GAO 

United States Government Accountability Office

Report to Congressional Committees

NEW MARKETS TAX 

CREDIT 

The Credit Helps Fund 

a Variety of Projects 

in Low-Income 

Communities, but 

Could Be Simplified 

January 2010 

GAO-10-334 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

January 2010

NEW MARKETS TAX CREDIT 

The Credit Helps Fund a Variety of Projects in LowIncome Communities, but Could Be Simplified 

Highlights of GAO-10-334, a report to 

congressional committees 

The Treasury Department’s 

Community Development Financial 

Institutions (CDFI) Fund awarded 

$26 billion in New Markets Tax 

Credits (NMTC) through 2009 for 

investment in low-income 

communities. The NMTC allows 

investors to claim a tax credit 

totaling 39 percent of their 

investment in Community 

Development Entities (CDE) over 7 

years which CDEs reinvest in 

qualified communities. 

This mandated report (1) describes 

where and how CDEs are using 

NMTCs, (2) assesses how CDEs 

use NMTCs to offer favorable 

financing terms to low-income 

community businesses and 

describes options for simplifying 

the NMTC, (3) describes how, if at 

all, NMTC investments support 

low-income community 

development, and (4) determines 

how effective IRS and the CDFI 

Fund have been in monitoring 

NMTC compliance. GAO analyzed 

CDFI Fund and CDE data, did 

case studies of CDEs, and 

interviewed relevant experts. 

What GAO Recommends

Congress should consider options 

to simplify the NMTC’s structure, 

and GAO recommends that the 

Secretary of the Treasury direct the 

CDFI Fund Director to collect 

additional data on program 

performance and improve projectlevel data. The CDFI Fund agreed 

with GAO’s recommendations and 

disagreed with GAO’s matter for 

Congress. GAO maintained its 

matter for Congress; evaluating the 

simplification’s effects can include 

the Fund’s concerns. 

Since 2003, CDEs have made NMTC investments in all 50 states, the District of 

Columbia, and Puerto Rico, with about 65 percent for real estate. NMTCs are 

often used as “gap financing,” accounting for a portion of total project costs. 

NMTC investments in low-income community businesses generally use 

leveraged structures, where equity is left in the businesses, or subsidized 

interest rate structures, where below-market interest rate loans are offered. 

Recently, investors appear to be paying less for tax credits than in previous 

years and they made fewer NMTC investments in 2009 than in previous years. 

The CDFI Fund does not collect data that could identify the portion of the 

subsidy channeled to businesses, such as data on credit pricing, transaction 

fees, and the amount of equity left in businesses. Two potential options (i.e., 

changing related parties tests or converting the NMTC to a grant program) 

could simplify the program and make additional funds available to businesses.

NMTC Investment by CDEs for Calendar Years 2003 through 2009 

Dollars (in billions)

Source: GAO analysis of CDFI Fund data.

Calendar year

0

0.5

1

1.5

2

2.5

3

3.5

4

2003 2004 2005 2006 2007 2008 2009

CDEs have used the NMTC program to support a variety of investments, but 

project impacts are difficult to measure and likely vary depending on the 

project. GAO identified NMTC-supported projects for mixed-use facilities, 

housing developments, and community facilities, among other qualified 

business activities. The CDFI Fund does not collect data on incomplete or 

failed projects, which might be used, for instance, to improve credit allocation 

selections. Projects with NMTC financing likely contribute employment and 

other outcomes to low-income communities. Limitations with available data 

make it difficult to isolate project impacts and GAO’s analysis does not allow 

it to determine whether the projects supported by NMTCs would have taken 

place absent the credit. Continued improvements could be made in collecting 

project-level data (e.g., removing double-counting of some outcomes). 

IRS monitors CDE and investor compliance with applicable laws, while the 

CDFI Fund monitors CDEs’ compliance with their allocation agreements. IRS 

and CDFI Fund officials weighed the costs and benefits of options to monitor 

compliance and selected controls on that basis. 

View GAO-10-334 or key components.

For more information, contact Michael 

Brostek at (202) 512-9110 or 

brostekm@gao.gov. 
Page i GAO-10-334 

Contents 

Letter 1

Background 3 

CDEs Made NMTC Investments, Which Generally Fill Gaps in 

Project Financing, in All 50 States, Primarily Investing in Real 

Estate 9 

According to CDE Representatives, CDEs Offer NMTC Financing 

Terms That Benefit Low-Income Community Businesses; 

Current Market Conditions Present Challenges and NMTC 

Financing Could Be Simplified 15 

CDEs Use NMTCs for a Range of Purposes with Outcomes That 

Can Be Difficult to Measure and Vary Depending on the Project 32 

IRS and the CDFI Fund Have Established Processes That Will 

Allow Them to Better Assess NMTC Compliance 37 

Conclusions 41 

Matter for Congressional Consideration 42 

Recommendations for Executive Action 42 

Agency Comments and Our Evaluation 43 

Appendix I Objectives, Scope, and Methodology 48 

Appendix II NMTC Investment Data by State, Fiscal Years 2003 

through 2008 52 

Appendix III Description of Primary Uses of NMTC Financing, by 

Investment Type 54 

Appendix IV Comments from the Department of The Treasury 55 

Appendix V GAO Contact and Staff Acknowledgments 58 

Tables 

Table 1: Top 10 States by NMTC Dollars through Fiscal Year 2008 9 

Table 2: Options for Simplifying the NMTC Program 31 

 New Markets Tax Credit 
Table 3: Location and Descriptions of NMTC Case Study Projects 33 

Figures 

Figure 1: NMTC Process for Using Allocated Tax Credits to Make 

QLICIs 5 

Figure 2: NMTC Loans and Investments in Metropolitan and 

Nonmetropolitan Areas 11 

Figure 3: NMTC Loans and Investment by Project Type 12 

Figure 4: NMTC Loans and Investments by CDE Type and Project 

Purpose 13 

Figure 5: Example of a Leveraged NMTC Transaction 17 

Figure 6: NMTC Investment by Calendar Year, 2003 through 2009 24 

Figure 7: Percentage of Flexible Rates and Terms Reported by 

CDEs Used in NMTC Products, Fiscal Year 2003 to Fiscal 

Year 2008 27 

Abbreviations 

AMT Alternative Minimum Tax 

CDE Community Development Entity 

CDFI Community Development Financial Institutions 

CIIS Community Investment Impact System 

FTE Full-Time Equivalent 

GO Zone Gulf Opportunity Zone 

HFA Housing finance agency 

IRS Internal Revenue Service 

LIHTC Low-Income Housing Tax Credit 

NCMS New Markets Compliance Monitoring System 

NMTC New Markets Tax Credit 

OMB Office of Management and Budget 

QALICB Qualified active low-income community business 

QEI Qualified Equity Investment 

QLICI Qualified low-income community investment 

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Page ii GAO-10-334 New Markets Tax Credit
Page 1 GAO-10-334 

 

United States Government Accountability Office

Washington, DC 20548 

 

January 29, 2010 

Congressional Committees 

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

part of the Community Renewal Tax Relief Act of 20001

 to encourage 

investors to make investments in impoverished, low-income communities 

that traditionally lack access to capital. 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 NMTC program is administered by the Community Development 

Financial Institutions (CDFI) Fund in the Department of The 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. As of January 2010, the CDFI Fund had 

allocated all $26 billion in total available NMTC allocation authority. The 

NMTC expired following the 2009 allocation round. However, legislative 

proposals have been put forth that would extend the program beyond 

2009. 

The Community Renewal Tax Relief Act of 2000 mandated that we report 

to Congress on the NMTC program by January 31, 2004, 2007, and 2010. In 

our report issued January 31, 2004, we described the status of the NMTC 

program, profiled CDEs that received first-round allocations, and 

evaluated whether systems were in place or planned to ensure NMTC 

compliance.2

 We concluded that progress was being made in implementing 

the program and recommended that the Internal Revenue Service (IRS) 

and the CDFI Fund work together to take additional steps toward 

monitoring compliance. In response, IRS and the CDFI Fund took steps to 

1

 Pub. L. No. 106-554 (2000). 

2

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

Actions Needed to Monitor Compliance, GAO-04-326 (Washington, D.C.: Jan. 30, 2004). 

 New Markets Tax Credit 
 

design and implement compliance monitoring processes. In our 2007 

report, we reviewed whether the NMTC appeared to be generating new 

investment in low-income communities and revisited CDFI Fund and IRS 

efforts to monitor compliance.3

 We concluded that the NMTC appeared to 

be generating new investment from individual investors and that corporate 

investors appeared to be shifting investments from higher income areas to 

low-income communities. We also made recommendations to IRS to 

develop a representative sample of CDEs to select for a compliance study 

and to explore options for cost-effectively monitoring investor 

compliance. In response, IRS used CDFI Fund data to revise criteria for 

selecting a more representative sample of CDEs to review as part of its 

compliance study and IRS studied the feasibility of developing a 

comprehensive investor compliance program. IRS concluded that such a 

program would not be cost-effective and that currently available data 

should allow them to detect investor noncompliance. In addition to our 

two mandated reports, in the spring of 2009, we addressed congressional 

interest in minority CDEs’ NMTC participation rates and found that 

minority CDEs have not been as successful in obtaining allocations as 

nonminority CDEs.4

 The CDFI Fund generally agreed with the findings of 

our requested report on minority CDEs’ participation in the NMTC 

program. 

Based on consultations with your offices, this final mandated report: 

(1) describes where and how CDEs are using NMTCs to invest in lowincome communities and targeted populations; (2) assesses how CDEs use 

NMTC financing to offer favorable financing terms to low-income 

community businesses and describes options for simplifying NMTC 

investment structures; (3) describes how, if at all, NMTC investments 

appear to support low-income community development; and 

(4) determines how effective measures taken by the CDFI Fund and the 

IRS have been in monitoring CDEs’ and investors’ compliance with the 

NMTC program. 

To accomplish these objectives, we used multiple methods of analysis. We 

analyzed data from the CDFI Fund’s Community Investment Impact 

 

3

 GAO, 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). 

4

 GAO, New Markets Tax Credit: Minority Entities Are Less Successful in Obtaining 

Awards Than Non-Minority Entities, GAO-09-536 (Washington, D.C.: Apr. 30, 2009). 

Page 2 GAO-10-334 New Markets Tax Credit
 

System (CIIS) database that contains data on the status of NMTC projects 

through fiscal year 2008. We analyzed information obtained through a nongeneralizable, purposeful sample of nine case study CDEs. To capture the 

range of projects supported by NMTC investment, we selected case study 

CDEs based on the geographic distribution of their operations, their 

communities of service (i.e., urban or rural), their status as a for-profit or 

nonprofit organization, and the asset size of a CDE or its parent 

corporation. We limited our CDE selection to organizations that received 

NMTC awards in the 2005 and 2006 allocation rounds, to examine NMTC 

investments that better reflect the types of investments that have taken 

place as the program has matured. In addition, we interviewed and 

analyzed information obtained from local lenders and other subject-matter 

experts who are familiar with the low-income communities, targeted 

populations, and businesses that the case study CDEs serve. We also met 

with officials from the CDFI Fund and IRS, and reviewed documents on 

their efforts to monitor NMTC compliance. 

We interviewed CDFI Fund officials with knowledge of the CIIS about the 

steps they take to ensure its accuracy and reviewed the computer 

programs the CDFI Fund uses to generate its NMTC databases. We 

determined that the data in this report were sufficiently reliable for our 

purposes. We conducted this performance audit from September 2008 

through January 2010 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. 

The CDFI Fund in the Department of The Treasury is authorized to 

allocate $26 billion5

 in tax credit authority to CDEs that manage NMTC Background 

 

5

 The original legislation that authorized the program allowed for $15 billion in tax credit 

authority for the NMTC program through 2007. However, the Gulf Opportunity Zone Act of 

2005, Pub. L. No. 109-135 (Dec. 21, 2005) authorized an additional $1 billion of NMTC equity 

for qualified areas affected by Hurricane Katrina over a period of 3 years: $300 million in 

2005, $300 million in 2006 and $400 million in 2007. The Tax Relief and Health Care Act of 

2006, Pub. L. No. 109-432 (Dec. 20, 2006) and the Tax Extenders and Alternative Minimum 

Tax Act of 2008, Pub. L. No. 110-343 (Oct. 3, 2008) extended the amount of NMTC authority 

available by $3.5 billion for both 2008 and 2009. The American Recovery and Reinvestment 

Act of 2009, Pub. L. No. 111-5 (Feb. 17, 2009) added an additional $3 billion of NMTC 

allocation authority to be split equally between the 2008 (retroactively) and 2009 allocation 

rounds. 

Page 3 GAO-10-334 New Markets Tax Credit
 

investments in low-income community development projects.6 Eligible 

organizations may apply for and receive NMTC allocations once they have 

been certified as a CDE by the CDFI Fund (a CDE that receives an 

allocation is often referred to as an allocatee).7

 Since the first round of 

NMTC allocations in 2003, demand for the NMTC has exceeded available 

allocation authority by at least 4.5 times in each allocation round. As of 

January 2010, the CDFI Fund had awarded all $26 billion in NMTC 

authority through 2009. The program expired at the end of 2009, but 

legislation has been proposed that would extend the program for future 

years.8

The NMTC Investment 

Process 

As figure 1 illustrates, after the CDFI Fund makes allocations to CDEs, 

investors make qualified equity investments (QEI) by acquiring stock or a 

capital interest in the CDEs, and, in exchange, can claim tax credits on a 

portion of their investment. The CDEs, in turn, are required to invest 

“substantially all” of the proceeds they receive into qualified low-income 

community investments (QLICI).9

 QLICI investments include (but are not 

limited to) investments in businesses, referred to as qualified active lowincome community businesses (QALICB), to be used for residential, 

 

6

 A low-income community is defined as a census tract (1) in which the poverty rate is at 

least 20 percent or (2) outside a metropolitan area in which the median family income does 

not exceed 80 percent of median statewide family income or within a metropolitan area in 

which the median family income does not exceed 80 percent of the greater statewide or 

metropolitan area median family income. After October 22, 2004, the Secretary of the 

Treasury was authorized to issue regulations designating targeted populations that may be 

treated as low-income communities and procedures for determining which entities are 

qualified active low-income community businesses with respect to such populations. In 

addition, the definition of a low-income community included certain areas not within 

census tracts, tracts with low population, and census tracts with high-migration rural 

counties. 

