The New Markets Tax Credit (NMTC) program distributed nearly $10 billion in its largest-ever combined allocation round, but community development projects are not progressing as quickly as expected. According to Onika Lewis-Mahabal, Vice President of New Markets Tax Credit at Nonprofit Finance Fund (NFF),the main obstacles are not a shortage of tax credits but the worsening financial health of nonprofit borrowers and sharply rising construction costs that have outpaced available subsidies.
Despite the record NMTC allocation, demand for project funding continues to outstrip supply. “Even with $10 billion on the market, that does not satisfy the needs that we are seeing in terms of the projects that we can do,” Lewis-Mahabal says. NFF received $75 million in this round, its largest ever. With typical NMTC allocations structured in $10 million increments, the organization can fund only eight projects from a pipeline of about 520.
This widening gap between project demand and available capital is not simply a matter of insufficient NMTC funding. Instead, the capital stacks required to close deals have become more complicated and harder to assemble, making it increasingly difficult for projects to reach completion.
Rising Costs Widen Funding Gaps
Two primary factors are driving the slowdown: escalating construction costs and increased operating expenses for nonprofits. These pressures are creating larger gaps in project budgets that NMTC allocations alone cannot bridge.
“Costs have gone up in many areas,” Lewis-Mahabal explains. “It’s not just construction. Operating costs for nonprofits have gone up as well.” NMTC is designed to fill gaps in community development finance by providing capital when other sources are unavailable. The program operates under a “but for” test, requiring projects to demonstrate they have exhausted other financing options before receiving allocations. When construction budgets rise 20 to 30 percent and nonprofit operating revenues decline, the gap NMTC must fill often exceeds what the program was designed to cover.
As a result, many projects now require additional capital beyond NMTC allocations to proceed. In some cases, nonprofits must pause projects for years while they fundraise or wait for delayed government reimbursements. While CDFIs like NFF can provide some gap financing, many projects either move forward more slowly or stall altogether.
Policy Shifts Add Financial Pressure
The financial challenges facing nonprofits extend beyond rising construction and operating costs. Policy shifts are affecting how nonprofits receive grant funding and government reimbursements, and changes in reimbursement timing or eligibility can leave nonprofits without anticipated revenue, straining project budgets.
Delays in receiving expected grants or government funds force nonprofits to seek bridge financing or other interim capital sources, adding complexity and cost to transactions. For projects already operating with thin margins, even short delays in reimbursements can jeopardize their financial feasibility.
These issues are not isolated to individual projects; they are widespread, affecting community development finance nationwide. While the permanent status of the NMTC program provides long-term stability, it does not resolve the underlying structural challenges faced by nonprofit borrowers.
Assembling Capital Stacks Gets Harder
Community development projects typically depend on multiple funding sources, including NMTC, low-income housing tax credits, state subsidies, and philanthropic capital. As each source faces its own limitations, assembling a complete capital stack has become more difficult. “We are seeing gaps in the capital stack for many projects,” Lewis-Mahabal says. “New markets are a gap filler. It is the capital of last resort.”
NFF tries to address these gaps by offering additional financing beyond NMTC allocations, such as capital campaign bridge loans and leverage loans to help nonprofits complete their funding. However, these tools do not solve the core problem of rising costs and constrained nonprofit budgets.
NFF’s Integrated Lending Approach
NFF’s approach to these challenges involves combining NMTC allocations with direct lending. As both an NMTC allocatee and a lender, NFF can provide multiple forms of capital to a single project, reducing the number of parties involved and streamlining transactions.
“As a lender, we can do both,” Lewis-Mahabal says. “We can be a one-stop shop for the nonprofits we serve.”
This integrated model allows NFF to structure deals that might otherwise fail due to gaps in the capital stack. However, it also concentrates risk within a single institution and does not resolve the broader issue of insufficient capital relative to project needs.
Integrated Models Face Limits
The challenges facing community development finance are growing. Construction and operating costs continue to rise, policy changes add uncertainty, and assembling complex capital stacks is harder than ever. While NFF’s integrated model offers a partial solution by streamlining financing and reducing transaction complexity, it cannot fully offset the broader financial pressures on nonprofits.
Whether other community development financial institutions adopt similar integrated models will depend on their capacity to manage both NMTC allocations and direct lending. Ultimately, the long-term viability of community development projects will require not just more efficient financing but also a stabilization of costs and more reliable funding streams for nonprofits. Until then, even record NMTC allocations may not be enough to meet the growing need for community investment.
