Get Money for Upgrades: New Markets Tax Credits

Many companies in distressed communities may qualify for a federal business-incentive loan program that few people know much about: New Markets Tax Credits (NMTCs).

Brynn Sanders, a consultant with Sanders Capital Consulting, St. Louis, advises corporate clients who are seeking loans that businesses, including commercial laundries, can use to buy equipment, upgrade buildings and make other improvements in order to preserve jobs and spur economic growth.

“The way that it works is there are community-development entities (CDEs) that apply to the CDFI (Community Development Financial Institutions) fund for an award,” Sanders said in a forthcoming article on NMTCs in Textile Services magazine. “That’s an annual process.” Laundries and others seeking NMTC funding must prepare an application. The CDFI entity, which can be a commercial bank with a community-development focus, applies for an award from the Community Development Financial Institutions (CDFI) Fund – an entity within the U.S. Treasury Department. The fund’s mission is to promote growth in economically distressed areas. The CDFI gets the money and determines which businesses can access it, she said.

The NMTC program dates to 2000 when Congress enacted bipartisan legislation designed to encourage private-sector growth in economically distressed areas. Initially, the NMTC program required yearly renewals. The annual process of competing budget priorities threatened the future of NMTCs. But that changed last year with a provision in the One Big Beautiful Bill Act (OBBBA) that made the program permanent. It now has a $5 billion-per-year allotment of federal funds. This year’s funding is actually double that amount because the government – due to administrative issues – decided to combine funding for 2024-’25. “This year it’s actually $10 billion because they got behind,” Sanders said. “So they put 2024 and 2025 funding into one round.”

To compete for this funding, laundries or other businesses must submit an outline of their strategy for investing the loan proceeds. “So some might say, ‘We are going to create jobs through manufacturing,’” Sanders said. So they all write different strategies on what they’re going to do for their specific geography and footprint.” If approved, these entities get an allocation from the CDFI Fund. The government allows CDFIs to select which businesses receive the money.

Mark Carter, the retired president of Up To Date Laundry in Baltimore, said his company has had experience with the NMTCs. “Why is it a good fit?” he asks rhetorically. “I would say this: Look at where our companies are in our industry. We are typically in metropolitan areas, or areas of redevelopment. We have a lot of low-income workers. We have a tremendous workforce in areas where jobs need to be protected or developed. That’s why I think it can be a great assistance because we do fit, I think, at least a profile of what’s trying to happen here with the money.”

If a commercial laundry gets a loan from a Community Development Entity (i.e., banks and other organizations that distribute NMTC funds), it would repay the loan over seven years at a bargain rate – sometimes as low as 1%. “There’s really nothing else like it out there for commercial businesses,” Sanders said. The NMTC program also includes a 20% loan-forgiveness provision, she added. “There are several different ways that you can use New Markets Tax Credits,” she said. “The most common one is a forgivable debt component (aka, ‘B-loans’), where at exit, you get around 20% of your project paid for.”

Businesses can leverage this process by getting a financial backer to invest in NMTCs. Sanders cited a hypothetical example of how this works. On a $10 million project, a laundry could qualify for the tax credits, she said. Then an investor makes a “Qualified Equity Investment (QEI) in a CDE to claim the credit on that investment. That, in turn, underwrites a portion of the loan that NMTC recipients pay, she said. “It’s plus or minus because all community development entities and investors have different fee structures,” she said. “So that varies, but you can assume it’s around the 20% subsidy.” Investors like NMTCs for the low interest rates they offer. Specifically, investors get a 39% federal tax credit on purchases of NMTCs. These credits are spread over seven years (5% yearly for the first three years; 6% yearly for the next four years).

Laundries that access NMTC funding also get a deal: low- or no-cost capital, Sanders said. This includes interest savings for NMTC recipients compared with traditional financing. “So if you think about going to market and paying 8%, you’re going to pay – 1%. The interest savings more than pay for everything. This has a negative cost of capital. People just have a really hard time wrapping their brains around that.” Watch for more on NMTCs in the March issue of Textile Services.