Using New Markets Tax Credits for Community Health Center Capital Infrastructure

1
Using New Markets Tax Credits for Community
Health Center Capital Infrastructure
2
Background

• CHCs increasingly must use debt financing for
  capital infrastructure
• Capital financing is sometimes unavailable or
  priced too high
• CHCs must develop avenues to access affordable
  capital

3
Corporation for the Development of Community
Health Centers (CDCHC)

• CDCHC created in 2001 as non-profit loan fund
• Certified loan funds as a Community Development
  Financial Institution(CDFI)
• CDFI status allows matching funds for loan corpus
  up to 5 million from Treasury Dept.
• CDFI status allows TA grants for capacity
  building up to 50,000
• CDFI status allows funds participation in NMTC
  program

4
CDCHC

• Sought and received private foundation grants,
  USDA CDFI funds for loan corpus (1,000,000)
• Made small loans from internal loan fund at low
  interest rates (4)
• Applied for and received NMTC allocation in 2004

5
NMTC Program

• Applicable only in low-income census tracts
• Applicable only to financing Qualified
  Low-Income Community Businesses
• Provides federal tax credit of 39 over a 7 year
  period to investors who fund qualified projects

6
Applying NMTC to CHCs

• CHCs are typically in low-income census tracts
  and qualify as low-income community businesses
• CDCHC, as a non-profit, forms required for-profit
  Limited Partnership to distribute tax credits to
  investors

7
Limited Partnership

• CHC building projects identified for funding
• Investors solicited for Partnership
• Investor deposit of cash with Partnership results
  in taxable-equivalent return of more than 7
  annually

8
Limited Partnership

• Partnership loans funds to CHC at nominal
  interest rate and balloon payment at end of 7th
  year is refinanced
• Loan costs to CHC are subsidized by 39 tax
  credits

9
Proposed Structure
U.S. Treasury Department
Allocation of NMTC
Tax Credits
CDCHC
Tax Credit Allocation
GP 1
Investment
Community Lending, LP
Investors
Tax Credit and Cash Distributions
Mortgage
Loan
FQHC Project
10
NMTC Considerations and Enhancements

• NMTC wont turn bad loan into good loan
• CHC projects must be economically feasible and
  CHC must demonstrate adequate cash flow and
  repayment ability
• CHC projects need equity by fundraising,
  charitable donations and possible capital
  injections from reserves

11
NMTC Considerations and Enhancements

• Underwriting guidelines make use of HRSA loan
  guarantee extremely useful
• HRSA guarantee essential when cash flow depends
  on projected increases in revenues from expansion
  project.
• HRSA guarantee may persuade investor to accept
  lower returns due to reduced risk

12
NMTC Considerations and Enhancements

• Banks have incentive to make CHC loans through
  NMTC because their investment is pre-approved and
  automatically results in Community Reinvestment
  Act (CRA) credit.

13
Commercial Loan vs. NMTC Loan Comparisons for an
8.9 Million Clinic Project

• Commercial Loan
• Amount Borrowed 8,900,000
• Origination Fee 89,000
• Total Amount Financed 8,989,000
• Interest rate prime 1 (7)
• Term 20 years, interest fixed for 7
• Monthly Payment 69,692
• Seven Year Cost of Loan 5,854,128
• Remaining Principal Balance after 7 Years
  7,125,392

14
Commercial Loan vs. NMTC Loan Comparisons for an
8.9 Million Clinic Project

• NMTC Loan
• Amount Borrowed 8,900,000
• Origination Fee 178,000
• Total Amount Financed 9,078,000
• Interest rate Zero (0)
• Term 2.5 of principal per year
• 7 year balloon to be refinanced
• Monthly Payment 20,660
• Seven Year Cost of Loan 1,735,440
• Remaining Principal Balance after 7 Years
  7,342,500

15
Commercial Loan vs. NMTC Loan Comparisons for an
8.9 Million Clinic Project

• Monthly payment difference in Commercial Loan and
  NMTC Loan 49,032
• Difference in total payments over 7 years
  4,118,688
• Interest savings over 7 years 3,990,485