FINANCING AND BUILDING REPLACEMENT CRITICAL ACCESS HOSPITALS – 101
Financing the replacement or renovation of critical access hospitals is becoming a significant issue for County governments, Hospital Districts and elected officials responsible for CAHs. In today’s turbulent credit markets, the most important issue becomes the credit worthiness of the institution. It’s crucial that operations for the hospital be profitable and in line with industry averages.
As Boards of these institutions begins to work through the varying options related to financing and replacing these facilities, they face a number of choices and strategies. A sample of these options follows:
TAX EXEMPT BOND FUNDING
Bond financing experts abound in the healthcare field. If such financing is available, it can be an attractive and low-cost way to finance expansion, renovation and, in some cases, replacement. For many districts and governmental entities, however, access to tax exempt bond financing requires referendums which may or may not be feasible or even passable in today’s economic climate. With the credit markets in daily turmoil, conditions in these markets place a premium on the underlying credit worthiness of the hospital.
Many times the elusive path towards HUD financing starts with a call from a broker who does feasibility studies required by HUD for an application. These fees are paid by the hospital and can run between $50,000 and $100,000. HUD guarantees 90% of the approved loan. The facility must have had a positive operating margin within the last three years. Tax revenue is not automatically included, but on a case-by-case basis, is included in the operating margin calculation. The feasibility phase takes approximately one year. Getting the loan guarantee may take another year. HUD has recently commented that it is trying to speed up the process and get more loan guarantees done. In FY 2006, HUD only guaranteed around $70 million of loans for critical access hospitals.
The USDA has recently gained access to loan guarantee funding through the 2007 Farm Bill and the Stimulus Package. They have lots of available funding. There has been a lot of speculation about the USDA’s ability to process loan guarantee applications in a timely and efficient manner and their available infrastructure.
The USDA is under some pressure to place some of this money. We have recently completed a $28 million dollar financing for a replacement hospital in Borger, TX. While the requirements and the process was significant, the USDA seems to be able to get early commitments done fairly quickly. It’s the final process that seems to drag. The regional offices and state offices are not accustomed to doing big projects yet. We had to do a lot of education with the regional and State folks. This project has been tentatively approved and funding is expected in the first quarter of 2010. The Hospital District has to self-fund the architectural and engineering expenses up through biddable plans. Estimated costs for this process run approximately $1.3 million dollars. CAH provided the funding for this work at Borger.
When we started the USDA process, one knowledgeable fellow in the business said: “While I don’t think they will be able to process loans as fast as HUD, they are some really nice people.” Even though it’s been a long process, we have to agree.
PRIVATE REAL ESTATE INVESTMENT TRUSTS (REIT)
Traditionally used in medical office building projects, some REITs are entering into hospital facilities. Interest rates are usually higher than mortgage financing (at the time of this writing they were over 10%). It is taxable money, as well. The REITs pay 100% of the cost to construct the hospital building and then lease the building back to the hospital. Successful operating history and credit worthiness are essential for consideration. REIT leases are complex and require specific assistance from an experienced real estate attorney. Private or public REIT financing represents a new avenue of funding that holds promise for healthcare facilities. During the recent credit slowdown, REIT funding disappeared. In 2010, capacity is expected to return.
Board members face a difficult choice in considering privatization. There’s a pretty big range of players. There are a number of for-profit companies that specialize in rural and smaller community hospitals. There are a number of start-up companies that have funding and are always looking for new facilities. Unfortunately, there are also proposals that come from less than stellar opportunists. There are horror stories related to boards that sold out to a couple of real estate investors from some large city. The assets and cash are stripped from the facility and an empty shell is left to the community. Loss of community influence, if not controlled, is usually the biggest issue board members struggle with. Community Hospital District boards may not have any influence on policy or operations of the hospital past the sale.
Used in municipal infrastructure projects such as roads, water plants, etc., the use of public/private partnerships in hospitals is just emerging. The model CAH is using brings taxable bond financing to replace the hospital. The Hospital District and CAH determine the levels of community funding that CAH commits for equipment, programs, debt repayment and facilities. CAH, through its partners and affiliations, secures tax-exempt financing for the district for their share of the debt. The hospital is managed by CAH but governed by both parties.
PUBLIC/PRIVATE PARTNERSHIP “LITE”
There is also a “lite” version of this emerging model. CAH acquires the hospital and brings in the capital to fund replacement of the hospital. While CAH owns the entire hospital, joint governance and reserved powers are shared with the Hospital District. In CAH’s first model, a percentage of the profits from the hospital are dedicated towards debt repayment, equipment and facilities replacement and other community health-related programs and needs. CAH has also contractually assumed the burden of managing and paying for the indigent care program for the Hospital District.