7

 Community Development Financial Institutions and Specialized Small Business 

Investment Companies automatically qualify as CDEs and only need to register as CDEs 

rather than apply for certification. 

8

 The Tax Extenders Act of 2009 (H.R. 4213) proposes to extend the NMTC for one year. As 

of the time of this report’s publication, the legislation has passed the House of 

Representatives. 

9

 “Substantially all” means that CDEs must use (within 12 months) at least 85 percent of 

investor proceeds in years 1 through 6 and 75 percent in year 7 of the investment. CDEs 

can satisfy this requirement by two methods: (1) direct tracing of investments to specific 

qualified low-income community investments or (2) showing that at least 85 percent of 

their aggregate gross assets (75 percent in year 7) are invested in qualified low-income 

community investments. 

Page 4 GAO-10-334 New Markets Tax Credit
 

commercial and industrial projects, and other types of investments such as 

purchasing loans from other CDEs. 

Figure 1: NMTC Process for Using Allocated Tax Credits to Make QLICIs 

Community 

Development Entity 

(CDE) 

with allocation

for-profita

Invests capital in or makes loans to

Source: GAO.

CDEs

either for-profit or 

nonprofit

Qualified

low-income

community Make a qualified investments

equity investment in

Allocates 

tax credit 

issuance 

rights to

Invests capital in, 

makes loans to, and 

buys loans from

Invests capital in or makes loans to

Return on investment

Return on 

investment

Return on investment

Provides financial services or 

counseling to

Claim tax credit and receive return on investment

Investors

Community 

Development 

Financial 

Institutions 

Fund

Provides financial services or counseling to

Return on investment

Return on investment

a

Only a for-profit CDE can receive qualified equity investment from NMTC investors. These CDEs can 

then make investments in other CDEs that could be for-profit CDEs or nonprofit CDEs or they can 

directly invest the NMTC funds in low-income communities. However, both for-profit and nonprofit 

CDEs can receive allocations from the CDFI Fund. If a nonprofit CDE receives a NMTC allocation 

from the CDFI Fund, it must transfer the allocation authority to a for-profit CDE before NMTC 

investments can be made. 

Although for-profit and nonprofit CDEs can apply for and receive NMTC 

allocations, only for-profit CDEs can offer NMTCs to investors because, by 

Page 5 GAO-10-334 New Markets Tax Credit
 

definition, nonprofit organizations generally do not have access to equity 

investment. When a nonprofit CDE receives a NMTC allocation, it must 

transfer the allocation to one or more of its for-profit subsidiaries. The forprofit subsidiaries do not have to be formed when the nonprofit CDE 

applies for an allocation. However, the subsidiary must submit a CDE 

certification application to the CDFI Fund within 30 days of receiving a 

Notification of Allocation from the CDFI Fund and must be a certified 

CDE before entering into an allocation agreement. 

Once a CDE with an allocation has obtained qualified equity investment 

from NMTC investors and the CDE has invested the funds in an eligible 

low-income community, an investor can claim NMTCs over a period of 

7 years totaling 39 percent of their original QEI.10 The NMTC is a 

nonrefundable tax credit, meaning taxpayers do not receive payments for 

tax credits that exceed their total tax liability. Investors can cease to 

qualify for the NMTC, and trigger a recapture event if the CDE (1) ceases 

to be a certified CDE, (2) does not satisfy the “substantially all” 

requirement, or (3) redeems the investment. A recapture event means that 

an investor will no longer be able to claim the credit, and that the investor 

that originally purchased the equity investment and subsequent holders of 

the investment are required to increase their income tax liability by the 

credits previously claimed plus interest for each resulting underpayment 

of tax.11

The NMTC Application 

Process 

The CDFI Fund’s process for making NMTC awards takes place in two 

phases. Under the first phase, NMTC applicants submit standardized 

application packages in which they respond to a series of questions about 

the CDE’s track record, the dollar amount of allocated tax credits 

requested, and the organization’s plans for using the credits to support 

activities in low-income communities. NMTC applications are first 

reviewed and scored by a group of external reviewers selected by the 

CDFI Fund who have demonstrated experience in business, real estate, or 

community development finance.12 Reviewers receive an applicant’s entire 

 

10 Beginning in the year in which the investment is made, investors are entitled to claim the 

credit for a 7-year period with 5 percent of the investment claimed in each of the first 3 

years and 6 percent in each of the last 4 years. Investors are allowed to carry the credit 

back 1 year and carry the credits forward for a 20-year period. 

11 For a more detailed explanation of the NMTC investment process, see GAO-07-296. 

12 The CDFI Fund requires reviewers to disclose any conflicts of interest related to 

applicants with whom they have or had a relationship. 

Page 6 GAO-10-334 New Markets Tax Credit
 

NMTC application, including applicant information that identifies the 

applicant CDE’s type and the amount of total assets held by the CDE. If 

the applicant has a controlling entity, similar information is provided to 

the reviewers about the controlling entity. 

Each application is reviewed by three external reviewers and, if the CDFI 

Fund identifies a scoring anomaly by one of the reviewers, a fourth 

reviewer also reviews and scores the application. Applications are scored 

based on a range of criteria, and applicants can receive scores of up to 

25 points by each reviewer in each of the following four sections: 

(1) business strategy, (2) community impact, (3) management capacity, 

and (4) capitalization strategy. Applicants can also receive up to 10 

“priority” points by demonstrating a record of successful investment in 

disadvantaged communities or businesses (up to 5 points) and by 

investing in businesses unrelated to the applicant (5 points). By agreeing 

to invest in unrelated entities, CDEs cannot own more than 50 percent of 

the QALICBs in which they invest. However, priority points are not 

included in calculating an applicant’s score until the second phase of the 

application review process. 

CDEs that meet or exceed an overall scoring threshold and a threshold in 

each of the four application sections advance to a second phase of the 

application process in which CDFI Fund officials determine—based on a 

final ranking score—which CDEs will receive allocations and how much 

they will receive.13 The final ranking score is the sum of the aggregate 

business strategy score, the community impact score, and half of the 

priority points that a CDE received for demonstrating a track record of 

successful investment in low-income communities and investing in 

unrelated entities. 

To determine how much allocation authority a CDE will receive, CDFI 

Fund staff review the amount of allocation authority that the CDE 

requested and, based on the information in the application materials, 

award allocation amounts in the order of CDEs’ final ranking scores. When 

 

13Applicants that meet or exceed minimum scoring thresholds (48 out of 75 aggregate 

points—each of the three reviewers assign a score out of 25 for each application section—

in each of the four application sections and an overall aggregate base score of 216 out of 

300 points) are assigned Final Rank Scores, which determine the order by which the CDFI 

Fund reviews CDEs for awards. This means that CDEs receiving average scores of 16 out 

of 25 or higher in each application section and average scores of at least 72 out of 100 

points overall advance to the second phase of the application process. 

Page 7 GAO-10-334 New Markets Tax Credit
 

recommending allocation amounts, CDFI Fund staff members are 

instructed to consider the amount of equity investment the CDE can 

expect to raise in 2 years, the amount of NMTC investment in low-income 

communities that can be deployed within 3 years, the quality of the 

financial products being offered, and the projected impact on low-income 

communities or low-income persons. Not all of the CDEs that satisfy the 

minimum application score thresholds receive allocations. Allocation 

authority is generally awarded in order of final ranking scores until the 

allocation authority is exhausted. 

Evaluating NMTC 

Effectiveness and the “butfor” Test 

In evaluating the effectiveness of the NMTC program, a key question is 

whether the investment is likely not to have taken place in the absence of 

the NMTC. That is, would investors have invested in the specific project in 

the same location “but-for” the NMTC subsidy included in the project? 

Addressing this question is difficult because it requires estimating what 

decisions investors and developers would have made in the absence of the 

tax credit. Several methods have been developed that address some of the 

difficulties present in effectiveness evaluations. For example, statistical 

methods use control or comparison groups in an effort to determine what 

program participants and other potential investors would have done if the 

program did not exist. In a 2007 report, we used methods like these to 

analyze the effect of the NMTC on investor behavior.14

Making definitive assessments about the extent to which benefits flow to 

targeted communities as a direct result of NMTC investments presents 

challenges. For example, the small size of the projects relative to the total 

economic activity within an area or areas eligible for the credit makes it 

difficult to detect the separate effect of the project.15 (For the NMTC 

program, 39 percent of the census tracts qualify and 36 percent of the U.S. 

population lives in these census tracts.) Many of the eligible communities 

may already have significant business activities that could mask NMTC 

impacts. Limitations associated with available data and the application of 

statistical techniques also make it difficult to determine whether benefits 

generated in a low-income community outside the scope of a particular 

project are the direct result of the NMTC program. 

 

14 GAO-07-296. 

15 GAO, New Markets Tax Credit: Implementation Status and Issues Related to Mandated 

Reports, GAO-03-223R (Washington, D.C.: Dec. 6, 2002). 

Page 8 GAO-10-334 New Markets Tax Credit
 

As a result, the analysis included in this report is limited to providing some 

examples of how CDEs participating in the NMTC program themselves 

apply a “but-for” test when selecting projects for NMTC investment. By 

applying these tests, CDEs attempt to identify and direct investment to 

projects in low-income communities that might not be feasible without 

NMTC assistance. 

Through fiscal year 2008, CDEs reported making about $12 billion in 

NMTC investments (on which investors can claim tax credits totaling 39 

percent) to about 2,111 projects located in all 50 states, the District of 

Columbia, and Puerto Rico. 

California received just over $1.2 billion in NMTC investment, the most of 

any state, which was nearly 10 percent of total NMTC investment. New 

York and Louisiana received the second and third largest NMTC 

investment amounts at just under $1.2 billion and $863 million, 

respectively. Table 1 shows the 10 states that received the most NMTC 

investment measured in dollars from 2003 through 2008. 

CDEs Made NMTC 

Investments, Which 

Generally Fill Gaps in 

Project Financing, in 

All 50 States, 

Primarily Investing in 

Real Estate 

Table 1: Top 10 States by NMTC Dollars through Fiscal Year 2008 

(Constant 2008 dollars) 

Rank State 

Total dollar amount of 

investment

Percentage of total 

dollar amounts

Number of 

projects 

Percentage of total 

projects

1 CA $1,208,528,336 9.6% 257 12.2%

2 NY 1,184,947,158 9.5 100 4.7

3 LA 862,539,451 6.9 96 4.5

4 MA 697,153,422 5.6 121 5.7

5 OH 575,835,516 4.6 172 8.1

6 WA 484,742,478 3.9 57 2.7

7 MO 464,481,135 3.7 57 2.7

8 WI 445,072,159 3.6 117 5.5

9 MD 408,771,661 3.3 39 1.8

10 NJ 388,761,424 3.1 44 2.1

Total 6,720,832,740 53.6 1,060 50.2

Source: GAO analysis of CDFI Fund data. 

CDEs also funded more projects in California than any other state, with 

257 projects. CDEs made the 2nd and 3rd largest number of NMTC 

investments in Ohio and Massachusetts, 172 and 121, respectively. 

Page 9 GAO-10-334 New Markets Tax Credit
 

Louisiana, as the third state receiving the most NMTC investment 

measured by dollars, also received significantly higher NMTC investment 

since 2005, likely owing largely to Gulf Opportunity (GO) Zone NMTC 

allocations to assist in recovery and rebuilding from Hurricane Katrina in 

2005. On a per capita basis (using 2008 state populations) the District of 

Columbia received the most NMTC investment, followed by Rhode Island, 

Louisiana, Maine, and Massachusetts. Appendix II contains a full list of the 

number of projects and amount of dollars received by each state, the 

District of Columbia, and Puerto Rico from 2003 through 2008, including 

the amount of NMTC investment in each state on a per capita basis. 

NMTC allocations are distributed widely across states and projects tend to 

be predominantly located in metropolitan areas. Measured in dollars, 

about 90 percent ($10.6 billion) of total NMTC allocations deployed to 

QALICBs were used for projects in designated metropolitan areas. 

Measured by the number of projects, 1,730 (83 percent) of total projects 

were located in metropolitan areas. In recent NMTC allocation rounds, the 

CDFI Fund has taken steps to ensure that additional NMTC allocation 

dollars are targeted to nonmetropolitan communities.16 For example, the 

CDFI Fund now tries to ensure that at least 20 percent of its NMTC 

allocation awards are targeted to nonmetropolitan areas. Figure 2 shows 

the relative proportions measured by amount of dollars and number of 

projects for NMTC projects. 

 

16 The CDFI Fund has defined nonmetropolitan counties as those counties that are not 

contained within a Metropolitan Statistical Area, as defined in Office of Management and 

Budget (OMB) Bulletin No. 99-04 with respect to 2000 census data. Section 223 of the 

American Jobs Creation Act of 2004 (P.L. 108-357) further specifies that low-income 

communities include census tracts in High Migration Rural Counties with a median family 

income at or below 85 percent of the applicable area median family income. Section 102(b) 

of the Tax Relief and Health Care Act of 2006 requires that the CDFI Fund ensure 

nonmetropolitan counties receive a proportional allocation of Qualified Equity Investments 

(QEI) under the NMTC Program. 

Page 10 GAO-10-334 New Markets Tax Credit
 

Figure 2: NMTC Loans and Investments in Metropolitan and Nonmetropolitan Areas 

0

10

20

30

40

50

60

70

80

90

100

By projects By dollars

Percentage

Source: GAO analysis of CDFI Fund data.

Projects

Metropolitan

Nonmetropolitan

82.7%

17.3%

90.5%

9.6%

Most of NMTC Investment 

Has Been in Real Estate 

Projects by For-Profit 

Allocatees 

Although the range of activities financed by CDEs varies, NMTC 

investments have been used primarily for commercial real estate projects. 

As figure 3 shows, CDEs used about 65 percent of total NMTC loans and 

equity investments for real estate projects, although designating fewer 

NMTC loans and investments, about 22 percent, to finance businessrelated activities of QALICBs. According to our analysis of CDFI Fund 

data, commercial real estate construction and rehabilitation accounted for 

nearly all (about 98 percent) of the investment in real estate. Commercial 

real estate facilities may also include mixed-use facilities that have a 

portion of the building dedicated to for-sale housing or rental housing and 

a portion dedicated to commercial activities. Investments strictly in 

housing account for the remaining portion of NMTC investments in real 

estate—investments strictly in rental housing are prohibited under 

program rules. 

