Presented by: Terry Glasscock, Senior Project Consultant, Capital Link Health Choice Network Of Florida June 2014 Capital Financing: Strategies and Tools.

Presented by:

Terry Glasscock,

Senior Project Consultant, Capital Link

Health Choice Network Of Florida

June 2014

Capital Financing: Strategies and Tools For

Success

In truth, there has never been a better

time to initiate a capital project.

Nor will there likely be a better time for years to come.

Window of Opportunity

• Lowest Interest rates• Stagnated building costs• Strategic Changes Ahead

(Medicare and Medicaid)• Government Financing Programs

NMTC and FDA

#1. Interest Rates

Interest Rates

• Fed Funds – 0%• TE Bond - .25%• Prime – 3.25%• Inflation - 0%

Rates Today Five Years Ago

• Fed Funds – 3.00%

• TE Bond -4.5%• Prime – 5.0%• Inflation – 4%

I’ll bet Five Years From Now???won’t see lower interest rates in your life time

#2. Building Costs

Building Costs

• Inflation rate – 1%• Construction bids – at or under

budget

Building Costs

#3. Strategic Changes Ahead

1900 – 3% GDP (Gross Domestic Product).

1964 – 6% GDP.

1994 – 15% GDP.

2020 – 25% GDP.

Per person expenditure for healthcare:

1965 - $205

2000 - $4637

2010 - $8233

Healthcare Costs

Office of Economic and Cooperative Development

MedicaidMedicare

Social Security, Medicare & MedicaidOutlays as a Percentage of GDP 1990-2075

1990 2000 2010 2020 2030 2040 2050 2060 20700

4

8

12

16

20

24 Social Security

Source: C. Eugene Steurle and Adam Carasso, (Budget Crisis at the Door), The Urban Institute, 2003. Based on data from the Congressional Budget Office, “A 125Year Picture of the Federal Government’s Share of the Economy, 1950-2075,” July 3, 2002, table 2.

Influences:

Federal Receipts vs Entitlement Spending

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

12034

2035

2036

2037

2038

2038

2040

0

2

4

6

8

10

12

14

16

18

20

22

Baseline SS, Medicare, and Medicaid

Source: C. Eugene Steurle and Adam Carasso, (Budget Crisis at the Door), The Urban Institute, 2003 Based on data from Budget of the U.S. Government, FY 2004 and CBO’s “Analysis of the President’s Budget, FY 2004.”

(As percent of GDP)

Defense51%

Social Secu-rity13%

Med-icaid1%

Safety Net6%

Inter-na-

tional Affairs

5%

Transporta-tion4%

In-ter-est6%

Every-thing Else15%

1962

Defense23%

Social Secu-rity20%

Medicare13%

Medicaid10%

Safety Net13%

International Affairs

1%

Transporta-tion3%

Interest6%

Everything Else12%

2011

Federal Government Spending

MedicaidMedicareS.S.43%

MedicaidMedicareS.S.20%

Congress’ own Commission on Entitlement Reform

reported that SS, Medicare, Medicaid and interest on the national debt will exceed

all federal income by 2030

Entitlement programs cannot be sustained at

current levels!Medicaid, Medicare, S.S.

Will be altered!The Window of Opportunity

Will Close.

So, How Can I Do This?

Business Plan Financial Forecasting Funding Considerations Financing Options

Business Plan and Financial ForecastCritical!

Components of a Business Plan

• CHC description and background

• Market analysis and Growth potential

• Organizational experience and structure

• Project Details• Financial history and

forecast

Business Plan: Financial Section

Financial Feasibility Historical Performance (three

years audited) 5-7 year Forecast Project budget Sources and Uses Financing Structure

Modeling the Impact of Your Capital investment Project

How will the project enhance your ability to be financially successful over the long-term?Increased VolumesHigher cost reimbursementHigher profile/fundraisingImproved recruitment/retention/

productivity

Sources & Uses Of Project Funds

Funding

Health Center Cash Reserves

Federal Government: ACA, CDBG, EDA, USDA, OCS, NMTC

State/Local Government

Grants/Appropriations

Foundation Grants—Private or Corporate

Hospital or Other Partners

Community Capital Campaigns

In-Kind Gifts, e.g. Donated

Land/Equipment, $1.00/Year Lease for

99 years

Equity/ Grant Funding

Financing Components

TE Bonds

Bank Loan

HRSA LGP

USDA28

Fed Grant

CCHN Ventures Loan

Foundation

State Funds

NMTC

Grants/Gifts

Combining the BestFinancing Sources

• Structure considerations mean big financial differences!

