Funding in Paradise

7 min read

NMTCs Bring Healthcare to a Tiny Island

A new healthcare center opened last year on a remote island.

“Our new facility is a dream that is finally being realized,” said Diana Shaw, Executive Director of the Lana`i Community Health Center (LCHC), in Lana`i City, Hawaii.

That dream took years to become a reality as LCHC gathered the funding it needed to build, one grant at a time. Finally an investment of New Markets Tax Credits allowed LCHC to complete the center, bringing better heath services and jobs to Lana`i’s low-income families.

An isolated island
Lana`i is the smallest Hawaiian island still accessible by plane and ferry service. It is just a few miles across, with a permanent population of 3,100, as of 2010.

A Four Seasons Resort, formerly known as the Manale Bay Hotel, dominates the southern end of the island.

Larry Ellison, billionaire founder of leading technology company Oracle, effectively bought Lana`i in 2012 and now owns 98% of the land, including the hotel.

“The vast majority of the people who live and work on the island are not wealthy,” says Kevin Thompson, project manager at U.S. Bancorp Community Development Corporation.

Roughly three-quarters of the working population works at the hotel. “People are lucky to have seasonal jobs – they are hired for the summer and laid off,” says Tamar deFries, partner with Pacific Growth Associates, which helped structure the development deal.

Residents struggle with the high cost of living. A gallon of milk typically costs more than $7 and a regular gallon of gas typically costs nearly $5. Of the island’s residents, 44% live at or below 200% of the federal poverty level.

Getting off the island can also be expensive – even for a basic doctor’s visit. The one-hour ferry ride to Maui costs $60 for a round trip ticket. The plane to Oahu costs well over $100, again for a round trip ticket.

LCHC has served the island since 2004. Until the new building opened, the nonprofit operated from a small, single-family home whose three bedrooms had been modified to serve as examination rooms and offices.

With more space and more staff, the new, 6,800-square- foot health center is expected to serve more than twice as many people: 1,700 individual patients a year compared to 800 at the old center. The number of visits to the clinic is also expected to roughly double to 5,800 a year from 2,900.

LCHC had its eye on the site for its new health center for years.

“We had our design finalized in 2010,” says Shaw. The nonprofit negotiated an option to buy the site for the health center – then owned by the owner of the Manele Bay Hotel. When Ellison bought the island in 2012, LCHC worked with elected officials to make sure their option to buy was included in the transaction.

The County of Maui provided the $366,288 necessary to pay for the purchase of the site with federal Community Development Block Grant funding. LCHC bought the site in 2012, years before the financing for the rest of the property had come together.

“You do have to take that leap,” says Shaw.

Permitting challenges
Winning the CDBG funding began the process of getting building permits for the new health clinic – which can be especially difficult in Hawaii because of concern ranging from environmental to archeological. Developers typically need to pay archeologists to visit the site to certify construction will not disturb any artifacts.

“The process is never easy,” says deFries. “The entitlement process can cost more than the actual building itself.”

The review process for entitlements began in August 2012 with the County of Maui. The building permit was finally issued in October 2014. “We ran into some delays in permitting,” says Charlie Spies, CEO of CEI Capital Management.

The long permitting process is also a barrier to finding funding on the islands. That’s because foundations are very aware of how hard it is to get a building permit on the islands.

“Private foundations will not fund you until you get a building permit,” says deFries. “The idea was to get funding primarily from federal and state programs.”

It cost a total of $8 million to develop the health center. Most of that money came from government grants, starting with the State of Hawaii Grant-in-Aid program, administered by the State of Hawaii Department of Health.

“That money is very difficult to get,” says deFries. LHCH met with legislators and their staffs over and over again.

“We made weekly pilgrimages to Oahu,” says Shaw. “It was a four or five month effort.” The Grant-in-Aid program eventually provided two grants totaling $2.25 million.

The health center also received two grants totaling $830,000 from the federal Health Resources and Services Administration and another $500,000 grant from the County of Maui Department of Housing and Human Concerns.

Smaller grants and donations eventually added up to $1.4 million.

That still left a hole of more than $2 million in the construction budget for the health center.

Filling the gap
The New Markets Tax Credit (NMTC) program made a crucial difference to the health center.

“Without the tax credit, we would be sitting here in a modified building or struggling to start construction,” says Shaw.

The developers contacted U.S. Bank, an NMTC investor, which connected the health clinic with CEI Capital Management, based in Brunswick, Maine, a community development entity that had NMTC allocation available. CEI also has a long familiarity with rural development deals.

The health clinic is unusual for the NMTC program – it is not located in a qualifying census tract where most of the people are low-income. Instead the health clinic is on a tiny island 98% owned by a world-famous billionaire and largely occupied by that billionaire’s luxury hotel.

Rather, the health center qualified for NMTC financing because it provides jobs for a “qualifying population” under the NMTC rules. At least 40% of the people who work at the center qualify as low-income.

U.S. Bank agreed to pay $2.6 million for the NMTCs generated by $8 million in qualified equity investments, which includes both the package of grants and the tax credit equity from U.S. Bank.

Construction started on the center in September 2014. The NMTC financing did not close until March 2015 – months later and several years after the nonprofit bought the development site.

That means that some of the equity investment paid to develop the center had already been spent before the project generated the NMTCs. U.S. Bank verified the invoices and wrote the check equal to the amount that had already been spent to develop the center. That money flowed through the NMTC entities to generate tax credits and was promptly repaid.

“We recycled the funds through a short-term bridge facility,” says Thompson. “It is in the spirit of the program to use the NMTCs to fill a gap. It would have been a shame if the project was penalized from having started already.”

The project also set aside $80,000 to provide additional benefits to the surrounding community. A scholarship program has already provided $10,000 to pay for the education of people who choose to work at federally qualified health centers, like LHCH. An internship program provides opportunities to high school and college students. The multipurpose room in the health center has programs and health classes from yoga to zumba.

Sources of Funding
$2.6 million, New Markets Tax Credit investment by U.S. Bank

$2.25 million, State of Hawaii Grant-in-Aid (administered via the State of Hawaii Department of Health)

$1.3 million, smaller grants and donations

$500,000, Health Resources and Services Administration (Affordable Care Act Grant)

$330,288, U.S. Health Resources and Services Administration (Health Care/Other Facilities grant)

$500,000, County of Maui, Department of Housing and Human Concerns grant

$366,424, County of Maui, Community Development Block Grant Program

$100,000, Atherton Foundation