Page 11 GAO-10-334 New Markets Tax Credit
 

Figure 3: NMTC Loans and Investment by Project Type 

Percentage of dollars

Source: GAO analysis of CDFI Fund data.

Projects

0

10

20

30

40

50

60

70

Mixed Other

purpose

Real Business

estate

65.3%

22.2%

11.2%

1.3%

Note: Business includes the following categories of business-related projects: business, working 

capital, fixed assets, and microenterprises. Real estate includes the following categories of real estate 

projects: commercial construction and rehabilitation, and residential construction and rehabilitation of 

single and multifamily housing. The mixed purpose category includes projects with multiple CDEs 

contributing for different purposes—the real estate category includes mixed-use facilities with a single 

CDE contributing or with multiple CDEs all reporting real estate as the purpose. 

According to a recent paper developed for the Federal Reserve Bank of 

San Francisco, the CDEs have likely made real estate investment the 

predominant form of NMTC investment because investors see real estate 

as more profitable than other types of investment and less likely to fall out 

of compliance with NMTC restrictions. For example, real estate deals can 

often be more easily paired with other federal, state, and local tax 

incentives.17 Representatives from CDEs we interviewed also noted that 

real estate projects are fixed in location, making it less likely that the 

project will fall out of compliance with NMTC program rules by moving 

the investment to a nonqualifying census tract within the 7-year NMTC 

compliance period. Furthermore, the investments are usually large and 

 

17 Lauren Lambie-Hanson, Addressing the Prevalence of Real Estate Investment in the New 

Markets Tax Credit Program, Federal Reserve Bank of San Francisco, Working Paper 

2008-04, Fall 2008. 

Page 12 GAO-10-334 New Markets Tax Credit
 

long term, making it unlikely that the investors will be repaid any principal 

on their investments within the 7-year compliance period, which would, by 

a requirement of the NMTC program, necessitate a reinvestment of the 

funds in another qualified low-income community business. 

Although the range of projects adopted by for-profit and nonprofit CDEs 

varied across different purpose categories, CDEs established or controlled 

by for-profit entities (and partnerships between for-profit and nonprofit 

CDEs) made a majority of their QEIs in real estate projects. On the other 

hand, CDEs established or controlled by nonprofit entities made a 

majority of their QEIs in business projects. 

Figure 4: NMTC Loans and Investments by CDE Type and Project Purpose 

0

10

20

30

40

50

60

70

80

90

100

For-profit CDEs Nonprofit CDEs Partnerships

Percentage

Source: GAO analysis of CDFI Fund data.

Projects

Non-real estate

Real estate

27.7%

72.3%

57.5%

42.5%

9.9%

90.1%

Page 13 GAO-10-334 New Markets Tax Credit
 

Through fiscal year 2008, our analysis indicates for projects with available 

data NMTC financing has been used, on average, to support about 36 

percent of total project costs for projects that receive NMTC financing. 

Due to limitations with project-level CDFI Fund data,18 we were unable to 

identify what portion of each individual project NMTC investments 

supported. However, according to CDE officials we interviewed, although 

NMTC investments are unique to individual projects and the portion of the 

project being financed with NMTC funds varies depending on the amount 

of other funding available, NMTC investments generally support 20 

percent to 30 percent of the total project costs for a particular project. For 

example, NMTC funds may be paired with other federal tax benefits, such 

as Historic Tax Credits,19 or used in conjunction with state and local 

development subsidies, including programs such as tax increment 

financing.20 Other projects may have access to funds from private 

foundations or individual donors. CDE representatives indicated that 

NMTC financing is frequently used to fill the gap between funds that have 

already been raised for a particular project and the total amount of 

funding needed to complete a project. 

Representatives from 

CDEs We Interviewed Said 

Most Projects Receive 

NMTC Funding to 

Supplement Funds from 

Other Sources 

According to data reported by CDEs to the CDFI Fund, most investment 

made by the CDEs in QALICBs comes in the form of term loans. Term 

loans comprised $10.1 billion (85.1 percent) of total NMTC dollars 

distributed by CDEs through fiscal year 2008 to QALICBs. Participating 

CDEs also used debt with equity features, lines of credit, and other types 

of transactions, but these transaction types accounted for smaller portions 

of the overall NMTC investment from 2003 through 2008. 

 

18 These limitations, which include instances where multiple CDEs report different project 

costs for the same project and lead to the potential over-, or in some cases under-, counting 

of project costs, are addressed in more detail beginning on page 35 of this report. 

19 According to our 2007 report, the NMTC is frequently combined with at least one other 

government tax incentive that can provide additional tax benefits to the investor. 

Respondents to a GAO survey of NMTC investors noted that they most frequently 

combined the NMTC with state and local tax benefits, but also combined NMTCs with 

other federal tax benefits, including benefits for rehabilitating historic properties, 

environmental tax incentives, and tax benefits for Empowerment Zones and Enterprise 

Communities. 

20 Local governments often establish tax increment financing (TIF) districts to use 

additional property tax assessments collected from economic development projects to 

retire the debt that a developer had to incur to undertake the project. 

Page 14 GAO-10-334 New Markets Tax Credit
 

According to CDFI Fund data and representatives from CDEs we 

interviewed, CDEs generally provide beneficial financing terms by either 

using NMTCs to leverage additional investment dollars to place in 

QALICBs or by subsidizing the interest rate on a loan to a QALICB (i.e., 

charge lower than market rate interest on its loans). In the case of the 

leveraged NMTC model, at least some portion of the tax credit equity 

generated from the sale of tax credit authority to NMTC investors is 

generally left in the QALICB at the end of the 7-year period in which 

investors can claim the credit. Businesses are able to obtain loans from 

CDEs that essentially function as private equity and should help QALICBs 

refinance their debt into more conventional loan products after the 7-year 

tax credit period. In the case of the subsidized interest rate on loans to 

QALICBs, less equity, if any, may be left in the QALICB after the 7-year 

period, but QALICBs may save more on interest costs than under the 

leveraged model. These businesses require less cash flow to repay loans 

than would be needed in the absence of the credit. 

According to CDE 

Representatives, 

CDEs Offer NMTC 

Financing Terms That 

Benefit Low-Income 

Community 

Businesses; Current 

Market Conditions 

Present Challenges 

and NMTC Financing 

Could Be Simplified 

Under the leveraged NMTC model, a tax credit equity investor generally 

forms a limited liability pass-through entity that obtains a loan from a 

bank. The tax credit equity investor combines its own funds with the loan 

from the bank (referred to as the leveraged lender) to invest in a CDE 

(makes a QEI) that, in turn, invests makes a qualified low-income 

community investment (QLICI). Because program rules require that CDEs 

obtain qualified equity investment from NMTC investors, the tax credit 

investor must obtain a loan from the leveraged lender—when the funds 

are combined in the limited liability entity, that entity then makes an 

equity investment in a CDE. In doing so, the financial benefits from the 

transaction are separated from the tax benefits; the leveraged lender 

receives interest payments on the loan to the limited liability pass-through 

entity and the tax credit investor receives a return on their investment by 

purchasing the right to claim tax credits on the total amount of the QEI. 

The leveraged investment structure may offer a more attractive 

combination of risk and return to investors than the direct investment 

approach illustrated in figure 1. From the leveraged lender’s perspective 

(as illustrated in fig. 5), this investment structure may be attractive 

Page 15 GAO-10-334 New Markets Tax Credit
 

because the loan-to-value ratio21 is more favorable than it would have been 

if the debt was not being combined with the investors’ equity. The more 

favorable ratio may compensate the leveraged lender for assuming a 

greater degree of risk, most notably if the business that receives the loan 

from the CDE defaults on its loan agreement. In that case, the leveraged 

lender’s investment is secured by the equity in the original investment in 

the limited liability entity, i.e., generally the tax credit investor’s 

contribution to the limited liability entity. From the tax credit investor’s 

perspective, the base for calculating the credit is much larger than it would 

be without the participation of the leveraged lender and if the business 

defaults on its loan, the investor is still generally allowed to claim the full 

amount of the credit. 

 

21 Loan-to-value ratio is the relationship, expressed as a percentage, between the amount of 

a loan and the value of the asset that the loan is being used to finance. NMTC financing may 

assist businesses in obtaining loan-to-value ratios generally associated with more 

conventional financing in cases where low-income community businesses obtain equity or 

equity-like investment from NMTC investors (the equity reduces the amount of debt that 

the QALICB must borrow in relation to the value of the asset the loan is being used to 

finance). 

Page 16 GAO-10-334 New Markets Tax Credit
 

Figure 5: Example of a Leveraged NMTC Transaction 

Source: GAO.

Investor limited liability entity

Total fund: $10,000,000

(Tax credit equity $2,808,000 +

leveraged loan: $7,192,000)

Community development entity (CDE)

(5% feeb

, $500,000)

Leveraged lender 

(Typically a bank)

$7,192,000 NMTC non-recourse loana

@market-based (or below) interest rate

Loan 1: Tax credit equity

$2,308,000 @ 1 percent interest

The CDE loans funds generated from the sale of tax credits

to investors at a low interest rate with the intention of 

converting the debt to equity in the QALICB following the 

7-year period in which the investor can claim NMTCs

through a “put-call” option.

Loan 2: Leveraged debtc

$7,192,000 @ Market-based (or below) interest rate

The CDE provides a second loan to the QALICB, generally 

with a market-based (or below) interest rate, on which the 

QALICB will make payments during the 7-year NMTC 

compliance period. At the end of the 7-year period, the 

QALICB generally needs to refinance this loan.

Tax credit investor

Investor claims up to $3,900,000 million in tax credits

(10,000,000*.39)

Credit Price = 72 cents

Tax credit equity to Investment fund = $2,808,000 

($3,900,000*$0.72)

Qualified active low-income community business (QALICB)

● Asset management fees

● Legal fees

● Other associated fees

After CDE and third party fees, $2,184,000 or 56 percent of the tax 

credits claimed by the investor remain in the QALICB following the 

7-year compliance period.

Interest on loan 2 Interest on loan 1

+ Tax credits

$9,500,000 Qualified low-income community 

investment (QLICI) divided into two loans

$10,000,000 Qualified equity 

investment (QEI)

Repay loans 1 and 2

Repay loans 1 and 2

a

The leveraged lender does not have recourse to the assets of the QALICB if it were to default on its 

loan repayments. Rather, the leveraged lender only has recourse to the assets of the limited liability 

entity formed to make a QEI. 

b

According to the CDFI Fund, most CDEs commit to invest more than 95 percent of their QEIs as 

QLICIs. For the 2009 pool of awardees, the average amount was 97.5 percent. Each awardee is 

required to meet its stated commitment as part of its allocation agreement. 

c

Due to the 7-year compliance period associated with the NMTC, most leveraged loans are interestonly for the 7-year period. 

In this example, the tax credit investor obtains its return on investment by 

purchasing the tax credits for an amount less than the full value of the tax 

credits that it will be allowed to claim. For example, in a $10 million QEI in 

Page 17 GAO-10-334 New Markets Tax Credit
 

a CDE, the tax credit investor would be able to claim about $3.9 million in 

tax credits over 7 years.22 If the tax credit investor invests $2.8 million in 

the limited liability entity, in effect, it pays 72 cents to the CDE for each 

dollar of tax credits that it will be allowed to claim.23 The leveraged lender 

would provide a $7.2 million loan to the limited liability entity for the total 

QEI of $10 million. Once the CDE obtains the QEI from the limited liability 

entity formed between the tax credit investor and the leveraged lender, it 

then makes QLICIs in qualified low-income communities. 

In general, the QLICIs take place in the form of loans to businesses 

because CDEs are generally required to adhere to related-party tests which 

require that the CDE have no more than a 50 percent ownership stake in a 

QALICB. Providing equity directly to a QALICB could result in the CDE 

owning more of a QALICB than is allowed. Representatives from CDEs we 

interviewed said that, as a result of the related-party test, CDEs generally 

offer two loans to a QALICB in a leveraged transaction (as opposed to one 

loan and one equity investment)—one loan that represents the funds 

loaned to the partnership by the leveraged lender (usually an interest-only 

loan for a 7-year period) and a second loan that represents some portion of 

the tax credit equity generated from the sale of the tax credit by the CDE 

to the tax credit investor (which is typically converted to equity at the end 

of the 7-year period). 

The QALICB is responsible for repaying the interest (and sometimes 

limited principal) on both loans during the 7-year tax credit period. At the 

end of the 7-year period, however, the QALICB generally has the option of 

purchasing the tax credit equity from the CDE through a “put” option for a 

nominal fee.24 The original tax credit investor does not generally get their 

 

22 Because inflation reduces the value of the dollar over time and because of the time value 

of money, the tax credits are worth somewhat less than the $3.9 million at the time the 

investment is made than the $3.9 million total over the 7-year period. 

23 $0.72 per dollar of tax credit authority x $3.9 million in authority = $2.8 million in tax 

credit equity in the pass-through entity. 

24 A “put” option is a contract that gives the holder of the contract the right to sell all or a 

portion of its interest in a security to a specified entity at a predetermined price. 

Conversely, a “call” option gives the holder the right to purchase all or a portion of an 

interest in a security from a specified entity at a predetermined price. In the case of the 

NMTC leveraged structure, CDEs generally structure transactions so that the tax credit 

investor may “put” its tax credit equity to the QALICB or the QALICB may “call” the tax 

credit equity from the investor, in either case, for a predetermined price at the end of the 

7-year period. 

Page 18 GAO-10-334 New Markets Tax Credit
 

original investment back because they obtain a sufficient return on their 

investment from the initial sale of the tax credit equity to the CDE. The 

QALICB should then generally be able to use the remaining equity 

generated from the sale of the tax credit to help it refinance its remaining 

debt into a more conventional, market rate loan with a standard loan-tovalue ratio. 