Let’s assume a $10,000,000 project.

ConventionalBank Loan

Conventional Bank Loan

• Loan 80% of project value - $8,000,000• Interest rate 6.5% with 25 year amortization• Where will the remaining $2,000,000 come

from?– Sale of existing building?– Hospital contribution?– State? – Capital Campaign?– Government grant

Conventional Bank Loan

Sources of Funds:

Bank Loan…….$8,000,000Other……….….$2,000,000Total……………$10,000,000

Annual Debt Service (P&I)…..$ 655,032

New Markets Tax Credits

NMTC Magic!

NMTC Hypothetical CHC ProjectAssumes $10 million in Project Costs

Equity Investor

CDE LLC

Equity investment ~ $3 million

Eligible CHC or “Special Purpose Entity”

established by CHC

Fees & Reserves ~$1 million

NMTC Fund LLC

$11 million investment into CDE

$10 million in loans

Bank or TE Bond Debt

“A Loan”: $8 million“B Loan”: $2 million

$8 millionLeverage Loan

$4.29 million in tax credits (39% over 7 years)

Lender

Weighted Average Cost of Capital ~ 5.2% in current market; ~$520,000 interest-only for 7 yrs; refi $8 million after 7 years

Tax credits & distributions to pay Leverage Lender

Loan payments

New Markets Tax Credits

• “Investment” that isn’t repaid• 20% of total project cost• Finding a Community

Development Entity (CDE)• Application and awards

37

Bank Loan and NMTC

• NMTC investment approximately 20% of project cost

• Bank loan for the balance - $8,000,000 interest only for 7 years – same rate

• $2,000,000 in “free” money!

Bank Loan: NMTC – Interest Only

Sources of Funds:

Bank Loan……..$8,000,000NMTC….……….$2,000,000Total…………….$10,000,000

Annual Debt Service………….$ 520,000

USDA

• Usable with other options• Population 20,000 or under• Loan guarantee 90%• Direct Loan 3.5% for 40 years

40

USDA Direct Loan Structure

• Loan will be 80% of project Cost - $8,000,000.

• Roughly 3.5% interest rate with 40 year amortization.

• Where will the remaining $2,000,000 come from?

USDA Direct Loan

Sources of Funds:

USDA Loan……..$ 8,000,000Other…………….$ 2,000,000Total……………...$10,000,000

Annual Debt Service………..$ 371,982

Tax Exempt Bonds

• With other options• NMTC• State issuing authority• Private Purchase by Bank

43

Tax Exempt Bonds and NMTC

• NMTC investment approximately 20% of project cost - $2,000,000

• TE Bonds for the balance - $8,000,000 interest only for 7 years

• Interest rate – 3.9% (fixed 10 years)• No need for additional financing

TE Bond: NMTC

Sources of Funds:

TE Bonds…..…..$ 8,000,000NMTC….……….$ 2,000,000Total………….….$10,000,000

Annual Debt Service…………..$ 312,000

Foundation PRI

• Program Related Investment• With NMTC• HRSA LG• Private Purchase (Non-profit

Foundations)

46

Foundation and NMTC

• NMTC investment approximately 20% of project cost - $2,000,000

• 80% federal guarantee• No need for additional financing• Loan for the balance - $8,000,000

interest only for 7 years• Interest rate – 3.0%

Foundation: HRSA LG and NMTC

Sources of Funds:

Tax Bonds……...$ 8,000,000NMTC….……….$ 2,000,000Total……………..$10,000,000

Annual Debt Service………..$ 240,000

Project Feasibility Analysis

• Paid for by HRSA• Will analyze using the examples shown above with

your financial and project information• Will show how much you can comfortably borrow

under each scenario. • What we will need from you:

– Description of the project– 3 years of audits– Price of project– Street address of site

• Business and Market analysis loans also available through CCHN Ventures.

Terry [email protected]