December 4, 2017, Alex Spanko, Skilled Nursing News - Senate Republicans passed their version of comprehensive tax reform in the early hours of Saturday morning, and while lawmakers in both houses still need to weigh in on a compromise bill, fears about the legislation’s impact are coursing through the long-term care industry.
Skilled nursing operators could be the “net losers” under the GOP-led tax reform, according to analyst Richard Anderson of Mizuho Securities USA. Because the legislation could raise the federal deficit by $1.7 trillion over the next decade, Anderson argued, a proposed $1 trillion cut to Medicaid and $500 billion slash to Medicare could become politically possible to make up for the lower revenues.
“While it is currently too early to draw complete conclusions given that the bill remains under debate, there are various potential ‘pay-fors’ aimed at reducing the impact on the deficit,” Anderson wrote in a note released before the late-night Senate vote.
But Democratic leaders have sounded the alarm about how the bill could potentially open the door for entitlement cuts down the road, with Senate Minority Leader Chuck Schumer, a New York Democrat, saying the tax plan would “gut” Medicare, according to The Hill.
Still, Rick Matros, CEO of Sabra Health Care REIT (Nasdaq: SBRA), remained upbeat about the future of skilled nursing real estate investment trusts (REITs) under the new tax plan.
“We don’t see anything that will negatively impact REITs or the skilled and senior housing space,” Matros told Skilled Nursing News.
Another potential “pay-for” could be Private Activity Bonds (PABs), according to Anderson.
The House version of the bill already calls for the elimination of PABs, tax-exempt municipal bonds that form a crucial funding foundation for non-profit developers of continuing care retirement communities (CCRCs); the Senate version would leave them intact.
“For our members, it really guts the major source of capital for them,” Steve Maag, LeadingAge’s director of residential communities, told SNN.
The group, which represents non-profit long-term care providers, has come out strong against the legislation, predicting that the House provision would essentially bring any plans to build or renovate CCRCs among non-profit operators to a halt. Without this source of tax-exempt cash, providers in the space could see their costs of capital increase by a third, Maag said, and kneecap the industry’s ability to expand for the next five years.
“This would clearly impact the development of new campuses and the cost for new campuses, and the bottom line is that the consumer ends up paying for this whole thing,” Maag said.
While non-profits could hypothetically access the commercial lending marketplace, those bonds would be taxable, and thus less appealing — and because non-profits by definition do not have equity in their properties, these developers and operators would be shut out of the private equity market entirely.
In one example of how this could all play out, a nonprofit CCRC in Bloomington, Illinois, is currently using PABs to fund a $33 million expansion project, and is considering its options should they be eliminated on Jan. 1.
As of Dec. 4, Westminster Village had only drawn $10 million of its $30 million loan, so the remaining $20 million would be smacked by the higher financing costs if the House version of the bill were to pass. That would cost the CCRC an extra $3.4 million, CEO Barbara Nathan told a local National Public Radio (NPR) affiliate.
Now, Westminster must decide whether to draw the remaining $20 million early to avoid that tax hit — though the CCRC would have to pay an extra $340,000 in interest even in that best-case scenario, Nathan told NPR.
Maag and LeadingAge have also expressed concerns about a provision, included in both the House and Senate versions of the bill, that would eliminate so-called “advanced refunding.” This practice allows holders of PABs to refinance once during the first 10 years of the bond issuance. Because investors generally require higher interest rates during the early stages of a project, when success is less clear, non-profit developers frequently take advantage of advance refunding to secure lower rates once portions of a CCRC have been completed, Maag said or simply when overall interest rates decline.
In addition to LeadingAge, the American Health Care Association (AHCA) — which represents for-profit long-term care operators — came out against the PAB repeal back in November, citing the bonds’ utility in renovating infrastructure and building affordable housing units.
With the bill set to enter the reconciliation process, the PAB language’s inclusion in the final bill remains uncertain, and its popularity among Republicans is far from unanimous. Rep. Randy Hultgren, an Illinois Republican who co-chairs the Congressional Municipal Finance Caucus, wrote a letter to Senate and House leaders urging them to drop the PAB repeal from the final bill. Twenty of Hultgren’s GOP colleagues co-signed the letter.