Although, according to CDEs and other experts we interviewed, the ability 

to purchase the NMTC equity from the investor after 7 years is the primary 

benefit of the leveraged model to the low-income community business, the 

model may also generate other benefits. For example, by combining the 

tax credit equity and the leveraged debt in a limited liability entity, CDEs 

can raise more money to invest in low-income community businesses than 

would otherwise be available. CDE representatives also noted that using 

tax credits to leverage debt also allows CDEs to offer competitive or 

below-market interest rates on some NMTC loans issued to QALICBs. In 

addition, by introducing the NMTC leveraged structure, CDE 

representatives indicated it is often possible to obtain other incentives, 

whether from private investors or governments, including additional 

equity, for projects. 

Structuring deals in such a manner requires QALICBs to obtain a legal 

opinion to ensure that the loans to the QALICB represent “true debt.” 

According to representatives from CDEs we interviewed, this is 

particularly true for the loan representing the tax credit equity given that it 

has equity-like features25 and the investor is expected to sell the equity to 

the QALICB at the end of the 7-year period in which the investor can claim 

tax credits. According to CDE and many QALICB representatives we 

interviewed, fees associated with obtaining such legal opinions and other 

expenses, including asset management fees26 over the 7-year compliance 

period, reduce the amount of tax credit equity that reverts to the QALICB 

after 7-years. In addition, according to representatives from CDEs, 

 

25 The loan representing the tax credit equity has “equity-like” features because a portion of 

it (less associated fees) is generally to be converted to equity in the QALICB after 7 years 

through a “put-call” mechanism. 

26 According to representatives from CDEs we interviewed, the fee structure of an NMTC 

transaction varies on a transaction-by-transaction basis. For example, in some transactions, 

QALICBs might pay asset management fees to the CDE to ensure that the QALICB remains 

compliant with NMTC requirements. However, the amount of fees charged by CDEs and 

other participating parties varies by transaction, as does who bears the burden of paying 

them. 

Page 19 GAO-10-334 New Markets Tax Credit
 

QALICBs, and attorneys representing CDEs, QALICBs, and investors with 

whom we spoke, the fees generated by the complexity of NMTC 

transactions are not necessarily subject to the “substantially all” test 

because some are paid by the QALICB out of the proceeds of the QLICI or 

other sources of funds and not by the CDE out of the QEI, which is the 

point at which the “substantially all” test is assessed. 

The amount of capital that is left in the QALICB is reduced by such fees, as 

well as by any reduction in the price that the tax credit investor pays for 

the right to claim the tax credits. The combined effect of high fees and 

lower price would be a lower net present value of the tax credit equity that 

remains in the QALICB after the 7-year period. The equity remaining in the 

QALICB after 7 years is the primary benefit of the NMTC to the QALICB 

under the leveraged structure because it should help QALICBs to obtain 

more conventional project financing after the NMTC compliance period is 

finished. Businesses that have considerable equity are more likely to have 

better loan-to-value and debt service coverage ratios27 and are generally 

more likely to obtain loans with conventional interest rates than 

businesses without their own equity. For this reason, the larger the 

amount of equity remaining in the business, the greater the likelihood that 

the business will continue on its own without any further government 

subsidies. Because the equity remaining after 7 years is the primary benefit 

to the low-income community business, the amount remaining as a 

percentage of the cost of the program to the government is an indicator of 

how cost-effectively the financial structure is performing. 

To understand the NMTC’s cost-effectiveness, the CDFI Fund would need 

to collect data on the sale price of the tax credits, fees paid by QALICBs 

not subject to the “substantially all” test, and the amount of equity that 

CDEs estimate will be left in the QALICB at the end of the 7-year period in 

which tax credits can be claimed. However, because the CDFI Fund does 

not collect this data, it is not possible to identify with precision the net 

benefits flowing to low-income community businesses in relation to the 

cost of the program to the government in foregone tax revenue. According 

to representatives from CDEs we interviewed, such information would not 

likely impose significant additional burdens on CDEs in addition to 

 

27 Debt service coverage ratios provide a measure of how much revenue a business tends to 

generate in relation to its debt obligations. NMTC financing, in some cases, could assist in 

businesses demonstrating more standard debt-service coverage ratios because when 

businesses obtain below market interest rates on loans, they generally have lower debt 

service payments than in the absence of the NMTC. 

Page 20 GAO-10-334 New Markets Tax Credit
 

current NMTC reporting requirements and would be readily available on a 

transaction-by-transaction basis. 

Although complete data on the cost of NMTC transactions in relation to 

the equity left in low-income communities do not exist, our analysis of 

leveraged transactions, which is limited to those identified in our case 

studies indicates that the projected equity in low-income community 

businesses after the 7-year period in which tax credits can be claimed is 

about 50 percent to 65 percent of the amount of tax credits that the tax 

credit investor can claim over 7 years. All eight of the CDEs that were the 

focus of our case studies and participated in leveraged transactions 

generally agreed that it is reasonable to expect that the CDE will leave 

about 50 percent to 65 percent of the amount of tax credits investors can 

claim in QALICBs after the 7-year tax credit period and that the 

complexity of the leveraged structure is a factor causing less equity to end 

up in the low-income community businesses. 

Because the NMTC investors are also required to pay taxes on a portion of 

their earnings from their NMTC investment and some QALICBs owe taxes 

on the equity remaining in the QALICB following the 7-year tax credit 

period, the total cost of the program to the government may be lower than 

the sum of the tax credits and the amount of equity left in the QALICB may 

actually be a larger share of total cost of the NMTC program to the 

government than the 50 percent to 65 percent figure cited above. However, 

the amount of tax credit equity left in the QALICB as a percentage of the 

total cost to the government also depends on fees paid and assumptions 

made about the time value of money.28 In addition, to the extent that 

NMTC investors may not be allowed to claim all of the tax credits that they 

initially believe they will be eligible to claim, the cost of the tax credit 

program to the government would be lower. Other market conditions also 

play a role in determining the amount of residual equity that ends up in 

QALICBs—when NMTC prices are higher, more equity is generated from 

the sale of the credits to investors than when prices are lower, which 

increases the capital available for CDEs to reinvest in low-income 

community businesses. 

 

28 In periods of higher interest rates, the present value of a dollar to be received in the 

future is worth less than in periods of lower interest rates. 

Page 21 GAO-10-334 New Markets Tax Credit
 

In contrast to the leveraged structure, another common method for 

structuring NMTC transactions involves using NMTCs to subsidize interest 

rates to businesses in low-income communities. In this structure, a single 

investor (or multiple investors) may make an investment in a CDE and the 

CDE then, in turn, loans the money to a QALICB. As a result of the 

investors being able to claim NMTCs, the CDE is able to offer the loan at a 

below-market interest rate. The CDE generally passes the interest paid on 

the loan back to the NMTC investor. By combining the tax credits with a 

below-market interest rate, the investor is generally able to obtain a 

sufficient return on investment to justify the risk associated with investing 

in a low-income community business. Representatives from one CDE we 

interviewed said that the CDE can generally offer loans with interest rates 

between 3.5 and 4.0 percentage points below the standard market rates at 

a given time and in a given location. Depending on prevailing market 

interest rates for loans, NMTC loans under the subsidized rate model could 

be as much or more than 50 percent below market interest rates. For 

example, if an investor were to offer a loan to a QALICB at a 7 percent 

interest rate, subsidizing the loan with NMTCs would likely allow the 

investor to offer the loan at 3.5 percent or 3.0 percent, or about 50 percent 

to 57 percent below market, resulting in considerable interest savings to 

the QALICB. Although this is a considerable interest rate savings to the 

QALICB over 7 years, available data make it difficult to compute a 

measure of interest savings to the QALICB in relation the amount of tax 

credits claimed by the investor or whether the interest savings will allow 

the QALICB to save enough in interest over the course of the loan to be in 

a position to obtain more conventional financing after 7 years. 

The subsidized interest rate model differs from the leveraged model in that 

no equity generated from the sale of the tax credits to investors is 

generally left in the low-income community business after the 7-year 

period. However, according to representatives from CDEs that we 

interviewed, the subsidized interest rate model is also less complex than 

the leveraged model and it may be possible to close NMTC transactions 

with fewer legal costs and other associated fees than in the leveraged 

model. As a result, the subsidized rate model may allow CDEs to finance 

smaller projects than can generally be completed using the leveraged 

model. 

Page 22 GAO-10-334 New Markets Tax Credit
 

According to representatives from CDEs and CDFI Fund data, current 

economic conditions also may be reducing investors’ appetite for tax 

credits, meaning that less tax credit equity is likely being generated from 

the sale of tax credits from CDEs to investors and CDEs, in general, are 

able to generate less QEI. For example, representatives from several CDEs 

indicated that before the housing market collapse and subsequent credit 

crisis in 2008, investors generally paid between $0.75 and $0.80 per dollar 

in tax credits. Under current economic conditions, these representatives 

said that investors may only be willing to pay $0.65 to $0.70 per dollar in 

tax credits. One CDE indicated that it has sold NMTCs to investors for as 

low as $0.51 per dollar and another CDE indicated that it had heard of 

NMTCs being sold for as low as $0.48. These lower prices to obtain 

NMTCs also imply that the amount of subsidy reaching the QALICBs has 

declined significantly. 

Current Economic 

Conditions May Also 

Decrease the NMTC’s CostEffectiveness by Lowering 

the Price Investors Pay for 

Tax Credits and Reducing 

the Number of Investors 

In addition, as figure 6 shows, NMTC investment in 2009 is likely to be less 

than in 2007 and 2008, which may be partially due to current credit market 

conditions. As of the end of 2009, CDEs had raised about $2.4 billion in 

QEI during calendar year 2009.29 According to representatives from CDEs 

we interviewed, when demand for the credit is lower, CDEs are more 

likely to sell tax credits to investors at reduced prices. 

 

29 Although the 2009 figure is updated through the end of the year, CDEs have up to 60 days 

to report investment data to the CDFI Fund after the investments are made, meaning 

additional 2009 investments could be reported in January and February of 2010. However, 

even if the CDEs raise more QEI in the 4th quarter of 2009 than any other 4th quarter of the 

year in which NMTCs have been available, or about $1.3 billion (which CDFI Fund officials 

do not expect), NMTC investment in 2009 would be about 16 percent to 19 percent lower 

than in 2007 and 2008, respectively. 

Page 23 GAO-10-334 New Markets Tax Credit
 

Figure 6: NMTC Investment by Calendar Year, 2003 through 2009 

Dollars (in billions)

Source: GAO analysis of CDFI Fund data.

Calendar year

0

0.5

1

1.5

2

2.5

3

3.5

4

2003 2004 2005 2006 2007 2008 2009

To increase the number of investors, industry organizations and CDEs 

have offered several policy options. Some have suggested that allowing 

NMTC investments to offset alternative minimum tax (AMT)30 liability 

would broaden the pool of potential investors. For example, while NMTCs 

cannot be used to offset AMT liability, other tax incentives for community 

development, including Low-Income Housing Tax Credits for rental 

housing and the Historic Rehabilitation Credit, can be used to offset AMT 

liability. If such an allowance increased the pool of investors and the price 

investors are willing to pay for the credit, it might have the beneficial 

effect of ensuring that a larger portion of the subsidy ended up in 

QALICBs. However, such an allowance would increase federal revenue 

losses to the extent that investors subject to the AMT who are not 

currently investing in NMTCs become NMTC investors and claim credits 

that would otherwise go unclaimed. Our analysis did not address whether 

such changes would likely increase the number of likely NMTC investors, 

 

30 AMT is a separate federal tax system that applies to both individual and corporate 

taxpayers. It parallels the income tax system but with different rules for determining 

taxable income, different tax rates for computing tax liability, and different rules for 

allowing the use of tax credits. 

Page 24 GAO-10-334 New Markets Tax Credit
 

contribute to increased NMTC investment, or assist in increasing the 

amount that investors are willing to pay for NMTCs. 

Although It Is Unclear 

Whether Low-Income 

Community Projects 

Would Occur “but-for” the 

NMTC, According to CDE 

Representatives, CDEs Use 

a Variety of Methods to 

Determine if Low-Income 

Community Businesses 

Need NMTC Financing 

Representatives from CDEs we interviewed indicated that the “but-for” 

test can be applied in a variety of different ways. For example, some CDEs 

require businesses to demonstrate that they have not otherwise been able 

to obtain financing before considering whether it would be appropriate to 

provide NMTC funds to a business. CDEs may also require potential 

beneficiaries of NMTC funds to complete a questionnaire that CDEs use to 

assess the likelihood that other forms of financing may be available. 

Representatives from other CDEs we interviewed indicated that they 

review their ongoing list of potential projects, often referred to as their 

project pipeline, to make assessments about which businesses or 

development projects require NMTC financing. Some CDEs may apply for 

an NMTC allocation with a specific project in mind for which they have 

tried to obtain financing in the past. 

However, evidence we gathered was inconclusive in corroborating that 

procedures used by CDEs target funding only to projects that would not 

have otherwise been done. On the one hand, in most cases, representatives 

from CDEs and businesses we interviewed indicated that alternative 

sources of financing were not available to finance their respective 

projects. On the other hand, in two cases, businesses that had obtained 

NMTC financing said that alternative sources of financing would have 

been available for their project, but that the terms and conditions offered 

as a result of the NMTC financing made their respective projects less 

expensive and the use of NMTCs was more attractive than other sources 

of financing. In addition, although low-income community businesses may 

be benefiting from NMTC financing, it is not always clear how much better 

the terms and conditions being offered are than would otherwise be 

available. For example, representatives from CDEs we interviewed 

indicated that it is sometimes difficult to identify standard market-based 

interest rates to make comparisons across projects. CDE representatives 

indicated that prevailing, standard market interest rates vary by industry 

type, geographic location, and over time. 

