Danielle Bergner: Hello and welcome to the Health Care Real Estate Advisor Podcast. I’m Danielle Bergner, a real estate attorney with Hall Render. And today we will be speaking with Carrie Vanderford Sanders, CEO of Hope Community Capital, on the topic of New Markets tax credits for hospitals and federally qualified health centers, or FQHCs. Good morning, Carrie.

Carrie Vanderford Sanders: Good morning, Danielle.

Danielle Bergner: Carrie, maybe for those not familiar with Hope Community Capital, could you maybe just start by telling us a little bit about your organization and what you do?

Carrie Vanderford Sanders: Yes. Thanks Danielle. My name is Carrie Vanderford Sanders, as Danielle identified, and I am the CEO and founder of Hope Community Capital. We are a national community development finance consultancy. We work with projects across the nation that need to access interesting tax credits, other public subsidies, also impact capital to develop and operate high impact community facilities.

Danielle Bergner: Wonderful. Before we dive into the application of the New Markets Tax Credit Program to hospitals and FQHCs, I thought it might be helpful if we just talk a little bit more broadly about the New Markets program, it’s underlying policies and objectives and just basically how it works. I think that would be a good foundation for our listeners today. Maybe Carrie, from your perspective, just explain a little bit, how does the New Markets Tax Credit Program work? A lot of people have heard of it, they’re familiar with the term. But what I find is a lot of our healthcare clients aren’t intimately familiar with the program and what it’s really intended to accomplish.

Carrie Vanderford Sanders: So Danielle, the New Markets Tax Credit Program is section 47d of the IRS code. And it was originally envisioned in 2001 and is currently administered through the US Department of Treasury through the Community Development Financial Institutions office. The point of the program then and still today is to provide a federal tax credit to investors for investing in a qualified project in a qualified census tract, through an entity called a community development entity that has been granted or awarded rather allocation authority for new market tax credits. So what this would look like is a again, often it is our bigger banks or often will have tax credit syndicators that are out to, or have an interest in a mission and a financial focus on investing in the new market tax credit. And what they will do is they will work with the community development entities that have applied for an award of new market tax credit authority.

Carrie Vanderford Sanders: I should mention that these community development entities are qualified by the US Department of Treasury through the Community Development Financial Institutions office annually apply for an allocation of the five billion in new market tax credits that is appropriated for this program annually. So we have five billion that these community development entities apply to the US Department of Treasury annually. The average allocation of authority to these community development entities in the past year was around 50, $51 million. So back to what does the investor do? The investor works with a community development entity that has been awarded the new market tax credit and the community development entity says, “Hey, I’ve got, in this case, let’s use a federally qualified health center located in a qualified census tract.” Meaning it is qualified on the basis of poverty, median, household income and unemployment. One or all of those three, as well as some other secondary criteria may come into play.

Carrie Vanderford Sanders: But nonetheless, the CDE in my scenario has a federally qualified health center that is in a qualified census tract and the federally qualified health center is engaging in activities, which we all know, I hope on this audience, what a federally qualified health center does, that qualify as an active business for new market tax credits. And the investor says, “Great.” So the CDE says, “I am allocating 10 million of our allocation to this wonderful FQHC project.” And the investor says, “Great. I would like to buy those credits.” So the investor receives 39% of that $10 million investment as a federal tax credit, taken over seven years. So that is the summary, Danielle. I can certainly go into much more nuance, but that it is an incentive for investors to invest in qualified projects in qualified census tracks.

Danielle Bergner: Which are generally low income communities or communities experiencing high rates of unemployment or poverty type conditions. Is that accurate?

Carrie Vanderford Sanders: Yes. And exactly you called it, a low income community. And that is exactly the designation that the US Department of Treasury and the CDFI fund calls it a low income community based on poverty, unemployment, and median household income. Right? And so there are certain benchmarks within those that help it to understand if this is a qualified census track from a geographic perspective.

