development (state) CDBG-ARRA yes 

Source: GAO survey of NMTC projects originating in 2010-2012. | GAO-14-500
Appendix III: Regression Analysis of Total 

Fees and Retentions Associated with 

Characteristics of the Project Using CDFI Fund 

Data, 2011-2012

Page 36 GAO-14-500 New Markets Tax Credit Update

Variable Name Coefficient Std. Error t P>|t| 

Average interest rate on loans .0968962 .0360374 2.69 0.007

Dollar amount of NMTC qualified equity investment (QEI) .0782438 .0014382 54.40 0.000

Number of transactions (financial structure complexity) .0482567 .0189266 2.55 0.011

Poverty rate > 30% (distressed community) -.302405 .1086737 -2.78 0.005

Dollar amount of non-public funds used on project -.0009428 .0002418 -3.90 0.000

Purpose: business .2869305 .1392813 2.12 0.040

Purpose: construction -.0928775 .1401169 -0.66 0.507

Origination year: 2012 -.1675759 .1076841 -1.56 0.120

Constant -.5996888 .1900319 -3.16 0.002

Source: GAO analysis of CDFI Fund data. | GAO-14-500

Notes: N=2,018; R-squared = 0.6028. Dollar amounts are scaled in $100,000 units.

The table reports the results of an ordinary least squares regression with 

the dependent variable equal to the amount of fees and retentions 

charged. Omitted category variables are: project type equal to 

“rehabilitation or other” and origination year equal to “2011.” The 

regression was also estimated using various functional forms including 

quadratic and log forms of the regression equation. These specifications 

either were rejected as statistically insignificant or, in the case of some of 

the log specifications, resulted in a substantial decrease in the 

explanatory power of the regression as measured by its R-squared.

This regression was also estimated with fees and retentions as separate 

dependent variables, and, in these cases, the results were different for 

certain variables of interest. With fees as the dependent variable, neither 

the interest rate nor the number of transactions was statistically significant 

at the 95 percent confidence level. However, the size of the qualified 

equity investment remained positive and significant. With retentions as 

the dependent variable, the retentions were positively and significantly 

related to interest rates but had no statistically significant relationship to 

the number of transactions.

Appendix III: Regression Analysis of Total 

Fees and Retentions Associated with 

Characteristics of the Project Using CDFI 

Fund Data, 2011-2012
Appendix IV: Comments from the Department 

of the Treasury

Page 37 GAO-14-500 New Markets Tax Credit Update

Appendix IV: Comments from the 

Department of the Treasury
Appendix IV: Comments from the Department 

of the Treasury

Page 38 GAO-14-500 New Markets Tax Credit Update
Appendix IV: Comments from the Department 

of the Treasury

Page 39 GAO-14-500 New Markets Tax Credit Update
Appendix IV: Comments from the Department 

of the Treasury

Page 40 GAO-14-500 New Markets Tax Credit Update
Appendix V: GAO Contact and Staff 

Acknowledgments

Page 41 GAO-14-500 New Markets Tax Credit Update

James R. White, (202) 512-9110, or whitej@gao.gov. 

In addition to the contact named above, Kevin Daly, Assistant Director; 

Amy Bowser; Cathy Hurley; Mark Kehoe; Jill Lacey; Edward Nannenhorn; 

Mark Ramage; Wayne Turowski; and Elwood White made key 

contributions to this report.

Appendix V: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments
Related GAO Products

Page 42 GAO-14-500 New Markets Tax Credit Update

2014 Annual Report: Additional Opportunities to Reduce Fragmentation, 

Overlap, and Duplication and Achieve Other Financial Benefits. 

GAO-14-343SP. Washington, D.C.: April 8, 2014.

Community Development: Limited Information on the Use and 

Effectiveness of Tax Expenditures Could Be Mitigated through 

Congressional Attention. GAO-12-262. Washington, D.C.: February 29, 

2012.

Efficiency and Effectiveness of Fragmented Economic Development 

Programs Are Unclear. GAO-11-477R. Washington, D.C.: May 19, 2011.

Opportunities to Reduce Potential Duplication in Government Programs, 

Save Tax Dollars, and Enhance Revenue. GAO-11-318SP. Washington, 

D.C.: March 1, 2011.

New Markets Tax Credit: The Credit Helps Fund a Variety of Projects in 

Low-Income Communities, but Could Be Simplified. GAO-10-334. 

Washington, D.C.: January 29, 2010.

HUD and Treasury Programs: More Information on Leverage Measures’ 

Accuracy and Linkage to Program Goals Is Needed in Assessing 

Performance. GAO-08-136. Washington, D.C.: January 18, 2008. 

Tax Policy: New Markets Tax Credit Appears to Increase Investment by 

Investors in Low-Income Communities, but Opportunities Exist to Better 

Monitor Compliance. GAO-07-296. Washington, D.C.: January 31, 2007.

New Markets Tax Credit Program: Progress Made in Implementation, but 

Further Actions Needed to Monitor Compliance. GAO-04-326. 

Washington, D.C.: January 30, 2004.

Related GAO Products

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