The CDFI Fund requires that CDEs commit to providing financial products 

to QALICBs that contain better rates and terms than the QALICBs would 

be able to obtain in the absence of NMTCs being part of the deal structure 

(CDEs make this commitment when they sign allocation agreements with 

the CDFI Fund after being notified that they received an NMTC 

allocation). The CDFI Fund prioritizes equity or equity-like investments 

Page 25 GAO-10-334 New Markets Tax Credit
 

and below-market interest rate loans as generally providing the greatest 

benefits to low-income community businesses. The CDFI Fund also 

collects information on other measurements indicative of flexible financial 

products, such as lower than standard debt-service coverage ratios, higher 

than standard loan-to-value ratios, and other measurements.31

As figure 7 shows, CDEs report providing equity or equity equivalent terms 

and conditions (first three columns in the figure) for about 22 percent of 

financial products that include NMTC financing. Below-market interest 

rates on loans are the most common type of flexible financial product 

being offered. About 82 percent of financial products that CDEs report to 

the CDFI Fund indicate that QALICBs have received below-market interest 

rate loans. In the case of leveraged transactions, the loan made by the tax 

credit equity investor is generally far below market interest rates and the 

loan from the leveraged lender is at a more standard interest rate, although 

lower than what would have been attainable in the absence of the NMTCs. 

In addition, the large number of loans in comparison to other equity 

investments does not reflect the portion of those loans designed to 

essentially function as private equity under the leveraged model. 

 

31 Other than equity or equity equivalent financing and below market interest rates, the 

CDFI Fund defines the following measures as being flexible rates and terms for NMTC 

financial products: subordinated debt, lower than standard origination fees, longer than 

standard interest only periods, longer than standard amortization periods, more flexible 

borrower credit standards, nontraditional forms of collateral, loan loss reserve standards 

that are less than standard, higher than standard loan-to-value ratios, and lower than 

standard debt-service coverage ratios. 

Page 26 GAO-10-334 New Markets Tax Credit
 

Figure 7: Percentage of Flexible Rates and Terms Reported by CDEs Used in NMTC 

Products, Fiscal Year 2003 to Fiscal Year 2008 

Percentage

Source: GAO analysis of CDFI Fund data.

Financial term or condition

0

10

20

30

40

50

60

70

80

90

Below-market

interest rates

Lower origination

fees

Interest only

payments

Longer amortization

periods

Subordinated

debt

Nontraditional

credit

Equity product

Equity terms

Debt/equity

features

6.0% 6.7% 9.3%

12.6%

31.2%

49.6%

56.2%

60.9%

82.6%

Options for Simplifying 

NMTC Transaction 

Structures 

Although the NMTC’s authorizing legislation and legislative history 

provide little explicit information on the program’s intent, the NMTC 

program seems designed to increase the amount of investment, 

particularly equity investment, available to businesses in low-income 

communities where conventional access to credit has traditionally been 

limited. While our analysis does not allow us to draw conclusions about 

what would have happened in low-income communities absent the credit, 

to the extent the NMTC program subsidizes projects that would not 

otherwise have occurred, businesses benefiting from both leveraged and 

subsidized interest rate NMTC investments may be aiding in the 

development of low-income communities. To increase the effectiveness of 

how NMTC funds are dispensed to low-income businesses, changes to the 

application of the related entities test or replacing the tax credit with a 

grant are two options that could simplify NMTC transaction structures and 

Page 27 GAO-10-334 New Markets Tax Credit
 

increase the amount of equity investment available to low-income 

businesses. 

According to representatives from CDEs we interviewed, economic 

development experts, and attorneys and accountants that execute NMTC 

transactions and based on actual transactions we reviewed through our 

case studies, the leveraged investment model is the structure that most 

directly develops equity in low-income community businesses. Though the 

leveraged NMTC investment model is structured to leave equity in lowincome community businesses at the end of the 7-year loan period, the 

transaction’s complex structure and its associated costs (in the form of the 

return on investment to tax credit investors and associated fees), raises 

questions about whether this is the most effective way to subsidize the 

creation of equity in low-income community businesses. According to 

representatives from CDEs we interviewed, identifying ways to streamline 

the leveraged model may result in CDEs placing more investment in 

QALICBs at the beginning of the 7-year period while incurring fewer fees 

and related costs that reduce the amount of tax credit equity that 

ultimately reverts to the QALICB under the current structure. According to 

representatives from CDEs and lawyers who developed rules for 

implementing the leveraged structure while working at IRS, one change 

that would reduce the complexity of leveraged transactions would be to 

apply the related parties test before the QLICI is made rather than 

afterwards, as is currently the case. This would allow CDEs to hold equity 

stakes in QALICBs in excess of the current 50 percent limit provided the 

CDE (or its investors) did not have more than 50 percent ownership of the 

QALICB before making the QLICI. The CDFI Fund is considering changes 

to the related entities test.32 Although this would somewhat increase the 

equity that can be left in low-income businesses, it would not address the 

major factor—the sale of the tax credits—which reduces equity that 

ultimately is left in the businesses. 

Option one 

According to our analysis, replacing the tax credit with a grant likely 

would increase the equity that could be placed in low-income businesses 

and make the federal subsidy more cost-effective. When the demand for 

NMTCs was highest, the credits sold for $0.75 to $0.80 per dollar. 

Therefore, the federal subsidy intended to assist low-income businesses 

Option two 

 

32 While the NMTC statute defines what constitutes ownership under the related-entity test, 

the CDFI Fund has the authority to establish the timing with respect to when the test of 

relatedness shall be applied. 

Page 28 GAO-10-334 New Markets Tax Credit
 

was reduced by 20 percent to 25 percent before any funds were made 

available to CDEs. With low demand for the tax credits, as has recently 

been the case, the credits sold for as low as $0.50 cents, or lower, halving 

or more the amount of federal subsidy available to CDEs for investment in 

low-income businesses. In a grant program, these up-front reductions in 

the federal subsidy could be largely or entirely avoided. 

A grant program could take various forms. A grant program could begin 

with the CDFI Fund making grants to CDEs, and then the CDEs making 

either equity investments in low-income businesses or providing them 

grants. Because the NMTC is structured much like a grant program—the 

CDFI Fund advertises for applications, peer review panels score 

applications, Fund staff determine amounts of NMTCs to allocate to 

winning applicants, and the CDFI Fund gathers information to monitor 

compliance and gauge program outcomes—the CDFI Fund likely could 

substantially use its current process for allocating the tax credits to 

instead allocate grant funds to CDEs. However, in switching the NMTC 

program to a grant program, some additional administrative costs may be 

incurred by the CDFI Fund and other interested parties, including CDEs 

and investors. For example, the Fund and CDEs would have 

responsibilities related to tracking costs associated with the grants to 

ensure only applicable costs are funded by the grant. Whether these costs 

would be greater or lesser than costs for the current tax credit program 

would depend somewhat on the design of any grant program. CDEs would 

continue to play a critical role in selecting and monitoring projects. 

To ensure that the federal subsidy remains in the business, whether the 

CDE then made an equity investment (owns part of the business) or a 

grant (has no ownership interest) to the low-income business, those funds 

ultimately would be left in the business. In either case, to ensure that the 

business has at least as much funding up front as it receives in the NMTC 

structure, a private lender would need to loan funds to the business.33 The 

CDEs could either broker this loan, somewhat as they do in the current 

structure, or the business itself could go into the market for a loan using 

the equity investment or grant received from the CDE as collateral. The 

program could be structured so that the lender may have recourse to the 

assets of the QALICB in the case of a bankruptcy, which is currently not 

 

33 The grant funds might also be used to induce additional equity investment by private 

investors in the low-income businesses as an alternative to loans or in combination with 

loans. NMTC investments in low-income businesses currently help induce equity 

investments in those businesses in some of the leveraged transactions. 

Page 29 GAO-10-334 New Markets Tax Credit
 

generally the case under the leveraged model. In the latter case, the CDE 

might provide advice to the business. Involvement of the CDE in assisting 

the low-income business might be made a requirement of the equity 

investment or grant since that business may be inexperienced in obtaining 

significant credit. In our case studies, we heard that some lenders were 

more confident in making loans because they knew and had confidence in 

the CDEs, including that the CDEs would be monitoring the low-income 

businesses throughout the lending period. Requiring CDE involvement in 

obtaining financing for the low-income business and subsequently 

monitoring the business might therefore facilitate lending that would not 

otherwise occur or that would not occur on as favorable terms. 

Regardless of how funds would be made available to businesses from 

CDEs, because more of the federal subsidy should make its way to the 

low-income businesses, which could be leveraged to obtain additional 

private financing, a grant-based program could either provide more 

funding to the same number of businesses at the same revenue cost, or 

similar funding to more businesses in total. Further, by eliminating the tax 

credit investor, a grant-based program likely would have less complex 

transaction structures with reduced fees relative to the current credit, 

thereby allowing an increased portion of available funds to flow to lowincome community businesses. In any case, reducing the complexity and 

associated transaction costs for NMTC projects might have the added 

effect of making smaller projects more viable. According to CDE 

representatives, because fees associated with the various NMTC 

transaction structures tend to be fixed and do not generally vary based on 

the size of the transaction, using the leveraged model for smaller 

transactions has proven challenging. 

Congress has turned to grant programs in other cases where tax credits 

had formerly been used. For example, to fill funding gaps in Low-Income 

Housing Tax Credit (LIHTC) projects, under the American Reinvestment 

and Recovery Act of 2009, Congress is offering the option of allowing state 

housing finance agencies (HFA) to exchange LIHTCs for federal grants to 

subsidize low-income rental housing. Under this option, LIHTC investors 

may or may not be a part of the investment structure. In cases where 

investors are no longer involved, HFAs are playing a more significant role 

in managing the assets developed from the grants awarded in lieu of tax 

credits. However, because the price LIHTC investors were willing to pay 

for tax credits dropped considerably during the severe economic 

downturn, if they were willing to invest at all, temporarily structuring the 

program as a grant program rather than a tax credit may be more costPage 30 GAO-10-334 New Markets Tax Credit
 

effective from the government’s perspective than continuing to sell tax 

credits for fractions on the dollar. 

If the NMTC were to be restructured as a grant program, a number of 

design issues would need to be considered and the choices made could 

affect how well the program would perform and whether, in practice, it 

would be more effective at providing equity to low-income businesses and 

facilitating private investment than the tax credit. Consequently, 

evaluating the performance of any grant program compared to the 

performance of the current credit would be useful. Table 2 illustrates two 

options for simplifying the program and the potential benefits and issues 

associated with these options. 

Table 2: Options for Simplifying the NMTC Program 

Option 

Who makes the 

change Examples of potential benefits Examples of potential issues 

1. Change the point 

at which the related 

entities test is 

applied from after 

the QLICI is made to 

before the QLICI is 

made. 

Treasury • Would make it easier for CDEs to make 

equity investments in QALICBs. 

• Would reduce costs associated with “true 

debt” analysis for leveraged loans and, as 

a result, would likely make more 

investment available to QALICBs. 

• By reducing fees, would make smaller 

projects more feasible than under the 

current structure. 

• Need to ensure that safeguards are 

in place to prevent investors from 

investing in their own businesses. 

• Continues to rely on the sale of the 

tax credits to subsidize low-income 

community businesses. 

2. Make grants to 

CDEs that, in turn, 

make equity 

investments in or 

provide grants to 

QALICBs. 

Congress and 

Treasury 

• Should increase the portion of the subsidy 

that goes to low-income communities by 

eliminating the sale of tax credits. 

• Would maintain the flexibility CDEs 

currently have in selecting projects to 

fund. 

• Would continue to rely on the 

administrative structure established by 

the CDFI Fund to administer the NMTC. 

• By reducing complexity of the structure, 

fees would be reduced and smaller 

projects would be more feasible than 

under the current model. 

• Would need to change the related 

entities test if CDEs are allowed to 

make equity investment in QALICBs. 

• Would need to calibrate the 

allocation amounts available to 

ensure that the cost of the grant 

program to the federal government is 

similar to the cost of the tax credit 

program. 

• Would need to define the relationship 

between the CDE and the lowincome business in obtaining private 

financing for the business and 

monitoring it over time. 

Source: GAO 

Page 31 GAO-10-334 New Markets Tax Credit
 

Unlike some other federal programs, such as the LIHTC program which is 

used strictly to develop rental housing, CDEs with NMTC allocations have 

considerable flexibility in deciding how to deploy NMTC financing to lowincome community businesses. In developing the program, Congress did 

not specify how CDEs can use the NMTC.34 CDE representatives, in 

general, said that the flexibility associated with the NMTC is one reason 

why the program has been popular among community development 

professionals and low-income community businesses. As a result, the 

impact of the program varies depending on the project characteristics and 

it can be difficult to fully measure through data reported to the CDFI 

Fund. In addition to our limited number of case studies, forthcoming 

research by the Urban Institute may provide additional information on 

how NMTCs are used for a wide range of purposes.35

CDEs Use NMTCs for 

a Range of Purposes 

with Outcomes That 

Can Be Difficult to 

Measure and Vary 

Depending on the 

Project 

Our case studies of CDEs illustrated a variety of NMTC projects. In these 

studies, we reviewed NMTC projects with a chiefly educational purpose, 

such as an after-school program for at-risk youth in a low-income area of a 

major metropolitan area and a charter school for children with special 

needs. Other projects were intended to promote diverse goals such as 

housing and jobs, including a community center that assists low-income 

residents in obtaining housing and employment, and enhancing the health 

of community residents through medical facilities (e.g., hospitals and a 

doctor’s office) in both a metropolitan location and a nonmetropolitan 

location. Mixed-use projects supported by NMTC investment also include 

commercial real estate, for-sale housing, and rental housing and appear to 

provide varying degrees of benefits to low-income community businesses 

and low-income community residents. CDEs have also identified and 

implemented techniques that allow for the NMTC’s use in strictly for-sale 

 

34 Regulatory requirements preclude business activities such as residential rental property, 

golf courses, massage parlors, liquor stores, gambling facilities, and farms from qualifying 

for NMTC financing. 

35 The Urban Institute received a contract from the CDFI Fund to evaluate the effectiveness 

of the NMTC program. The results of its study, which includes surveys and additional case 

studies, are due in 2011. 

Page 32 GAO-10-334 New Markets Tax Credit
 

housing projects.36 Although it is clear from our case studies that lowincome community businesses and residents have benefited from projects 

supported by NMTC investment, available data and statistical techniques 

do not allow us to identify the extent to which these benefits would have 

been realized in the absence of the credit. Table 3 provides a list and 

description of all of the NMTC financed projects we visited. 

Table 3: Location and Descriptions of NMTC Case Study Projects 

Census region Project description 

South Multifamily housing facility that provides affordable rental housing and 

childcare opportunities to low-income persons. 

