How one small consulting firm is helping communities across the country create affordable for-sale housing with the New Markets Tax Credit Program

Since 2003, communities across the US have used the federal New Markets Tax Credit Program (NMTC Program) to revitalize distressed neighborhoods. The program incentivizes private investment into low-income and economically disadvantaged communities by providing investors with a federal tax credit for investing in economic development projects in those communities. According to the NMTC website, for every $1 invested by the Federal government, the NMTC Program generates over $8 of private investment. These funds flow through Community Development Entities (CDE) and go towards a wide range of projects, from large multi-use retail and commercial buildings to loans for local businesses. The idea is that this boost of new investment will create a ripple effect that catalyzes further revitalization in an area.

While the NMTC Program has supported a wide range of projects throughout the country, for many years, individuals and companies involved in the NMTC industry tended to shy away from using NMTCs for affordable for-sale housing projects. That all changed, however, when one small consulting firm located in St. Louis, Missouri (Smith NMTC Associates, LLC) persuaded Habitat for Humanity International (HFHI) to collaborate with them on an application for NMTCs. The application, and subsequent ones, successfully garnered $108 million in NMTCs to be used exclusively for Habitat affiliates’ projects throughout the U.S.—all of which develop affordable for-sale housing and sell to low-income households.

Smith NMTC Associates are now working to spread this NMTC affordable for-sale housing model they developed with HFHI so that other non-profit borrowers can access financing to build affordable, for-sale housing in their communities. From when they started in 2008 through today, they have deployed $458,788,110 of NMTCs in 36 closings across 33 states with 20 CDEs serving 117 nonprofit borrowers. This has resulted in the financing of over 4,140 homes throughout the country, at a time when affordable housing stock is at an all-time low.

We talked to Howard Smith, co-founder of Smith NMTC Associates, about how they devised this NMTC housing model and how exactly it works to uplift individuals and neighborhoods, including those right here in Pittsburgh’s East End.

Howard Smith_Smith NMTC Associates
Howard Smith of Smith NMTC Associates LLC

Can you tell us about your background at Habitat for Humanity and how you developed the NMTC affordable for-sale housing model there?

I’ve been involved with Habitat for Humanity in St. Louis, Missouri since the early nineties—as a board member, board chair, and on the law committee. In 2001, we were doing a Blitz Build where we constructed 15 homes in 15 days to celebrate our 15th year in existence in St. Louis. The co-chair of the Blitz Build went on to become one of the heads of US Bank’s community development corporation (CDC). At that time, their CDC was getting very involved in the NMTC Program. Meanwhile, I was working as an attorney for a local industrial design builder, and after looking into the program, we applied for and accessed $12 million in NMTC allocation through US Bank for an industrial building in St. Louis.

The NMTC Program is complicated, but it also offers flexibility in the funding structure unlike other programs such as the Low-Income Housing Tax Credit Program (LIHTC Program). So, while we were doing that transaction with US Bank, we realized that NMTCs could be a great tool for affordable for-sale housing developments. At the time, everyone was focused on rental housing, but we really wanted to create wealth for individuals and families through homeownership, something we had witnessed the value of firsthand through our work with Habitat. That’s when we sketched out a structure on the back of a napkin, had US Bank’s NMTC legal counsel review it and give it a tentative heads up, and flew down to HFHI in Atlanta to pitch it to them. My wife, Donna Smith, is also an attorney and a writer. So, I told HFHI that we would write the allocation application and guarantee the recapture risk. My wife wrote the first application in 2007, which is when we formed our company and decided to work on NMTCs full-time. Donna wrote three successful applications for HFHI, and we deployed the $108M received to Habitat affiliates throughout the country. We also worked with Habitat affiliates and other third party CDEs to deploy additional NMTCs for affordable homeownership.

Since then, we have been helping other non-profits use this model. We have worked with The Housing Partnership Network, Inc. (HPN) since 2007, receiving and deploying $120M of NMTC allocation to HPN members throughout the country. Last year, we formed a similar collaboration with Community Housing Capital (CHC), a NeighborWorks America affiliate lender and prepared an NMTC allocation application for them. We are waiting to hear about awards for that round. This year, in addition to HPN and CHC, we will also be filing an application for the National Housing Trust Community Development Fund which will focus on affordable homeownership projects centered around permanent affordability. We are excited the model is being used more.

“We really wanted to create wealth for individuals and families through homeownership.”

What is the NMTC affordable for-sale housing model and how does it direct funds into distressed communities?

