Transcript Presentation for Northeast Hospital Corp.

Capital Project Financing, Loan Guarantees, Stimulus
Funding, and Grant Opportunity Success Stories
LRGHealthcare – Laconia Campus
John Weaver/Seth Gabarro – DiGiorgio Associates Inc.
Phil Chaput – LRGHealthcare
Jeffrey Sacks – Nixon Peabody LLP
Larry Brown – DAI
Mike Kessler - DAI
March 19, 2010
Results of Economic Downturn
First recession in decades that has negatively affected healthcare financing
Banks are in crisis-much more conservative with funding capital projects
Healthcare must remain competitive
Lack of access to capital has challenged financing for facility, equipment and
technology needs as well as meet obligations on existing debt
Healthcare facilities are looking for alternative funding sources
Moody’s has a negative outlook for the US not-for-profit hospital sector
The weakened economy remains and recovery of not-for-profit hospitals will
likely be delayed until after the broad economy heals
Many hospitals have to update their infrastructure and making rooms
sensitive to patient needs and advancing technology remains a priority
More than 49% of hospitals are financing smaller construction projects from
existing cash reserves
Capital Project Funding Sources - Overview
 Conventional Sources of Capital
 Alternative Funding Sources
- HUD 242
- USDA
- New Market and Historic Tax Credits
- Stimulus Grants
 Grants and Fundraising
- Robert Wood Johnson Foundation
- Baldrige Award
- Kresge Foundation
 Specialty Funding Sources
- Energy/Wood Fuels Grants
HUD Backed Financing
HUD-Housing & Urban Development
Established in 1965
FHA (Federal Housing Administration) a division of HUD
Not a funding agency is the largest government insurer of
mortgages in the world
HUD insures loans resulting in lower interest rates
HUD insures up to 90% of the loan
Lenders bear minimal risk because HUD is insuring debt
Eligibility for HUD 242 Backed Financing
Facility must be an acute care hospital with no more than 50% of patient days
attributable to the following services:
- chronic convalescence and rest, drug and alcoholic, epileptic, nervous and
mental, mental deficiency and tuberculosis
- for Critical Access Hospitals this restriction does not apply
If state has a CON process, CON must be issued or pending
Must grant FHA-insured lender a first mortgage on the entire hospital including
property, plant, equipment, and receivables
Must be willing to make monthly payments into a Mortgage Reserve Fund that
will build to a balance equal to two years of debt service after ten years
Average operating margin for last 3 fiscal years to be greater than or equal to
0
Average debt service coverage ratio greater than or equal to 1.25
Design/Build projects must have mortgage amounts under $30 million
HUD 242 Loan Fees/Requirements
Loan to value may not exceed 90%
Maximum loan term 25 years
One-time fee of .8% of loan amount
Annual premium of .5% of remaining balance
Hospital must be able to provide first mortgage lien on the hospital’s real
estate
When justified by circumstances, financial margins may be varied
Applying for HUD Backed Funding
Choose a lender-FHA maintains a list of lenders who are active in the hospital
mortgage insurance program
Preliminary Review-FHA will perform a free preliminary review of the hospital
and project to make sure that basic eligibility criteria are met
Pre-Application Meeting-If the hospital passes the preliminary review, the
lender and representatives of the hospital are invited for a pre-application
meeting
Submit Application-Please refer to the Applicant's Guide or the Applicant's
Guide for Critical Access Hospitals
Underwriting-conducted by staff members of FHA
Commitment-If the hospital and project meet FHA's requirements and the
FHA Commissioner approves the application, a commitment for mortgage
insurance is issued
Closing-FHA counsel assists the mortgage lender, hospital, and their legal
representatives to close the loan
HUD – Pre-Construction and Construction
Owner and CM should meet with HUD before the GMP process to have an
understanding of the requirements. Some specifics of the HUD process
outlined below:
- A preferred list of trade bidders is allowable, but they must meet the preestablished prequalification requirements
- All subcontractors who meet the prequalification requirements must be
allowed to bid
- Trade bids must be solicited and opened publicly
- Award must go to the lowest bidder
- Prevailing Rate Requirements (David Bacon Act) apply
- HUD must approve, but is not a party to, the contract
- Surety performance and payment bond required from CM
During construction, HUD staff members monitor and approve loan draws and
perform monthly site visits
Final Endorsement-Once construction is completed and the final draw has
been made, the final mortgage amount is established and amortization begins
Case Study: LRGHealthcare – Lakes Region General
Hospital
LRGHealthcare – Lakes Region General Hospital, is an acute care, 137 bed
facility located in Laconia, New Hampshire, and a long-standing client of
DiGiorgio Associates Inc.