Single and multifamily housing units that will provide affordable housing 

opportunities to employed persons, living in high-cost areas, with 

limited capacity to purchase market-rate housing. 

Northeasta Community facility that houses year-round academic enrichment, 

sports, and community service programs for youth in the surrounding 

community. 

Community facility that provides comprehensive housing, community, 

and employment services to low-income residents in the surrounding 

community. 

Educational facility that provides comprehensive and multidisciplinary 

(i.e., psychological, social services, physical and occupational therapy) 

services to special-needs children in the surrounding community. 

Community-owned forest that provides local resource management and 

eco-tourism opportunities to the surrounding community. 

Mixed-use complex that houses a hotel, restaurant, and commercial 

office space. 

Medical center and hospital that will provide comprehensive health care 

services to the surrounding nonmetropolitan community. 

Education facility that conducts research, community outreach, and 

youth programs on matters related to fishing and the environment. 

Midwest Single-family housing units that will provide affordable housing 

opportunities to employed persons, living in high-cost areas, with 

limited capacity to purchase market-rate housing. 

 

36 Using NMTCs to finance the development of for-sale housing presents challenges 

because when developers complete the construction of the housing and sell the houses to 

home buyers, the developer may be in a position to repay the CDE, which would be 

considered redemption of the original investment. Per NMTC program rules, the CDE 

would have to redeploy the original investment within 12 months or risk having the credits 

recaptured by the IRS. One developer with whom we spoke indicated that the CDE with 

which his organization worked facilitated a deal structure that would legally address these 

concerns. 

Page 33 GAO-10-334 New Markets Tax Credit
 

Census region Project description 

Medical center and mixed-use facility that provides healthcare and 

other services to the surrounding metropolitan community. 

West Mixed-use development that will provide market-rate “for sale” and 

affordable housing opportunities, commercial office space, and public 

open space for the surrounding metropolitan community. 

Mixed-use development that will provide market-rate and affordable 

housing opportunities and commercial space to the surrounding 

metropolitan community. 

Source: GAO case study analysis. 

a

We visited more project sites in the Northeast than in other census regions because we visited a 

large financial institution in the Northeast that participates in the program in a number of ways (e.g., 

allocate, tax credit investor, and leveraged lender) and we visited a CDE that focuses on investing in 

nonmetropolitan areas that took us to multiple project sites. 

The variety of projects supported by NMTC investment also makes it 

difficult to devise and implement a set of measures that fully captures their 

impact on the low-income communities. Job creation can be difficult to 

quantify and may have different relevance for different types of projects. 

For example, the after-school program we visited included a $9 million 

facility financed, in part, with NMTC funds. According to the director of 

the after-school program, with the use of NMTC funds and other funds, it 

has created about 12 full-time jobs. The director and representatives from 

the CDE that financed the project noted that although financing a $9 

million facility to generate only 12 jobs may not, on the surface, appear to 

be generating significant benefits to low-income communities, the afterschool program provides counseling and physical education activities to a 

number of at-risk children each week. They also noted that the facility 

fulfills a need in providing physical education opportunities to children 

that are generally not available in the public school system due to a lack of 

funding. Representatives from the CDE that financed the project indicated 

that it can be difficult to demonstrate the impact of the program because 

many projects may be providing benefits to low-income communities that 

extend beyond quantifiable data, such as the number of jobs that a facility 

is expected to generate or the square feet of real estate being constructed 

or rehabilitated. 

Other projects we visited, which may have the potential to provide 

benefits to low-income communities, are currently still in the development 

phase or have been slowed by legal issues or market and regulatory risks. 

For example, one CDE we visited used its NMTC authority for 

predevelopment costs associated with a relatively large mixed-use facility 

in a depressed urban area. Although the NMTC funds have been depleted, 

Page 34 GAO-10-334 New Markets Tax Credit
 

the developer has not yet been able to obtain all of the additional financing 

necessary to begin the construction phase of the project. The CDFI Fund’s 

application process can try to limit specific risks associated with the 

management capacity or capitalization strategy of a CDE but cannot 

address such systemic risks as an unanticipated tightening of capital 

markets. 

The CDFI Fund does not collect data on project failure rates and our 

limited number of case studies does not show how frequently community 

development projects supported by NMTC financing are never completed 

or end up in bankruptcy. If the projects are never completed, taxpayers 

bear the burden because failure to complete a project does not cause the 

tax credits to be recaptured. In addition, because the NMTC program is 

designed to support projects in areas where access to capital has been 

traditionally scarce and capital investment is considered riskier, it seems 

likely that certain projects supported by the NMTC may ultimately fail. 

Data on the failure rate of NMTC projects would likely give the CDFI Fund 

a better understanding of the types of projects best suited for NMTC 

financing and additional resources for making future decisions about how 

to allocate NMTC funding. 

CDEs Report Data on 

Employment, Real Estate 

Development, and Other 

Outcomes in Low-Income 

Communities to the CDFI 

Fund 

The authorizing legislation for the NMTC program does not require the 

CDFI Fund to evaluate the success of the NMTC program; however, the 

agency does collect data from CDEs about the outcomes associated with 

projects that receive NMTC financing. CDEs that receive NMTC 

allocations submit annual reports to the CDFI Fund through CIIS. The 

annual CIIS reports contain information about how projects that received 

NMTC financing (in whole or in part) may have contributed to economicdevelopment-related project outcomes, such as the number of full-time 

equivalent (FTE) positions by job type,37 affordable housing opportunities, 

and other new construction and rehabilitated real estate development in 

low-income communities. However, it is difficult to establish causal links 

between QEI, QLICI, and these reported project outcomes. Consequently, 

we are unable to determine the extent to which any economic 

development in the communities receiving the NMTC investment would 

have occurred if the NMTC program did not exist. 

 

37 For projects receiving business financing, one FTE is a 35 hour or more work week. In 

calculating FTEs, the CDFI Fund instructs CDEs to combine the hours worked by part-time 

employees. 

Page 35 GAO-10-334 New Markets Tax Credit
 

Although the CDFI Fund collects information from CDEs on the number of 

FTEs associated with funded projects, the CDFI Fund had not (at the time 

of publication of this report) released this information with respect to the 

2008 data—primarily because it had not yet fully completed the process of 

cleaning the data, including implementing changes to its data cleansing 

protocols, particularly with respect to projects that were financed by 

multiple CDEs. According to representatives from CDEs we interviewed, 

techniques to determine the number of jobs varied widely. Some CDEs use 

proprietary economic modeling tools or contract with third-party 

consultants to determine the number of jobs on projects with NMTC 

financing, while other CDEs relied on internally developed research 

methods or on input from developers and low-income community 

businesses. These techniques vary in their reliability. As a result, although 

self-reported jobs data to the CDFI Fund represents a solid step in tracking 

the use and accountability of federal resources, the data may not reliably 

identify the number of jobs associated with NMTC financing. 

The CDFI Fund also collects self-reported data on the projected real estate 

square footage for projects with NMTC financing as well as data on rental 

and for sale housing units, the capacity of educational, childcare and 

healthcare facilities developed using NMTC financing. Although 

information on the square footage of real estate provides an additional 

measure of the outcomes of projects associated with NMTC financing, the 

raw numbers, in and of themselves, may not provide information about the 

full context of a particular project. For example, according to comments 

submitted to the CDFI Fund by one research institution, developing real 

estate in low-income communities in some areas is much more costly and 

difficult than in other low-income communities. 

Although the CDFI Fund collects project-level data on the self-reported 

estimates of outcomes, the data collection method they use does not allow 

them to clearly identify the estimated outcomes for each individual 

project. Specifically, in cases where multiple CDEs contribute NMTC 

funds to the same project, the CDEs often all report outcome data on the 

project in CIIS. Our analysis indicates that this occurs for about 18 percent 

of the projects in the CIIS database. In such cases, CDEs can report 

duplicate and inconsistent data for a single project which can result in the 

overcounting or undercounting of estimated project outcomes. 

The CDFI Fund is aware of this data limitation and has developed an 

approach to consolidate and aggregate multiple entries for a single project. 

However, the CDFI Fund’s methods may not be adequate in all cases. For 

example, if four CDEs contribute to the same project and report the same 

Page 36 GAO-10-334 New Markets Tax Credit
 

project-level information, simply summing the project level data in CIIS 

would result in overestimating the outcomes for the NMTC program as a 

whole. According to CDFI Fund officials, in these cases it is appropriate to 

average the reported outcomes from all four CDEs to estimate the 

outcome of the project. However, if a similar number of CDEs were 

contributing NMTC funds to a single project for different purposes and 

were reporting the projected outcome of only their portion of the 

investment, then attempting to correct for duplicate entries for the same 

project might result in underestimating the outcomes of the NMTC 

program. 

IRS is responsible for ensuring that CDEs and NMTC investors adhere to 

NMTC laws and regulations. As we noted in our 2007 report,38 to get a 

sense of how many resources to dedicate to the new NMTC program, IRS 

conducted a compliance study of CDEs receiving allocations in the first 

round, focusing on CDEs’ compliance with the “substantially all” 

requirement to invest at least 85 percent of their QEIs within 1 year of 

receiving the investment. IRS officials said that they chose to focus on 

CDEs’ compliance with the “substantially all” requirement because they 

believed that this was the area where noncompliance with NMTC 

provisions was most likely to occur. In response to our recommendation 

in that report, IRS established criteria for selecting which CDEs to audit as 

part of the compliance study to ensure that IRS was reviewing the full 

range of NMTC transactions and that the results of its sample would be as 

representative as possible of all CDEs with NMTC allocations. For 

example, IRS officials indicated that they attempted to identify a range of 

CDEs to audit based on characteristics such as the physical location of the 

CDE, allocation amount, the CDE’s status as a nonprofit or for-profit 

entity, percentage of allocation invested in urban and rural areas, the 

percentage invested in real estate and non-real estate projects, and other 

characteristics. 

IRS and the CDFI 

Fund Have 

Established Processes 

That Will Allow Them 

to Better Assess 

NMTC Compliance 

Based on the results of its compliance study and the outcome of future 

CDE audits, IRS intends to make decisions on the amount of resources to 

dedicate to CDE audits. In 2008, IRS used criteria similar to those used to 

identify CDEs for its compliance study to identify which CDEs to select for 

audit. 

 

38 GAO-07-296. 

Page 37 GAO-10-334 New Markets Tax Credit
 

IRS officials have also taken steps to ensure that only taxpayers eligible to 

claim NMTCs actually claim them on their tax returns. For example, IRS 

selected a sample of NMTC investors using CDFI Fund data from the 

beginning of the NMTC program until the end of calendar year 2004 to 

assess whether investors were claiming the proper amount of tax credits 

on their returns and to determine whether it would be cost-effective to 

identify all eligible NMTC claimants, including those investing in passthrough entities.39 IRS chose this time period because the information was 

readily available from the CDFI Fund and correlated with 2005 tax returns, 

the most recently available tax returns at the time of the study. 

Using its sample, IRS officials compared the amount of NMTCs that they 

believed NMTC investors identified in CDFI Fund data should be able to 

claim on their tax returns to the amounts that taxpayers actually claimed 

on their tax returns. This comparison showed little evidence of ineligible 

taxpayers claiming the credit. IRS officials found that in cases where 

taxpayers claimed more tax credits than IRS would have expected the 

taxpayer to be eligible to claim, the additional tax credits claimed 

generally resulted from investors carrying over unused credits from 

previous years.40

IRS officials also noted that it can be difficult to track the amount of tax 

credits claimants are eligible to claim in the leveraged structure because it 

is not clear from the data what portion of the NMTC investment is 

allocated to which investor. However, IRS concluded that it is possible to 

work around limitations associated with CDFI Fund data on NMTC 

investors to ensure that NMTC claimants do not fraudulently claim tax 

credits. For example, IRS noted that it can use the CDFI Fund data as 

supplementary information when conducting audits and CDEs maintain 

records of eligible investors should IRS need to recapture tax credits. 

Further, IRS sometimes reviews NMTC claims as part of its regular field 

 

39 While CDFI Fund data identifies most NMTC investors that invest in pass-through 

entities, after the 3rd tier of pass-through entities for a given qualified equity investment is 

established, CDFI Fund data do not always identify the actual claimant. For example, in 

cases where a taxpayer eligible to claim NMTCs transfers the right to claim NMTCs to 

another taxpayer, CDFI Fund data do not capture the transfer. 

40 IRS officials assumed that claimants would be able to claim no more than 5 percent of 

the amount of qualified equity investment that attributed to the taxpayer in the CDFI Fund 

data. Investors can claim 5 percent of their investment in tax credits for the first 3 years of 

the 7-year NMTC compliance period and 6 percent in the last 4 years. Because IRS used tax 

returns filed in 2005 and the first NMTC awards did not take place until 2003, all of the 

investments would have still been within the first 3 years of the 7-year compliance period. 

Page 38 GAO-10-334 New Markets Tax Credit
 

audits. This means that IRS auditors reviewing tax returns of corporations 

or individuals that also claim the NMTC would seek documentation that 

the taxpayer claimed the correct NMTC amount. IRS officials also intend 

to continue to review claimants’ tax returns when the NTMC amount 

claimed is significant. IRS officials concluded that the potential benefits 

generated from developing a comprehensive system to track NMTC 

investor compliance for each NMTC transaction would likely be 

outweighed by the burden it would place on taxpayers and that the above 

steps should be adequate to ensure compliance. 

Our guidance on internal controls notes that federal agency management 

should weigh the costs and benefits of processes to provide reasonable 

assurance that agency objectives, including ensuring effective and efficient 

operations and compliance with applicable laws, are met.41 Our review 

indicates that IRS weighed the costs and benefits associated with its 

NMTC compliance monitoring efforts and has taken steps it believes will 

ensure that IRS will be able to meet the agency’s goals of identifying 

noncompliant CDEs and NMTC claimants. 

The CDFI Fund is responsible for monitoring CDEs to ensure that CDEs 

are compliant with their allocation agreements through the New Markets 

Compliance Monitoring System (NCMS) and, on a more limited basis, by 

making site visits to selected CDEs. The NCMS compiles data from other 

CDFI Fund databases that track investor behavior and project details to 

identify when a CDE may be falling out of compliance with its allocation 

agreement. CDFI Fund databases rely on data that CDEs self-report to the 

CDFI Fund. However, the CDFI Fund has several mechanisms in place 

that help ensure that compliance data collected are accurate and reliable, 

such as comparing census data to self-reported CDE data for some data 

fields and providing written instructions and a help desk to call when 

CDEs have questions about how to report information to the CDFI Fund. 

