As a general matter, the use of tax-exempt bonds as a source of funds for capital improvements and expenditures provides a highly cost-effective and secure method of financing that is open to many not-for-profit assisted living facilities1 holding 501(c)(3) status under the Internal Revenue Code of 1986, as amended (“Code”). In addition to providing a lower rate of interest than a borrower could achieve on a traditional, taxable loan, the tax-exempt bond market also includes the possibility of issuing fixed-rate debt with a 30 year maturity, thus providing a level of certainty not available with traditional debt vehicles.

The Code generally permits the issuance of tax-exempt debt by any entity holding 501(c)(3) status, but delegates to each state the ability to define which of these entities may issue tax-exempt debt and through which governmental agency such debt may be issued. Although not all states allow a wide range of tax-exempt entities to issue tax-exempt bonds, most do. With respect to assisted living facilities, the New Hampshire Health and Education Facilities Authority is authorized to issue such debt on behalf of any “nursing home”, which includes an entity that provides “nursing care, sheltered care, intermediate care, life-care or continuing care….” 2 In Massachusetts and Rhode Island, the Massachusetts Development Finance Agency and the Rhode Island Hospital and Educational Building Corporation are empowered to issue such debt to finance assisted living facilities.

Issuing tax-exempt bonds to fund a development or expansion project makes sense when the project has sufficient size to absorb the additional costs that are incident to such a financing, which generally translates into a financing of at least $5 million. Because the use of taxexempt bonds requires complying with numerous technical Code provisions, purchasers of these bonds require an opinion of a law firm, such as Hinckley Allen & Snyder, that is recognized as “bond counsel”. A taxexempt financing also involves a variety of other professionals, such as borrower’s counsel, an investment banker or placement agent, and a corporate bond trustee. Issuing bonds usually takes four to six months once the formal financing process begins.

If an assisted living facility is considering the use of taxexempt debt to fund a development or expansion project, it is important that it confer with counsel or another professional experienced and skilled in such financings at a very early point not only to ensure that it can take advantage of this financing vehicle, but also that it can use the bond issue to reimburse itself for any early expenditures related to the project.

In summary, although the tax-exempt bond issuance process has a level of complexity greater than a taxable financing, the advantages of using such debt generally outweigh the complexity factor. As mentioned above, most borrowers find that the two most important advantages are the ability to issue debt that is less expensive and, in the case of 30 year fixed-rate debt, the certainty as to future financing costs that allows the borrower to accurately predict resident costs well into the future.