Most medium to large-scale healthcare projects require a combination of various monetary resources to fill a variety of financial gaps. Today’s traditional capital sources are not sufficient for project costs without a tremendous source of public funding and/or private equity. Obtaining certain subsidies, credits or grants in connection with these economic development projects can often be the financial difference-maker for an otherwise viable project. Upon learning that New Markets Tax Credit (“NMTC”) financing can create as much as a twenty-five percent (25%) subsidy for their project costs, many of our healthcare clients initially ask “What’s the catch?” While NMTC transactions involve a competitive marketplace for allocation and are more complicated than more conventional financings, borrowers that reach financial closing are greatly rewarded.
The New Markets Tax Credit program was enacted as part of the Community Renewal and Tax Relief Act of 2000 (P.L. 106-554, 113 Stat. 2763) and is designed to encourage new private sector investments in low-income communities. NMTCs are allocated by the Community Development Financial Institutions Fund, a bureau within the United States Department of the Treasury that runs the NMTC program, under a competitive application process.
Corporate taxpayers may participate in the NMTC Program by receiving a credit against federal income taxes for making qualified equity investments in designated community development entities. The credit received is equivalent to thirty-nine percent (39%) of the investment and is utilized over a seven-year period (five percent (5%) for the first three (3) years and six percent (6%) for the four (4) remaining years). These investments are typically leveraged with various types of secured debt (e.g., conventional lending or bond financing) or affiliate debt, which allows the tax credit investor to receive the NMTCs on the equity/debt combination. The resulting subsidy to a project generated from the monetized NMTCs can amount to as much as twenty to twenty-five percent (20% – 25%) of the total cost of the project.
In most cases, the NMTC program utilizes geographic qualification based on the census tract location of the project. In other words, the first step to determine whether your project qualifies for NMTCs is to identify the location of the project and whether it is located in a “qualified census tract”. Qualifying census tracts have either a poverty rate of at least 20% or a median family income below 80% of statewide median income or area median income, whichever is greater. While a census tract will qualify if it meets one of the above criteria, most projects that receive NMTC allocation are located in census tracts with characteristics evidencing a higher level of distress such as a median family income less than 60%, a poverty rate greater than 30% and an unemployment rate at least 1.5 times the national average. In fact, more than 70% of NMTC investments have been made in highly distressed areas.
The NMTC program has proven to be an effective means of rebuilding economically distressed communities, and new and rehabilitated projects are being developed throughout the country as a result of the program, including healthcare facilities and hospitals. NMTC financing can be used for real estate acquisitions, site prep, substantial rehab, new construction, equipment and soft costs and working capital. Typically, projects should have costs of at least $5 million in order to attract adequate interest from investors.
Both public and private healthcare companies can utilize the NMTC program. For public hospitals and healthcare facilities, the governmental authority may utilize NMTCs by creating a non-profit public benefit corporation to lease and develop the real estate and construction. NMTC financing has been utilized for numerous public and private healthcare companies across the country.
In summary, the NMTC is a non-refundable tax credit designed to encourage private investments in eligible low-income communities. As a general rule of thumb, the resulting subsidy to a project generated from the use of NMTCs can amount to as much as 20% – 25% of the total cost of the project. In other words, every dollar generated in equity from the NMTCs is a dollar saved for the project borrower. Because NMTCs provide a substantial current and long-term subsidy to the construction and operation of a project, every medium to large-scale healthcare project in a qualified census tract should consider NMTCs as an alternative source of financing.