The model is designed to incentivize private investment into distressed communities using the sale proceeds from NMTCs as part of the capital stack [the different forms of capital used to finance a development project]. There are two parts to the capital stack. A portion of it is the sale proceeds that the investor, US Bank, our partner in these transactions, purchases. The other is what the recipient of those proceeds has to bring, which is counterpart funding to complement those sale proceeds. Though dependent on market pricing for the credits which can vary, a rule of thumb is that the recipient has to bring roughly two-thirds of the funding and the sale proceeds from the tax credit amount to around one-third. In the end, it’s a seven-year program, in which the investor pays upfront for tax credits received over seven years.

Let’s imagine a real-life example. Say a non-profit developer is trying to build new, affordable for-sale homes in a neighborhood and wants to use the NMTC Program to help fund the project. They would apply for the tax credits, and once received, the bank would buy those tax credits from them to use against their tax exposure. The proceeds of that sale would then go into the project, added to the money that the non-profit developer needs to bring to fund the project. The developer can then use the portion of the funds that will remain in the project at the end of the seven-year compliance period and will not have to be repaid. They can use this money to subsidize market or affordability gaps, to build additional units, or to subsidize construction costs to ensure that the homes they’re building can be sold at an affordable price. Some developers who do mixed-income developments can also use the market-rate purchaser’s sale proceeds to offset losses on the affordable sales. In this way, NMTCs act as a subsidy that allows non-profit developers to sell homes at lower prices while not sacrificing the quality of the homes constructed.

The NMTC affordable for-sale housing model developed by Smith NMTC Associates takes advantage of a complex yet flexible funding structure that allows non-profit developers to leverage NMTCs to potentially act as a subsidy for creating affordable homes.

Who is taking advantage of this model?

We only work with non-profits, because that maximizes the amount of benefit there is to build the affordable housing units. Some of our clients are HFHI affiliates, some are HPN members, some are NeighborWorks America Members, and all tend to be high-performing, non-profit developers like ELDI. 

How does this differ from the way things are normally done?

There are very few community development tools available for non-profit developers who develop and sell affordable housing, and there’s nothing out there that compares to this. There is a statute that is said to be pending in Congress that will help create those incentives, but it’s based on the LIHTC Program which has been tremendously successful but is only for rental housing. Congress is now attempting to adapt that statute to expand it to for-sale housing. We’re not sure if that’s the right way to do it, but that’s the only other tool out there that is being considered. That’s why we’re trying to expand the NMTC Program, because it’s so much more flexible than the LIHTC Program.

NMTC Affordable For-Sale Housing East LibertyCan you tell us about your work with ELDI?

ELDI is developing 26 for-sale homes in East Liberty, Larimer, and Garfield.  The project is a combination of eight market-rate homes and 18 affordable, for-sale homes.  Of the eight market-rate homes, six will be new construction. The NMTC structure allows for a mixed-income approach to help create affordable homeownership opportunities in these revitalizing neighborhoods, and the project will help meet the homeownership goals of the community plans for East Liberty, Larimer, and Garfield.

How can this model be used to help close the Black-white wealth gap in the US?

There is a housing crisis in this country—particularly around affordable housing for low- and moderate-income (LMI) households. Those hit the hardest by the shortage are people of color, especially Black families. Median sale priced homes throughout the country are not affordable for LMI families and to first-time homebuyers. 72% of white households own their own home, while less than 42% of Black households own their own homes nationally. This is true even though many of these families could qualify for a mortgage.

There are several issues—one is the lack of affordable housing stock; another is the impacts of structural racism which have denied these families the same opportunities to build wealth, qualify for loans, and become homeowners.

With NMTCs, we can accelerate and increase the growth of affordable homes for LMI buyers. Developers (most often nonprofits) can scale up their development projects to more quickly address the dearth of homes available.

This can begin to help close the wealth gap as homeownership is the primary wealth-building tool for LMI families. It provides housing and financial security so that families can cope when medical emergencies or other sudden events occur. Homeownership is often less expensive on a monthly basis than rental housing. It also provides stability—rent can be increased, ownership of buildings can change hands, leases cannot be renewed. It provides a financial cushion because the family is building equity and savings. It also can serve as collateral for loans that can be used to attend college, for children’s schooling, or for emergencies.

Creating more affordable housing stock is an important part of ensuring that more Black families have the opportunity and access to become homeowners.

Learn more about Smith NMTC Associates LLC and the NMTC housing model.