A version of this article was published in the April 2023 edition of Healthcare News.
The New Market Tax Credit (NMTC) can be a powerful financing tool for health care organizations, filling financing needs and providing more impact in the communities and for the patients they serve.
NMTCs provide businesses and organizations across the United States with flexible financing based on various qualifying factors. There are opportunities for health care organizations in particular to use the proceeds of NMTC financing to help finance an expansion or relocation, provide equipment financing, or provide working capital.
Passed in 2000 as part of the Community Renewal Tax Relief Act, the NMTC provides a 39% federal tax credit to investors who invest in traditionally underserved, low-income communities. These investments then flow to the low-income community through the NMTC financing structure.
Explore the basics of the NMTC with our FAQ. See how the NMTC can be used by health care organizations in the following sections:
For additional background on the NMTC, explore our FAQ.
How Can Health Care Organizations Benefit from New Market Tax Credits?
While not-for-profit health care organizations may not have federal tax liability and can’t directly use NMTCs, they could still benefit from the NMTC financing structure.
An NMTC investor with federal tax liability can receive the credits generated from the structure by making qualified investments in an NMTC-eligible community. The invested equity flows through the NMTC structure and ultimately to a qualified low-income community business (QALICB) or project, which is generally a subsidiary or a business segment of the health care organization.
The QALICB can receive the benefit of the NMTC structure in the form of either equity or low-interest rate loans, with low-interest rate loans being a commonly preferred vehicle. The health care organization can then use the loan proceeds to complete their project, install equipment, or for working capital.
What Types of Health Care Organizations Can Use NMTC Financing?
Health care organizations can use NMTC financing as long as NMTC proceeds aren’t allocated for an impermissible purpose. Most health care organizations usually aren’t engaged in activities prohibited by the NMTC regulations.
NMTC financing is competitive. The more compelling the mission of the health care organization and the more health care services it can provide to the low-income community, the more likely it is to attract financing. Additionally, CDEs and investors are placing greater and greater emphasis on projects that focus on diversity, equity, and inclusion of the community.
Entity Types that Receive NMTC Funding
Following are some broad categories of health care entities that have received NMTC financing:
- Federally qualified health centers (FQHC)
- Community health centers
- Hospitals and emergency rooms
- Addiction treatment centers
- Children’s hospitals and health centers
- Behavioral health centers
- Dental service providers
- Cancer treatment centers
- Nursing homes and hospice providers
- Home health providers
- Veterans’ services providers
This list is in no way exhaustive. The common thread is that each entity type provides meaningful benefit to the low-income communities in which they are located and serve.
Are there Community Development Entities (CDEs) that Focus on Health Care Organizations?
Every CDE makes representations to the Community Development Financial Institutions (CDFI) Fund regarding how and where they will deploy their allocation.
Some CDEs are focused on health care services and outcomes, while others have a broader focus. A CDE that primarily invests in manufacturing businesses in rural locations might not be a good fit for a health care organization in a city, but many CDEs are supportive of various types of health care organizations because of the impactful services these organizations provide in their respective local communities.
Additionally, given the impact of COVID-19 on our health care system and the vulnerabilities that it exposed, particularly to traditionally underserved patient populations, many CDEs are interested in health care transactions that can demonstrate a meaningful impact to those communities in need.
Careful consideration of the mission and goals of your organization, its locations, the type of project, and the expected impacts in the community will often reveal several CDEs that might be interested in bringing NMTC allocation to your project.
If My Health Care Organization Is Classified as Rural by the Health Resources & Services Administration (HRSA), Will My NMTC Project Qualify as Rural?
Not necessarily. The CDFI Fund uses the CDFI Information Mapping System v.4 for determining the eligibility of census tracts for its various programs, including the NMTC program. Classification of a location as metro or non-metro is based on whether a census tract is located within a particular metropolitan statistical area. It’s possible, especially in populous states like California, that a health center classified as rural under HRSA might not be rural for purposes of attracting NMTC allocation.
If My Health Care Organization Is Part of a Hospital District or Similar Quasi-Public Entity, Can it Qualify for NMTC Financing?
To qualify for NMTC financing, a QALICB must be a corporation or partnership for federal income tax purposes. As a general rule, public entities, such as municipalities, can’t use NMTC financing.
There are, however, options for structuring NMTC transactions that may allow a hospital district or similar quasi-public entity to use NMTC financing. A nuanced examination of the facts of such a transaction is required.
My Health Care Organization Tells a Compelling Story and Is Located in a Severely Distressed Census Tract. It Shouldn’t Have Any Trouble Attracting NMTC Financing, Correct?
NMTCs financing isn’t “as of right.” Even compelling projects don’t always obtain NMTC financing. Attracting allocation can sometimes come down to being in the right place at the right time.
Sometimes, a project simply isn’t ready when a CDE has allocation or, conversely, a CDE that is committed to a project might not receive allocation and be unable to bring allocation to a project. Obtaining NMTC financing is a competitive process with a limited amount of allocation authority available every year, so it’s important to tell your story in a compelling way in hopes of garnering interest from multiple CDEs.
My Health Care Organization Needs Working Capital Because of the COVID-19 Pandemic or Some Other Natural Disaster. Can NMTC Financing Help?
Yes. It’s possible to look at the operations of the health care organization to determine if NMTC financing might be available.
The same minimum size of NMTC financing is applicable, and the NMTC proceeds will need to be used within 12 months of closing, but working capital can be a permissible use of the proceeds.
Using NMTC proceeds for working capital, however, hasn’t been a traditional use of NMTC financing. While it’s gaining acceptance in the NMTC industry, there are pre- and post-closing compliance considerations.
We’re Here to Help
Organizations that aren’t exploring options for business tax credits could be missing out on opportunity. If you would like to discuss the work your health care organization does in your community and how NMTC might help, contact your Moss Adams professional.