Danielle Bergner: I think that’s really important policy issue to understand at the outset of the conversation, because we get phone calls frequently from healthcare clients that hear of this program and they hear it’s really great and a great way to help finance facility improvements and capital projects. But a lot of our clients who call don’t understand at the outset that the program is not intended to create subsidy or incentive in every community around the country. It really is the policy underlying this program is to direct investment, to incentivize investment in fundamentally low income communities. And so I think that’s an important thing to understand. And Carrie, you and I have worked over the years on many New Markets projects and one of the things I like about the New Markets program is it’s not an urban program, it’s not a rural program. It is a program that incentivizes and helps with facilitating capital projects in urban and rural areas around the country, so long as they meet the qualified low income standards for that community.

Carrie Vanderford Sanders: Absolutely. And often I say, it’s a geography program, right? That is the first conversation I have of once I say, “I’m intrigued with the impact of this project and I can see what you’re doing for the community here, let me get that address.” And immediately, I map it and that’s where we start in terms of whether or not it will have access to this New Markets Tax Credit program.

Danielle Bergner: So one of the things you just said piqued my interest, and it’s one of the things I really enjoy about working with you when you said you when you’re talking to somebody about a project and it piques your interest in terms of it’s fit for the program, you act as somewhat of an intermediary between the CDEs and the parties that are ultimately looking to secure the investment for their project. And so what are the things that you look for as a consultant when you’re evaluating, is this project a good fit or not a good fit for the New Markets program?

Carrie Vanderford Sanders: So I will say for our firm, our specialty truly is on community facilities. So that does include, I believe what your audience is very focused on as well, which again, is the hospitals, the health clinics, the federally qualified health centers, and on. So what I am looking for in terms of impact really mirrors what those community development entities that have a allocation authority. What they have said to the US Department of Treasury that they will do, and the impact they will create with the allocation, if they win it. Right? So these community development entities have a business strategy, they have a community impact focus. And my job between, as you said, the community development entities and the actual project themselves seeking the tax credits, my job is to understand the business strategy and the impact strategy of these community development entities and see if there is alignment in what is happening at the project.

Carrie Vanderford Sanders: So for health related facilities, let’s call it, we are looking for number of patient visits. We are really looking at that. We are really looking at payer mix. So why we are looking at payer mix? We are trying to understand how many low income patients are being served. So those are two main things. We are looking for expansion of, let’s just say behavioral health. There’s no behavioral health, we want to use New Markets Tax Credits to do behavioral health at this particular hospital. Let’s say we want to do reproductive care. That is another expansion. It’s what can we, if we had access to this New Markets, what sort of impact could we make? Could we serve more patients? Could we offer more services? Could we bring in more healthcare providers? These are the impacts that are really important to the community development entities to understand.

Carrie Vanderford Sanders: And so, as I mentioned I believe earlier, these community development entities, when they apply for an allocation of this tax credit authority, it is highly competitive. It is subscribed, I believe four times more than what the five billion is available to allocate from the federal government. So when they go in, these CDEs, for these allocations, they want to have the most competitive projects and most high impact projects. So they’re saying, “We can do this.”

Carrie Vanderford Sanders: And so when they win that allocation, they are going to be very, very impeccable and meticulous with regard to alignment in terms of, are you putting the allocation into this FQHC over here in a rural community that is medically underserved? Is that, in my example, is that aligned with what they told the CDFI fund they would do with their allocation? And I will say, in my experience, and I’ve been doing this I think 17 years now Danielle, projects that are serving low income communities that are providing greater access to healthcare, do very well on the impact. And I don’t need to tell your audience about the impact, but I will say that this is a very strong alignment for the program.

Danielle Bergner: Yeah. That’s great. That impact piece, I think, is really important to understand, because it does guide which projects these CDEs ultimately choose. It’s a competitive process, right?

Carrie Vanderford Sanders: Correct.