 LRGH received capital loan and refinancing amounts equaling $142 million.
This is a savings of $26 million during the life of the loan
LRGH submitted a $42 million CON for the first phase implementation of the
$95 million Facility Master Plan we completed with the hospital in 2006. DAI
then completed Construction Documents for implementation of Phase I of the
Master Plan
DAI and MBI assisted LRGH with HUD
financing deliverables
Case Study: LRGHealthcare – Lakes Region General
Hospital
 HUD Process from a Facilities Manager’s Perspective
 Involvement of Facilities Department in Process
 ALTA Surveys
 Phase 1 Environmental Surveys
 Benefits of the Affiliation Financially
Alternative Funding Sources – USDA
USDA offers direct cash funding of projects as well as a separate guaranteed
loan backing
Eligible to towns with population under 20,000
To qualify, non-profits must not have sufficient project funds
Low program entry cost with no application fee and a one-time 1%
processing fee
Direct Community Facility loans currently at 4% fixed interest rate for up to
40 years.
With a desire to move quickly, the local processing goal is 60-90 days after
receipt of a certified audit
Staff engineer and field inspection are provided free
USDA together with the Farm Credit Administration can issue a whole Rural
Hospital Bond Package
www.usda.gov
Alternative Funding Sources – USDA
USDA Rural Development mission includes support for facility improvements
at Hospitals, medical clinics, assisted living, medical and vocational
rehabilitation centers, and community support services such as child or adult
day care
Their objective is to provide credit enhancement to help finance community
facilities in rural areas to serve much-needed medical care
The Community Facilities Program offers 3 financing options; Guaranteed
Loan Program, Direct Loan Program and a Grant Program
USDA guarantees up to 90% of any loss against principal or interest
Eligible purposes of the funds include construction to improve or to enlarge
essential community facilities
Reasonable professional fees associated with the project such as legal,
engineering, architectural services, and feasibility studies may be included
USDA will consider Direct Lending in combination with Guaranteed Lending
providing the community a low overall cost funding source
www.usda.gov
Alternative Funding Sources – USDA
For those projects receiving other assistance and have revenue sources
(Sales tax, Property Tax, General Obligation and revenue Bonds) they receive
a priority consideration for selection. Guaranteed Community Facilities loans
are eligible to meet CRA (Community Reinvestment Act) requirements of
Commercial Banks and Savings & Loans Institutions.
Loans may be sold on the secondary market through an assignment of
guarantee, increasing the Lender of Record’s return on investment
There is no maximum loan limit; the amount is determined upon project
feasibility, repayment ability, and reasonable project cost
Loan approval can occur in 30-60 days
The Community Facility program repayment period extends to a maximum of
40 years
Interest rates can differ for the guaranteed portion of the financing from the
non-guaranteed financing component
www.usda.gov
Alternative Funding Sources – New Market Tax Credits
 The purpose of the New Market Tax Credit is to encourage investment in
poorer communities by giving the investor tax credits to improve its return on
relatively riskier investments in low income communities.
 The New Market Tax Credit was adopted in 2000, and is seen in Section 45D
of the Internal Revenue Code.
 This program is administered through the “Community Development Financial
Institutions Fund”, a department of the U.S. Treasury.
 Tax credits reduce a taxpayer’s tax liability “dollar for dollar”. Almost all
investors are corporations. For example, if a tax payer owes $1 million in
taxes and has $500,000 in tax credits, the tax payer only has to pay $500,000
in cash. The rest is paid with these credits.
Alternative Funding Sources – New Market Tax Credits
Tax credits are not actually bought and sold. Instead, the investor becomes a
partner of a partnership or member of an LLC, and gets a “K-1” that tells it how
much tax credit it has been allocated for the year.
When the economy is bad, tax payers don’t owe much tax, so there is less
demand for tax credits.
Pricing for New Market Tax Credits has declined from about $.72 per credit
dollar to about $.68 per credit dollar in the last 18 months.
