A QALICB must derive at least 50% of gross income from active conduct in a low-income community, locate at least 40% of its tangible property there, perform at least 40% of its services there, and keep nonqualified financial property under 5%. There is no intangible-property test. Passive residential rental is not a qualified business. A sub-CDE is the ordinary allocatee structure, not a way to qualify passive rental.
QALICB tests and how real-estate projects qualify
Tax credit programs change with IRS, Treasury, NPS, and CDFI Fund guidance. This page is sponsor-POV process commentary, not tax or legal advice. Engage tax counsel and a tax-credit syndicator for every transaction before relying on the mechanics described.
QALICB four-part test: under §45D(d)(2), a QALICB must satisfy: (a) at least 50% of gross income derived from the active conduct of a qualified business in a Low-Income Community; (b) at least 40% of tangible property (owned or leased) located in an LIC; (c) at least 40% of services performed in an LIC; and (d) less than 5% of property attributable to nonqualified financial property (e.g., debt instruments, stock).
Real-estate-focused QALICB use cases: mixed-use commercial buildings with operating tenants in low-income communities; community-impact retail centers; healthcare facilities (clinics, hospitals); workforce-development centers; community kitchens and incubators. The active business in the LIC anchors the qualification.
Pure passive rental constraint: passive residential rental real estate is not a qualified business under NMTC rules. Pure rental real-estate projects typically structure through alternative mechanisms (LIHTC for residential rental) rather than NMTC. Mixed-use projects with substantial commercial active operations are commonly structured as NMTC-eligible.
Sub-CDE structure: for projects where the QALICB owns the real estate and an active business operates in the building, the sub-CDE makes a Qualified Low-Income Community Investment in the QALICB's debt. A sub-CDE is the ordinary allocatee structure. It makes the qualified low-income community investment. It is not a way to qualify passive residential rental.
Bridge financing role: NMTC bridge facilities sometimes advance against the leverage loan or against the tax credit equity. The structure is more complex than LIHTC or HTC bridges because the leverage loan typically funds at closing (rather than tranche-by-tranche), so bridge needs are smaller. The financing structuring complexity is the bigger consideration than bridge sizing.
Sponsor playbook: NMTC works for community-impact mixed-use and active-business CRE projects. Engage an experienced CDE and tax counsel from inception. Tax counsel must be involved in the QALICB structuring to confirm satisfaction of the four-part test before significant capital is committed.
Sources
- New Markets Tax Credit Program · U.S. Department of the Treasury, CDFI Fund · current
- Partnership Taxation: IRC Subchapter K (Form 1065 Instructions) · U.S. Internal Revenue Service · current