Danielle Bergner: Let me ask this question. At a federal policy level, it seems to me, the federal policy has swung back and forth a little bit over the years in terms of the types of projects that CDEs have been successful, or I should say the types of strategies that CDEs have been successful securing credits with. For a number of years, the New Markets allocations were heavily skewed towards CDEs that we’re focusing on more pure economic development job creation, going to CDEs that had missions that were very focused on job creation and economic development. But it does seem to me like that pendulum has swung back a bit more towards community development, healthcare, social determinants of health type of issues. Is that perception correct, on my part?

Carrie Vanderford Sanders: Yes. And something that I find just amazing pretty much on a daily basis getting to do this work is the diversity of projects that get done using New Markets Tax Credits. So yes, is there a focus on jobs? Absolutely. I cannot tell you, there must be at least five or six CDEs that are very focused on one thing and one thing only, and that is rural manufacturing. And that is jobs. That is what we are talking about there, is quality jobs. But there are also a handful of CDEs that are 100% focused on health, education and other social determinants of health. In fact, there is at least one CDE that is solely focused on investing their tax credits into FQHCs.

Carrie Vanderford Sanders: Yes, Danielle, I believe that there’s less of a focus on jobs for some CDEs. But what I am really excited about and what I have noticed is just the diversity of projects that can get done, because think about it, the criteria is, as far as the IRS code goes, they don’t talk about community impact in the IRS code. Section 47d does not say anything about community impact. That’s what the industry has created, which is a good thing in my opinion. But the code says you’re in a qualified census track and you’re a qualified active, low income community business. That’s what it says. But I agree, I think we’ve gotten very sophisticated. I’ve seen social determinants of health. The UN development goals as well are things that tend to come into impact as well.

Danielle Bergner: Can you help us to understand how the subsidy associated with the New Markets Tax Credit program works?

Carrie Vanderford Sanders: I have worked on the several FQHCs throughout the country, and I’m not going to name names. But in each of those cases, what they have come to me with is that our operations will… We’ve done our community health planning. We know we need to add dental, let’s say. Dental is big here in Wisconsin, big time need. I’m sure that’s not unlikely in other places as well. So we need to add dental. We need to add a rural dental clinic to our FQHC. We have very thin operating margins. We are not able to take out a lot of debt. We’ve also raised some capital, some private capital, but we’re missing about 20% of our capital stack to finish this dental clinic project. And the need is so desperate, but we have exhausted our resources, financially, to get this done. We need 20 more percent.

Carrie Vanderford Sanders: And that is where I say, okay, where is this thing located? Let me understand if it’s a low income community and let’s see what your total project cost is. So it’s a 10 million dental clinic expansion. They have figured out how to bring eight million to the table, we’re missing two. And I’m saying, let’s go find 10 million in allocation, which will generate $2 million in low cost equity to the project. What happens at the New Market Tax Credits in very broad strokes. It is a seven year compliance program. And so when you close on the financing on day one of the closing of the financing of the 10 million in financing, which is financed through the New Market Tax Credits, you have access to that full 10 million of financing. The investor pays in advance for that credit that they’re receiving, right? They’re receiving a credit, that’s the whole point of this program. They pay in advance for it. You get to access to that money to build out your dental clinic.

Carrie Vanderford Sanders: And at the end of the seven year compliance period, the investor says, “Well, thank you so much. I’ve received the tax credit that you said I would. And I paid $2 million for that tax credit.” So I’ve got my tax credit. You’ve got your $2 million that you’ve used to build this thriving dental clinic. So I’m going to leave that $2 million… I mean, there’s a whole lot of legal documents. It’s not just to leave the two million. But Danielle can help you with those legal documents.

Carrie Vanderford Sanders: But they’re going to leave that two million in the project and exit the transaction. So what you have done then, as the FQHC, is because of the New Market Tax Credit financing, you have financed a 10 million project, but really have only had to repay and, or raise capital for eight million of that 10 because of this wonderful New Market structure. And the thing is with my dental clinic expansion scenario there, the idea is that, yeah, maybe the clinic would’ve raised that $2 million eventually, but the critical need for serving those patients with dental services was so great that they can’t wait. They can’t wait to raise another $2 million. Who knows when or if that will come. So the New Markets accelerate that last piece of capital and makes the project happen when the community really needs it. Hope that makes sense.