According to CDFI Fund officials, the CDFI Fund has conducted more site 

visits to CDEs in recent years than in the program’s earlier years in an 

effort to monitor compliance. CDFI Fund officials said that they 

conducted five NMTC specific site visits in Fiscal Years 2008 through 2009. 

In 2007, we reported that the CDFI Fund conducted two site visits in 2005 

 

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

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

Page 39 GAO-10-334 New Markets Tax Credit
 

and an additional two site visits in 2006.42 CDFI Fund officials indicated 

that they are more likely to make a site visit to a CDE when they have 

reason to believe that the CDE is not in compliance with the terms of its 

allocation agreement or is in danger of falling out of compliance. Although 

these site visits do not yield generalizable results to measure CDEs’ 

compliance rates with their allocation agreements, they do supplement the 

information that the CDFI Fund receives through NCMS. In addition, 

CDEs and investors may also monitor potential compliance concerns. For 

example, in our 2007 report, we noted that investors we surveyed were 

generally concerned about the potential that CDEs could be noncompliant 

with program requirements and that they play an active role in ensuring 

that CDEs remain compliant with NMTC program requirements.43

Since falling out of compliance with the terms of the allocation agreement 

does not trigger a recapture of NMTCs from investors, in cases where a 

CDE is found to be out of compliance with its allocation agreement the 

actions taken by the CDFI Fund are generally limited to measures such as 

barring the CDE from applying for NMTC awards in future rounds. In 

other cases, the CDFI Fund may agree to modify the terms of a CDE’s 

allocation agreement so that the CDE will come back in compliance with 

the allocation agreement. In general, the requirements to which CDEs 

agree to adhere in their allocation agreements are more stringent than the 

requirements that trigger a recapture of NMTCs. For example, CDEs may 

agree to invest closer to 95 percent of their allocation in low-income 

communities when the statute requires 85 percent to avoid triggering a 

recapture of NMTCs by the IRS. If a CDE were to agree to invest 95 

percent of its allocation in a low-income community and fail to meet that 

requirement, it would be out of compliance with its allocation agreement, 

but would remain compliant with the NMTC program’s statutory 

requirements. 

Our analysis of the CDFI Fund’s efforts to ensure CDEs remain compliant 

with their allocation agreements indicates that the CDFI Fund has weighed 

the costs and the benefits to provide reasonable assurance that the 

agency’s objectives for monitoring CDEs compliance with their allocation 

agreements are met, including ensuring effective and efficient operations 

and compliance with applicable laws. 

 

42 GAO-07-296. 

43 GAO-07-296. 

Page 40 GAO-10-334 New Markets Tax Credit
 

Congress designed the NMTC to promote investment and economic 

development in low-income communities. Our previous reports on the 

NMTC program indicated that the NMTC appears to increase investment in 

low-income communities by participating investors, and the analysis 

included in this report indicates that the NMTC program supports a range 

of low-income community businesses and residents projects. The benefits 

generated from economic development projects supporting the NMTC 

program vary depending on the nature of the project and can be difficult to 

quantify. Applying statistical techniques to assess the benefits of the 

NMTC program to low-income communities presents challenges, in part, 

because such a large area of the country, and portion of the population, is 

eligible to receive NMTC investment. As a result, our analysis does not 

allow us to determine the extent to which these projects and their 

resulting benefits to low-income communities would be realized absent 

the NMTC. 

Conclusions 

The low-income community businesses and residents appear to benefit 

from projects supported by the NMTC. However, the NMTC program faces 

challenges should it be extended beyond 2009. For example, the 

complexity of NMTC transaction structures appears to make it more 

difficult for CDEs to execute smaller transactions and results in less equity 

ending up in low-income community businesses than would likely end up 

there were the transaction structures simplified. In addition, current 

economic conditions have likely contributed to lower prices that investors 

are willing to pay to purchase the right to claim the NMTC, which also 

decreases the amount of equity available for low-income community 

businesses and the amount of debt that CDEs can leverage based on the 

available equity. 

Additional information on NMTC pricing and fees associated with NMTC 

transactions that reduce the amount of the subsidy ultimately reaching 

low-income communities would lead to a better understanding of the 

benefits of the program in relation to its costs. Such information would 

also give Congress and the Treasury useful information to make 

assessments about how to best structure the program, whether through 

simplifying the current structure by altering related parties rules or 

changing the program to function as a grant, to maximize the amount of 

NMTCs that reach low-income community businesses. Changing the 

related parties rule might have the effect of simplifying the program. 

However, it would not address concerns associated with relying on the 

sale price of the tax credits to generate funds to invest in low-income 

community businesses. Improving available information on each 

Page 41 GAO-10-334 New Markets Tax Credit
 

individual project would also likely allow for a more accurate assessment 

of the program’s impacts. 

Should the program be extended beyond 2009, to ensure that the 

maximum amount of capital ends up in low-income community 

businesses, Congress should consider offering grants to CDEs that would 

provide the funds to low-income community businesses. If it does so, 

Congress should require Treasury to gather appropriate data to assess 

whether and to what extent the grant program increases the amount of 

federal subsidy provided to low-income community businesses compared 

to the NMTC; whether the grant program otherwise affects the success of 

efforts to assist low-income communities; and how costs for administering 

the program incurred by the CDFI Fund, CDEs, and investors would 

change. One option would be for Congress to set aside a portion of funds 

to be used as grants and a portion to be used as tax credit allocation 

authority under the current structure of the program in a future allocation 

round to facilitate comparison of the two program structures. 

We recommend that the Secretary of the Treasury take the following three 

actions. 

Should the program be extended beyond 2009 and absent a broader 

restructuring of the program, to ensure that the CDFI Fund has complete 

data on the amount of capital flowing to low-income community 

businesses from the sale of NMTCs to investors, we recommend that the 

Secretary of the Treasury direct the CDFI Fund Director to collect data 

that show the sale price of NMTCs from CDEs to investors, fees paid by 

QALICBs to close NMTC transactions, and the amount of equity that the 

CDE projects it will leave in the QALICB at the end of the 7-year period 

during which investors can claim tax credits. 

Matter for 

Congressional 

Consideration 

Recommendations for 

Executive Action 

To more effectively assess the outcomes generated by the NMTC program 

in low-income communities, should the program be extended beyond 

2009, we recommend that the Secretary of the Treasury direct the CDFI 

Fund Director to continue improving strategies for collecting NMTC 

project-level data that clearly identify the potential outcome of each 

project without the potential for double-counting the outcomes of some 

projects or undercounting the outcomes of others. 

Additionally, to ensure that the CDFI Fund understands which projects 

have stalled or are not going to be completed and whether the criteria for 

Page 42 GAO-10-334 New Markets Tax Credit
 

funding selection could be improved, we recommend that the Secretary of 

the Treasury direct the CDFI Fund Director to collect data on the failure 

rate of NMTC projects. 

We provided a draft of this report to the Director of the Community 

Development Financial Institutions (CDFI) Fund and the Commissioner of 

Internal Revenue. We received written comments from the Director of the 

Community Development Institutions (CDFI) Fund; her comments are 

reprinted in appendix IV. The Commissioner of Internal Revenue did not 

provide written comments. The CDFI Fund and the IRS also suggested 

several technical changes to the report, which we incorporated where 

appropriate. 

Agency Comments 

and Our Evaluation 

The CDFI Fund agreed with a number of observations in the report and 

agreed with our recommendations that the CDFI Fund collect additional 

data on the program and refine their current data collection systems. The 

CDFI Fund also agreed with our observation that the current application 

of the related parties test may have unintended consequences of limiting 

equity investments and increasing administrative fees associated with the 

NMTC program. 

However, the CDFI Fund expressed concerns with our Matter for 

Congressional Consideration that in a future allocation round, Congress 

should consider testing whether providing grants to CDEs that would, in 

turn, provide funds to low-income community businesses in lieu of 

allowing investors to claim tax credits for making investments in CDEs, 

would improve the program. The CDFI Fund said that it is not clear that 

such a change will make the federal subsidy more efficient, indicating that 

the NMTC is likely more cost-effective than a grant because investors pay 

some taxes when exiting NMTC transactions. According to our analysis, 

the leakage caused by investors paying less than a dollar to purchase the 

right to claim a dollar in tax credits and the significant fees generated by 

NMTC transaction structures means that it is likely that a lower portion of 

the subsidy is actually channeled to the low-income community business 

than may be under a grant program. Even if a grant program were 

marginally more expensive to the government than the current NMTC 

program, which we are not certain would be the case, if a larger portion of 

the subsidy reached low-income community businesses, the grant program 

could be more cost-effective. 

The CDFI Fund also said that changing the NMTC program to a grant 

program would require significant programmatic changes and that it could 

Page 43 GAO-10-334 New Markets Tax Credit
 

not use its current process for allocating tax credits to instead allocate 

grants. In the report, we acknowledge that switching the NMTC program 

to a grant program will require the consideration of a number of design 

issues and that changing the program could impose additional 

administrative costs on the CDFI Fund. We do, however, conclude that the 

similarities between the NMTC’s current programmatic structure and 

other grant programs (application advertisement, the review and scoring 

of applications by peer review panels, determinations by agency staff 

regarding the amounts of NMTC allocations to winning applicants, and 

processes for monitoring compliance and gauging outcomes) make it 

likely that the CDFI Fund could substantially use its current processes for 

allocating the tax credits to instead allocate grant funds to CDEs. Although 

we agree administrative changes would be required, we believe those 

changes could build upon current processes. In addition, the CDFI Fund 

manages several grant programs already, making it likely that the CDFI 

Fund could leverage this administrative capacity and expertise to 

administer the new markets program as a grant. 

The CDFI Fund also said that changing the NMTC program to a grant 

program could cause program compliance to suffer because the grant 

program would lack rigorous investor oversight. Although we 

acknowledge that investors have contributed to program compliance, 

under a grant program both lenders and CDEs would likely have 

incentives to provide oversight, perhaps even more than under the NMTC 

program. The involvement of lenders in businesses may increase under a 

grant-based program because lenders could make loans directly to lowincome businesses and have direct recourse to the underlying assets of the 

business whereas under the current program the leveraged lender does 

not have recourse to the assets of the low-income business if the business 

were to default on its repayment of the loan. Moreover, as we say in the 

report, under a grant program the involvement of CDEs in assisting lowincome businesses might be made a requirement of the equity investment 

or grant since these businesses may be inexperienced in obtaining 

significant credit. The importance of CDE involvement in program 

compliance and oversight was particularly evident in our case studies, in 

which we heard that CDE involvement, including asset management 

activities, increased the confidence of some lenders in making loans 

because they knew the CDE and believed that the CDE would monitor the 

low-income businesses throughout the lending period. The grant program 

could also include penalties for CDE’s failure to make low income 

community investments in accordance with program rules. 

Page 44 GAO-10-334 New Markets Tax Credit
 

The CDFI Fund also expressed uncertainty that CDEs will be able to 

attract the requisite debt at the same rates and terms as are currently 

available if the NMTC investment incentive is replaced with a grant, noting 

that the debt and equity investor are, in many cases, the same entity. 

Although our analysis does not address whether the same rates and terms 

would be available, the leveraged model was created with the intention of 

separating the tax benefits of the tax credit investor from the economic 

returns from the leveraged lender—meaning that the structure’s design 

was intended to ensure that the leveraged lender would be able to receive 

a return on investment sufficient to justify only their portion of the 

investment. Further, according to several economic development experts 

we interviewed, because under the current model the leveraged lender 

generally does not have access to the underlying assets of the low-income 

community business in which the CDE invests, many potential leveraged 

lenders have been unwilling to participate in the NMTC program—

particularly in light of current economic conditions. If a grant program 

were structured so that the leveraged lender had access to the underlying 

low-income community business’ assets in cases where the business fails, 

it is possible that more lenders may be willing to participate in the 

program. 

Although we believe the concerns raised by the CDFI Fund can be 

addressed or may not be borne out in a grant program, we do believe that 

these and other issues merit study if Congress creates a grant program. 

Hence, our Matter for Congress includes the option that the CDFI Fund be 

required to assess the results of a grant program in comparison to the tax 

credit. 

Finally, the CDFI Fund noted its efforts to work with Congress to increase 

investor participation by allowing investors to use the NMTC to offset 

Alternative Minimum Tax (AMT) liability. This would help place the NMTC 

on equal footing with other similar tax incentives, including the LowIncome Housing Tax Credit (LIHTC) and the Historic Rehabilitation 

Credit. The CDFI Fund stated that this change would stabilize the current 

market of NMTC investors and attract new investors. Although this could 

be the case, our work did not address whether such changes to the NMTC 

program would have these effects. We note, however, that although LIHTC 

program investors are allowed to use LIHTCs to offset AMT liability, the 

selling price for LIHTCs has fallen to a point where Congress temporarily 

converted a portion of the LIHTC program to a grant. Furthermore, if 

investors were allowed to use the NMTC to offset AMT liability, the price 

of the credit would need to rise above its previous levels to negate the 

likely benefits of changing it to a grant program. 

Page 45 GAO-10-334 New Markets Tax Credit
 

We are sending copies of this report to interested congressional 

committees, the Commissioner of Internal Revenue, the Director of the 

Community Development Financial Institutions Fund, and other interested 

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

Web site at http://www.gao.gov. 

If you staff have questions about this report, please contact me at (202) 

512-9110 or brostekm@gao.gov. Contact points for our Offices of 

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

of this report. Staff who made major contributions to this report are listed 

Michael Brostek

in appendix V. 

