A Look at the New Market Tax Credit With Tony Burns of CHDP
Some surgeons across the nation are relying on the government’s New Market Tax Credit (NMTC) as a financial mechanism to build ambulatory surgery centers (ASCs) and other clinic spaces.
Utilizing NMTC funding, CHDP recently developed a $33MM, five-room, 19,000 square foot multi-specialty ASC in Northern Nevada. The project also included a cath lab, infusion center, medical office building, imaging center and urgent care. Utilizing the NMTC subsidies, CHDP partnered with over a dozen physicians to bring the project to completion where it had previously not been possible due to population demographics and payer mix.
Tony Burns will speak at PHA’s 2023 Annual Conference September 10-12, 2023, at the Boulders Resort in Scottsdale, Arizona.
PHA: How would you describe this type of financing? And how does it different from existing types of financing that physician groups use to fund their practices, ASCs, hospitals, etc.?
Tony Burns: CHDP utilizes various state, federal and local financial incentives to fund the development of healthcare facilities. The primary tool we utilize is the New Market Tax Credit (NMTC) program. The NMTC program’s purpose is to encourage investments in low-income and underserved communities by offering subsidized financing for projects in qualified areas. Large financial institutions generally invest in the NMTCs that are generated from the qualifying project, and the tax credits serve as the mechanism to provide additional funding to the project. CHDP generally utilizes its own capital to fund a portion of the development costs for the facility and leverages NMTCs to increase the impact of each dollar invested.
The key difference between NMTC financing and traditional financing is that NMTC financing does not need to be repaid and the physician group will generally have no personal liability for any financing related to the project. The project needs to maintain compliance with the NMTC program requirements for a seven-year period. However, following the expiration of that time period, the debt is forgiven and there is no additional obligation on the part of the project with respect to the NMTC program.
PHA: How are physicians using this type of tax credit/financing in their practices?
Tony Burns: The NMTC funding can be utilized for almost any type of project related cost. In our past projects, CHDP has utilized the proceeds to acquire and improve property, purchase medical equipment and fund working capital. In general, the NMTC program is utilized for larger projects ($5MM minimum). As a result, additional capital for existing practices may not be an ideal candidate for the program, although there are certain small loan programs that are subsidized with NMTC that may be available.
PHA: Could this help practices that feature a high mix of Medicare and Medicaid?
Tony Burns: Yes, the subsidy provided by the NMTC and similar programs reduces the cost to construct and equip a facility, and also can provide significant amounts of working capital to fund operations. As a result, CHDP facilities generally operate with significantly less fixed costs (for example, no real estate or equipment lease payments), which improves the bottom-line net income for the business. By significantly lowering fixed expenses, the practice will have more flexibility to explore a different payor mix which includes higher percentages of Medicare and Medicaid patients.
PHA: Do physicians retain a leadership role in this type of a model? How does the ownership structure work?
Tony Burns: CHDP utilizes several different models to partner with physician groups to develop ASCs and other healthcare facilities and we don’t adopt a one size fits all approach. In general, CHDP will do all of the work related to financing and development of the facility (in consultation with the participating physicians). CHDP may also manage the operations of the facility, but this is not required if the physician group otherwise has the ability to provide these management services. In either case, CHDP and the participating physicians will form a joint venture where CHDP takes an equity position based on the amount of capital and financing it delivers to the project and the physicians contribute cash for an ownership position in the joint venture.
Due to legal constraints, the physician group needs to buy-in at fair market value, but by including the doctor group in the development process we are able to permit the physicians to buy-in at an early stage and a much lower valuation.
PHA: What is the exit value in case physicians decide to sell a practice or facility?
Tony Burns: The exit value is based on traditional valuation methods. Based on the subsidy provided by the NMTC program and the resulting decrease in fixed costs, the valuation should be substantially higher than traditional models. In addition, CHDP is developing facilities across the country. The scale provided by the CHDP brand would result in higher valuations than if a physician group developed a facility independently.
PHA: What are the pros and cons of this model?
Tony Burns: The primary benefit of this model is the reduction of fixed costs through subsidized financing. This financing results in the additional benefits discussed in the response to prior questions (no personal guarantees by physician group, lower fixed costs, flexible payor mix, higher exit value).
The primary disadvantage is that the NTMC and other programs CHDP utilizes can be technical and complicated. It is often difficult for physician groups to have the time and resources to fully understand the NMTC program and to find the appropriate parties to secure NMTCs, close the transaction and monitor compliance after financial closing. Thankfully, the CHDP team has collectively closed almost $1 billion worth of NMTC investments and we navigate the entire process.