Danielle Bergner: It does. It does. So in a nutshell, for people who have that question, the answer is it’s really a way to access a low cost equity investment, and a way to realize at the end of seven years, this subsidy value to the project, which is roughly equivalent, to your point, there’s a lot of legal details and calculations that are necessary. But rough numbers at the end of seven years, the project, and in this case, the FQHC or the nonprofit hospital realizes the value of that new market’s tax credit equity investment. When the investor exits the project, exits the investment and leaves their $2 million in the project.

Carrie Vanderford Sanders: Correct. And I would just add one detail to that, which is that just to reiterate, you have access to the full 10 million on the day of closing, to fund those construction costs and such. That funds on the day of closing. So what you’re really doing is you’re not repaying your investor at the end of the seven years. That money is in the project and it doesn’t come out, thanks to New Markets.

Danielle Bergner: Carrie, are there opportunities to payer New Markets Tax Credit equity investment with philanthropic commitments? Because I work with a number of clinics that have a really strong donor base from various sources, but they aren’t always sure how to… But maybe those philanthropic commitments, they’re not enough. They’re not enough. To your point, they would get there in three to five years. Right? In the meantime, there’s a need. The community has a need for dental services, for behavioral health services. Is there an opportunity for either nonprofit hospitals or FQHCs to couple philanthropic commitments with the New Markets Tax Credits equity structure?

Carrie Vanderford Sanders: Absolutely. So I mentioned in my $10 million example there, that you could count on two million after all is said and done, two million coming from your new market tax credit subsidy. But where’s the rest of the eight million? Often, I see cash at closing. So maybe you have capital campaign or donor receipts that you actually have as cash on day of closing. We’ll put that in to kind of fill our $8 million bucket. And then you’ll have some that may come in over three to five years, in which case the project would probably seek a bridge loan, from a financing institution. And the repayment source for that bridge loan of course, is your pledges receivable. And so that comes in. And then the other source that I see, I do actually think I’ve seen HRSA grants also as part of that $8 million bucket of sources.

Carrie Vanderford Sanders: So other sorts of grants that maybe public grants can be part of that bucket as well. And then permanent debt can also be part of it. And then also, I will just see sometimes just the cash of the organization. Maybe they’ll put in a half a million in our $8 million bucket that is their net assets that they have been reserving for some time. And it’s like, well, this was for an expansion and here we go. So we can fill that eight million of the 10, many different ways. And that’s another part of New Markets that’s so exciting to me is because it’s so diverse in how you can do that. But you do need to figure out the eight million and it all has to be there. I should say this, the whole 10 million has to be counted for on closing day. Just note that the two million of that 10 is derived from the New Market Tax Credit equity.

Danielle Bergner: Right, understood. Carrie, one question I have for you. It’s a very relevant and timely topic, which is behavioral health specifically. We’re actually preparing to issue an article within the next week or so regarding the status of behavioral health and in particular, the lack of facilities currently existing to meet demand in the community. And I’m wondering from your perspective, because you are on the front lines of so many, you’re seeing so many projects, some of which will go, and some of which will not. I’m curious if you’ve seen an uptick in behavioral health related projects in particular?

Carrie Vanderford Sanders: I have. And to add a little nuance to that, what I am seeing is telehealth. So I’m seeing maybe there is a hospital system or an FQHC system that maybe is based in, let’s just say, Madison, Wisconsin, since that’s where I’m calling in from today and that they may have rural affiliates that are medically underserved, lack of medical professionals in those communities and on. And so I am seeing an uptick in, and I’m sure this is no surprise to any of your listeners here, an uptick in telehealth as it relates to behavioral health. And can we use New Markets for that? Absolutely. That’s what I’m talking about with how diverse and exciting the New Markets funding can be. At least it’s exciting to me, Danielle, I don’t know.