 New Market Tax Credits apply to any size building project.
Alternative Funding Sources – New Market Tax Credits
An investor capitalizes a “bank” (the
Community Development Entity) that pays it
back with both cash and tax credits. The
combination is enough to give it the desired
rate of return. To do this, the CDE has to be
approved by the CDFI Fund, and be awarded
an allocation of tax credits.
Alternative Funding Sources – Robert Wood Johnson
Foundation
Grants to not-for-profits are available through specific calls for proposals
Unsolicited proposals are accepted in three program areas – Building Human
Capital, Pioneer and Vulnerable Populations.
Building Human Capital- invests in training of health professionals.
- One goal is to reverse the childhood obesity epidemic by 2015
- Develop policies and programs to expand health coverage
Pioneer – supports innovators to explore cutting edge solutions of health and
healthcare.
Vulnerable Populations – programs to transcend the social barriers that stand
in the way to better health.
Public Health policy for Americans to have quality public health services and
policies that protect, promote and preserve their health.
Equality commitment to improve the quality of health care for all Americans
www.rwjf.org
Alternative Funding Sources – The Baldridge Award
Healthcare sector is part of the nation’s highest recognition for Innovation and
Performance Excellence
Award is announced in late November by the President of the United States.
National Institute of Standards and Technology (NIST) award promotes
excellence in organizational performance
Criteria helps organizations improve their performance by focusing on three
goals: delivering ever-improving value to customers and stakeholders, improving
the organization’s overall effectiveness, and organizational and personal
learning.
An independent board examines seven areas: leadership; strategic planning;
customer focus; measurement, analysis and knowledge management; workforce
focus; process management; and results.
Eligibility Certification deadline is April 6, 2010 ; 877/237-9064
www.baldrige.nist.gov
Alternative Funding Sources – The Kresge Foundation
A foundation that seeks to influence the quality of life for future generations to
promote human progress.
Funding methods support facility capital, growth capital, operating support,
and program support for our nation’s nonprofit infrastructure.
Awards planning grants and other forms of seed money for new nonprofits.
Makes available signature challenge grants for matching funds.
Health Program – improve access to healthcare for marginalized, particularly
low-income and minority populations.
Four values apply: creating opportunity, working in underserved geography,
promoting diversity, and strengthening community impact.
Environment Program – Address the challenges of global change focusing on
reducing greenhouse-gas emissions, adoption of renewable energy
technologies, and adaptive strategies for dealing with climate change.
Community Development – grants in geographically defined rural, urban, and
aging suburban neighborhoods and its physical revitalization.
www.kresge.org
Locating Funding Sources – Energy/Wood Fuels Grants
 DSIRE is a comprehensive source of information on state, local, utility and
federal incentives and policies that promote renewable energy and energy
efficiency. www.dsireusa.org
 THE CHP Partnership Funding Database tracks federal and state CHP and
biomass financial incentives as well as regulations that remove unintended
barriers to CHP or biomass project development such as standardized
interconnection rules, net metering rules, or output-based regulations.
www.epa.gov/CHP/funding/index.html
 Fuel Cell Connection – (monthly email) focuses on federal and state-funded
fuel cell research and development programs within the U.S. The Connection
provides information on funding opportunities and contract awards, as well as
legislation that will affect the fuel cell industry. www.usfcc.com
 www.grants.gov is your source to find and apply for federal grants.
Specialty Funding Sources – Energy/Wood Fuels Grants
Case Study: Millinocket Regional Hospital
Millinocket Regional Hospital (MRH) in Millinocket, Maine needs to replace
boiler.
 MRH desires to utilize fuel source other than oil.
 State of Maine Department of Conservation, Maine Forest Service request
applications for grants to convert oil fired boiler plant to wood fuels.
Grant Highlights:
 Open to all Maine public entities including schools, hospitals, state, county,
local and tribal governments.
 Preference given to Androscoggin, Aroostook, Franklin, Oxford, Penobscot,
Piscataquis, Somerset and Washington Counties.
 Preparation of grant
 Results of initial grant application
 Next steps
Open Discussion and Questions
Other Resources
For further information on any of the topics
covered in this presentation, please contact:
Larry Brown or Seth Gabarro
(617) 723-7100