Director, Strategic Issues 

Page 46 GAO-10-334 New Markets Tax Credit
 

List of Committees 

The Honorable Christopher J. Dodd 

Chairman 

The Honorable Richard C. Shelby 

Ranking Member 

Committee on Banking, Housing, and Urban Affairs 

United States Senate 

The Honorable Max Baucus 

Chairman 

The Honorable Charles E. Grassley 

Ranking Member 

Committee on Finance 

United States Senate 

The Honorable Mary L. Landrieu 

Chair 

The Honorable Olympia J. Snowe 

Ranking Member 

Committee on Small Business and Entrepreneurship 

United States Senate 

The Honorable Barney Frank 

Chairman 

The Honorable Spencer Bachus 

Ranking Member 

Committee on Financial Services 

House of Representatives 

The Honorable Nydia M. Velázquez 

Chair 

The Honorable Sam Graves 

Ranking Member 

Committee on Small Business 

House of Representatives 

The Honorable Charles B. Rangel 

Chairman 

The Honorable Dave Camp 

Ranking Member 

Committee on Ways and Means 

House of Representatives 

Page 47 GAO-10-334 New Markets Tax Credit
Appendix I: Objectives, Scope, and 

Methodology 

Page 48 GAO-10-334 

Appendix I: Objectives, Scope, and 

Methodology 

Based on consultations with your offices, this final mandated report: 

(1) describes where and how Community Development Entities (CDE) are 

using New Markets Tax Credits (NMTC) to invest in low-income 

communities and targeted populations; (2) assesses how CDEs use NMTC 

financing to offer favorable financing terms to low-income community 

businesses and describes options for simplifying NMTC investment 

structures; (3) describe how, if at all, NMTC investments support lowincome community development; and (4) updates our review of how 

effective the Internal Revenue Service (IRS) and the Community 

Development Financial Institutions (CDFI) Fund have been in monitoring 

CDEs’ and investors’ compliance with the NMTC program. 

To describe where and how CDEs are using the NMTC to invest in lowincome communities, we analyzed the CDFI Fund’s Community 

Investment Impact System (CIIS) Transaction Level Report that contains 

self-reported data for reported NMTC projects through fiscal year 2008. 

Specifically, we used CIIS to develop summary statistics for the number 

and location of projects. We also used CIIS data to summarize the types of 

projects in which CDEs invest, the percentage and amounts of NMTC 

investments for different CDE types, the portion of total project costs that 

are financed through NMTC investments, and the amounts and relative 

percentages of different types of financing for NMTC projects. 

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 represents the most current available information on the 

status of the program. For some analysis, we were unable to use CIIS data 

for all available projects because CDEs may not have reported information 

for all required fields. 

We interviewed CDFI Fund officials with knowledge of the CIIS about the 

steps they take to ensure its accuracy, and reviewed the computer 

programs the CDFI Fund uses to generate its NMTC databases. We 

determined that the data we used in this report were sufficiently reliable 

for our purposes. 

To supplement our analysis of CIIS data for each objective, we conducted 

case studies of nine CDEs. Specifically, we interviewed representatives 

from these CDEs and systematically collected documentation contained in 

CDE project files to learn more about how CDEs decide which projects to 

fund using their NMTC allocations. In addition, we interviewed local 

economic development officials, lenders, and other subject-matter experts 

 New Markets Tax Credit 
Appendix I: Objectives, Scope, and 

Methodology 

to examine how projects funded, in part or entirely, with NMTC 

allocations may contribute to economic development in low-income 

communities. 

To capture the range of projects supported by NMTC investment, we used 

a purposeful sampling technique to identify the nine CDEs for case study 

analysis. To develop our sample, we used CIIS and NMTC application data 

to identify CDEs that received NMTC awards during the 2005 and 2006 

allocation rounds. We limited our CDE selection to organizations receiving 

awards in these allocation rounds to examine projects with NMTC 

investments that were more indicative of the current NMTC program 

structure. To identify similarities and differences in projects by geographic 

area, we selected CDEs that serve low-income communities in each of the 

four U.S. Census Bureau regions (West, Midwest, Northeast, and South). 

The four low-income communities we identified were located in Los 

Angeles, California; Chicago, Illinois; New York, New York; and 

Washington, D.C. We selected two CDEs in each community. To capture 

variations in projects located in urban and rural communities, we selected 

one CDE with investments in rural projects located in Maine and New 

Hampshire. To examine the potential differences in investment strategies 

between nonprofit and for-profit CDEs, we selected nonprofit and forprofit organizations for our case studies. We also selected CDEs of varying 

asset sizes to examine variations in organizational capacity and the 

execution of NMTC investments. We identified options for simplifying the 

NMTC program through interviews with representatives from CDEs, 

qualified active low-income community businesses (QALICB), and 

investors. 

Our case study results cannot be generalized to the full population of 

CDEs that have received NMTC allocations. Because the nature of project 

data, how it is collected, and how it is recorded varies by CDE, in some 

instances we relied on testimonial evidence obtained from CDE 

representatives, which we were not always able to substantiate with 

documentation. Also, given the volume and nature of community 

development activities in low-income communities and limitations with 

available data and available statistical techniques, we were unable to 

establish a causal link between a NMTC project and the changes in 

economic conditions in a community. 

To describe and evaluate the extent to which NMTC investments appear to 

offer more favorable terms and conditions to borrowers in low-income 

communities, we reviewed and described common NMTC financing 

structures and analyzed CIIS data to analyze the terms and conditions for 

Page 49 GAO-10-334 New Markets Tax Credit
Appendix I: Objectives, Scope, and 

Methodology 

NMTC projects. Through our case studies, we identified how leveraged 

NMTC transaction structures and subsidized interest rate transaction 

structures provide benefits to low-income community businesses. We also 

used NMTC investor data from the CDFI Fund to review changes in the 

demand for NMTCs by investors over time. In addition, we used CIIS data 

to identify the frequency with which CDEs report using NMTC allocation 

authority to offer more favorable terms and conditions for loans and other 

financial products. We used information obtained from our case studies to 

identify the processes that the CDEs we reviewed use to assess the 

eligibility and viability of potential NMTC projects, and to obtain 

supplemental information from NMTC project files about the favorable 

terms and conditions these CDEs offer in conjunction with NMTC 

financing. 

To describe how NMTC investments may contribute to economic 

development in low-income communities, we analyzed CIIS data on 

outcomes associated with projects that are in part or in whole supported 

by NMTC investment. Through our case studies, we interviewed 

representatives from CDEs and financial institutions, local economic 

development officials, and other subject-matter experts in each of the U.S. 

Census Bureau’s four regions to obtain information about the contextual 

factors that are important to assessing economic conditions in low-income 

communities. We collected and analyzed documentation from CDE project 

files regarding how the CDEs we reviewed assess the outcomes of their 

projects on the communities in which they exist. We also collected and 

analyzed testimonial evidence obtained through our case studies to 

identify and summarize how and the extent to which current economic 

conditions have affected NMTC program activities. 

To describe and evaluate the effectiveness of measures to ensure that 

CDEs and investors are in compliance with the NMTC program, we met 

with officials from IRS and the CDFI Fund. We also collected and analyzed 

documents on the status of CDFI Fund and IRS compliance monitoring 

efforts. We compared the information obtained to GAO’s Standards for 

Internal Control in the Federal Government to assess the effectiveness of 

measures taken by IRS and the CDFI Fund to monitor compliance. 

We conducted this performance audit from September 2008 to January 

2010, 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 

Page 50 GAO-10-334 New Markets Tax Credit
Appendix I: Objectives, Scope, and 

Methodology 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives. 

Page 51 GAO-10-334 New Markets Tax Credit
Appendix II: NMTC Investment Data by State, 

Fiscal Years 2003 through 2008 

State 

Total dollar amount 

of investment

Dollar amount 

per capita

Percentage of all 

loans and 

investment

Number of 

projects 

Percentage of 

NMTC projects

Alaska $37,978,424 55.3 0.30 23 1.09

Alabama 71,131,651 15.3 0.57 10 0.47

Arkansas 22,351,073 7.8 0.18 15 0.71

Arizona 235,904,081 36.3 1.88 45 2.13

California 1,208,528,336 32.9 9.65 257 12.17

Colorado 142,265,617 28.8 1.14 59 2.79

Connecticut 101,027,293 28.9 0.81 10 0.47

District of Columbia 189,636,869 320.4 1.51 22 1.04

Delaware 64,490,138 73.9 0.51 7 0.33

Florida 146,887,678 8.0 1.17 29 1.37

Georgia 132,099,181 13.6 1.05 16 0.76

Hawaii 286,195 0.2 0.00 1 0.05

Iowa 103,800,268 34.6 0.83 16 0.76

Idaho 22,465,154 14.7 0.18 18 0.85

Illinois 205,879,374 16.0 1.64 68 3.22

Indiana 128,735,168 20.2 1.03 20 0.95

Kansas 15,201,077 5.4 0.12 2 0.09

Kentucky 380,231,286 89.1 3.03 83 3.93

Louisiana 862,539,451 195.6 6.88 96 4.55

Massachusetts 697,153,422 107.3 5.56 121 5.73

Maryland 408,771,661 72.6 3.26 39 1.85

Maine 216,657,193 164.6 1.73 19 0.90

Michigan 273,872,011 27.4 2.19 33 1.56

Minnesota 349,942,905 67.0 2.79 79 3.74

Missouri 464,481,135 78.6 3.71 57 2.70

Mississippi 204,035,342 69.4 1.63 35 1.66

Montana 995,308 1.0 0.01 2 0.09

North Carolina 368,608,411 40.0 2.94 38 1.80

North Dakota 11,428,689 17.8 0.09 2 0.09

Nebraska 32,191,630 18.1 0.26 2 0.09

New Hampshire 48,373,626 36.8 0.39 6 0.28

New Jersey 388,761,424 44.8 3.10 44 2.08

New Mexico 30,112,118 15.2 0.24 4 0.19

Nevada 652,388 0.3 0.01 1 0.05

Appendix II: NMTC Investment Data by State, 

Fiscal Years 2003 through 2008 

Page 52 GAO-10-334 New Markets Tax Credit 
Appendix II: NMTC Investment Data by State, 

Fiscal Years 2003 through 2008 

State 

Total dollar amount 

of investment

Dollar amount 

per capita

Percentage of all 

loans and 

investment

Number of 

projects 

Percentage of 

NMTC projects

New York 1,184,947,158 60.8 9.46 100 4.74

Ohio 575,835,516 50.1 4.60 172 8.15

Oklahoma 264,840,433 72.7 2.11 48 2.27

Oregon 361,838,881 95.5 2.89 58 2.75

Pennsylvania 326,283,735 26.2 2.60 51 2.42

Puerto Rico 1,634,384 0.4 0.01 2 0.09

Rhode Island 236,870,697 225.4 1.89 25 1.18

South Carolina 116,486,899 26.0 0.93 17 0.81

South Dakota 34,652,816 43.1 0.28 4 0.19

Tennessee 133,702,989 21.5 1.07 51 2.42

Texas 284,996,298 11.7 2.27 53 2.51

Utah 110,284,073 40.3 0.88 24 1.14

Virginia 314,165,784 40.4 2.51 37 1.75

Vermont 5,023,705 8.1 0.04 1 0.05

Washington 484,742,478 74.0 3.87 57 2.70

Wisconsin 445,072,159 79.1 3.55 117 5.54

West Virginia 63,637,250 35.1 0.51 11 0.52

Wyoming 15,917,456 29.9 0.13 3 0.14

Total 12,529,292,310 40.7 100.00 2,111 100.00

Source: GAO analysis of CDFI Fund data. 

Note: Dollar amounts are in constant 2008 dollars. Per capita calculations are based on the estimated 

2008 population. 

Page 53 GAO-10-334 New Markets Tax Credit
Appendix III: Description of Primary Uses of Appendix III: Description of Primary Uses of NMTC Financing, by Investment Type 

NMTC Financing, by Investment Type 

Purpose Definition 

Business Financing to for-profit and nonprofit businesses with more 

than five employees or in an amount greater than $35,000 

for the purpose of expansion, working capital, equipment 

purchase or rental, or commercial real estate development 

or improvement. 

Microenterprise Financing to a for-profit or nonprofit enterprise that has five 

or fewer employees (including the proprietor) and in an 

amount no more than $35,000 for the purpose of 

expansion, working capital, equipment purchase or rental, 

or commercial real estate development or improvement. 

Real estate Financing for rehabilitation of office, retail, manufacturing, 

or community facility space. Financing may include 

acquisition costs. Includes mixed-use real estate that 

combines both commercial and residential uses. Excludes 

acquisitions without rehabilitation. 

Commercial construction, 

permanent, acquisition 

without rehabilitation 

Financing for: (1) predevelopment financing; (2) 

construction or permanent financing; or (3) acquisition 

without rehabilitation of office, retail, manufacturing, or 

community facility space. Includes mixed-use real estate 

that combines both commercial and residential use. 

Commercial rehabilitation Financing for the rehabilitation of office, retail, 

manufacturing, or community facility space. 

Financial note may include acquisition costs. Includes 

mixed-use real estate that combines both commercial and 

residential uses. Excludes acquisitions without 

rehabilitation. 

Housing construction, 

multifamily 

Financing for predevelopment financing, or construction of 

multifamily housing. 

Housing rehabilitation, 

multifamily 

Financing for the rehabilitation or acquisition of multifamily 

housing. 

Housing construction, 

single family 

Financing for predevelopment financing, or construction of 

single-family housing. 

Housing rehabilitation, 

single family 

Financing for the rehabilitation or acquisition of singlefamily housing. 

Other Financing other activities not specifically defined. 

Source: CDFI Fund. 

Page 54 GAO-10-334 New Markets Tax Credit 
Appendix IV: Comments from the Department Appendix IV: Comments from the of Treasury 

Department of Treasury 

Page 55 GAO-10-334 New Markets Tax Credit
Appendix IV: Comments from the Department 

of Treasury 

Page 56 GAO-10-334 New Markets Tax Credit
Appendix IV: Comments from the Department 

of Treasury 

Page 57 GAO-10-334 New Markets Tax Credit
Appendix V: 

A

GAO Contact and Staff 

cknowledgments 

Page 58 GAO-10-334 

Appendix V: GAO Contact and Staff 

Acknowledgments 

Michael Brostek, (202) 512-9110, or brostekm@gao.gov 

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

LaKeshia Allen; Thomas Gilbert; Catherine Hurley; Cristian Ion; Ed 

Nannenhorn; Jungjin Park; Sabrina Streagle; and Elizabeth Wood made 

key contributions to this report. 

 New Markets Tax Credit 

GAO Contact 

Acknowledgments 

(450702) 
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