Carrie Vanderford Sanders: I’m seeing more telehealth and especially to reach our rural communities.

Danielle Bergner: Give me an example of how New Markets is being used in the context of telehealth.

Carrie Vanderford Sanders: Okay. So I have a current project right now, which again, will remain nameless, but it is in Wisconsin and there are going to be five small offices in rural communities in a five county area. So five offices, five counties. One of the major health systems in Wisconsin is going to be the main collaborator here providing the telehealth. So they will have an office there, they will have the technology in each of these communities, but they will not see patients face to face. They will still be seeing patients from a telehealth perspective. So there is the need to finance the cost of this space. There are other collaborators within this space, including other social service organizations, and I’ll just leave it at that. But they’re coming together in probably about a 5,000 square foot space in five communities, in five rural counties.

Carrie Vanderford Sanders: And this hospital system is kind of setting up and organizing the financing structure, because there really needs to be a lead to organize the financing structure on all of these New Markets to build the space, execute the collaboration agreements with the other partners in the 5,000 square feet and to market and build, I guess you can say, the telehealth business or outreach, I suppose is the better way of saying that. And that is in those five communities, 5,000 square feet, that is a 13 million New Market Tax Credit project. And it’s very interesting because we’ve got lots of different partners and five different communities. So that’s an example of how that would look like.

Danielle Bergner: That is really exciting. And it reminds me of an article I read recently in the Modern Healthcare magazine, which had a really catchy subheading, which was clicks and mortar is the future of behavioral health. And it caught my attention because the type of project you are describing right now is exactly the type of project that this label, clicks and mortar, is talking about. That it’s not one or the other, the solution is a mix of the two types of delivery facilities, both telehealth and a bricks and mortar location for people to access those telehealth services. Right?

Carrie Vanderford Sanders: Yeah.

Danielle Bergner: The collaboration aspect that you talk about is really interesting too.

Carrie Vanderford Sanders: I like that, clicks and mortar.

Danielle Bergner: I know, I liked it too. I thought it was catchy. Well, Carrie, this has been really enlightening, really interesting. I’m sure that our audience will find it of great interest. Before we close out, let me ask you, if a nonprofit hospital or an FQHC is starting to think about a project or they have a need in a low income community that likely qualifies for the program, what would you suggest as a good starting point for them?

Carrie Vanderford Sanders: Yeah, first off let’s understand if it is actually in a low income community. Secondly, let us understand the entire project cost, so really understanding the uses of the financing. What are we trying to do here? And it can be in broad strokes, of course. But understanding what are we doing here, from a financing perspective. And then we also of course, want to understand what are we doing from an impact perspective here? And that gets back to again, patient visits, on and on the things I mentioned earlier about impact. So we want to understand again, location, what are we financing and what are the impacts of this project.

Carrie Vanderford Sanders: From there, you call Danielle and you say, “Danielle, I have something. Is this a Mew Markets deal?” And Danielle can resource you to her partners. Feel free to give me a call, Danielle. And we can see if it’s a fit. The other thing, as part of our business philosophy is that we are not going to engage a project just because it is in a low income community and there’s a way to use the 10 million. We have to make sure that there is actually a community development entity out there that has alignment with their business and impact strategy to what is being presented by the project sponsor, as we call them. Because it is complex. That word has not come up yet, Danielle, about New Markets on this call. But it is not the easiest or right way, in my opinion, to raise 20% of your capital stack. It is not. However, it is a very powerful way to raise a part of your capital stack when you have exhausted other less complex options. And so it works very, very well though for hospitals health clinics and on.

Danielle Bergner: Carrie, thank you so much for joining us today. Thank you to our audience for joining us. If you would like to learn more about any of the topics you heard in today’s episode, please visit our website at hallrender.com, or reach out to me at my email address DBergner@hallrender.com. Thank you.

Carrie Vanderford Sanders: Thank you.