capital planning & financing · 2019. 9. 18. · • launched in 1995, nonprofit, hrsa national...

Capital Planning & Financing

Steps to a Successful Project

Jonathan Chapman

Chief Project Officer

Community Care Network of Kansas Primary Care Conference

September 13, 2019

2019 Capital Link 2www.caplink.org

• Strategic Planning

• Financial Strength

• Operational & Clinical Excellence

• Assessing Market Opportunity

• Developing a Business Plan

• Identifying Financing Resources

• Project Planning Expertise

Steps to a Successful Project

Capital Link

• Launched in 1995, nonprofit, HRSA national cooperative partner

• Offices in CA, CO, FL, MA, MO, and WV

• Over $1.2 billion in financing for over 230 capital projects

- Direct assistance to health centers and complementary nonprofit organizations in planning for and financing operational growth and capital needs

- Industry vision and leadership in the development of strategies for organizational, facilities, operational and financial improvements

- Metrics and analytical services for measuring health center impact, evaluating financial and operating trends and promoting performance improvement

Assessing Risk “at the Edges”

What to Plan? How to Plan?

• Reference the Capital Link Strategic Planning Toolkit

• Know and define your market

• Complete a physical space assessment

• Know your financial and operational health

• Determine debt capacity

• Consider financial feasibility and sustainability

• Identify sources and types of financing

Business Plan Outline

• Executive Summary

• History and Operations

• Market Description and Analysis

• Management and Governance

• The Capital Project

• Financial Operations and Pro Forma

• Appendix

• Define current service area and potential markets for expansion.

• Assess payer mix.

• Estimate your health center’s market share.

• Evaluate unmet health needs.

• Review competition/similar providers.

• Estimate unmet needs/strategic program opportunities.

• Estimate needed & available capacity.

Market Opportunity

Physical Space Considerations

1. Age and condition of current space?

2. Existing space adequate and/or attractive?

3. How is space configured? Healthcare, team-based,flexible?

4. Does it represent your community?

5. Collaboration/funding requirements?

• Operational and clinical assessments are necessary before expanding capacity.

• Analyze productivity and patient utilization.

• Clarify your operational model.

• Evaluate your programs.

Operational and Clinical Assessments

Estimating Service Area Demand

• Evaluate service area market share

- Total population, low income population, target market

- Payer mix

• Population Projections

- Anticipate changing demographics and their effect

• Estimating potential patients, visits, providers, capital needs

Back of the Envelope

Expansion Considerations• Market Share – Current and Projected• Number of Patients from specific population divided by that total population• Service Area FQHC Patients = 10,000• Service Area General Population = 50,000; Low Income Population = 25,000• 20% market share General Population; 40% market share Low Income Population

• Estimating Encounters/Visits• Historic/Realistic visits per patient times expected patients• FQHC Visits = 30,000• 30,000 / 10,000 = 3.0 visits per patient

• Projecting Workforce Needs• Historic/Realistic Provider Productivity divided by expected visits/patients• FQHC Provider FTE = 15.0 • FQHC Visits = 30,000• 30,000 / 15.0 = 2,000 visits per FTE

Expansion Considerations

• An organization wants to increase its low income population market share by 10%; how many more patients, visits, providers?

• 40% x 1.10 = 44%• 44% x 25,000 = 11,000 patients (increase of 1,000 low

income patients)

• 1,000 x 3.0 visits per patient = 3,000 additional visits

• 3,000 / 2,000 visits per Provider FTE = 1.5 Provider FTEs

• Estimated Square Footage/Funding Needed to Treat New Patients –HYPOTHETICAL

• Using estimated square feet per provider as basis…1,500

• 1.5 FTE x 1,500 sq. ft. per = 2,250 total sq ft

• Using estimated cost per square foot as basis…$1901

• 2,250sq. ft. x $190/sq. ft. = ~$428,000 estimated cost

1 http://www.buildingjournal.com/construction-estimating.html

Hard Costs: 70% $428,000Equipment: 15% 92,000Soft Costs: 15% 92,000

Total Project Cost 100% $612,000

+ Land/Building Acquisition

Typical Breakdown of Project Costs for Health Centers:

Business Plan Outline

• Executive Summary

• History and Operations

• Market Description and Analysis

• Management and Governance

• The Capital Project

• Financial Operations and Pro Forma

• Appendix

• Historical Performance (3 years audited)

• Organizational Budgets

• Financial Projections (5-8 years)

• Financial Feasibility & Assumptions

• Benchmarks & Strategic Goals

Financial Strength

“Traditional” Key Metrics

Metric Why This Is Important

9 Medical Provider Productivity (patients) Becomes more important in transition to team-based care

10 Medical Team Productivity Who are your teams? How do they perform?

11 Cost (Revenue) Per Visit How are your visit costs changing over time?

12 Cost (Revenue) per Patient With the move to PCMH, how are patient costs changing?

13 Medical Support Staff Ratio How strategic is the staffing the medical teams?

14 Non-Clinical Staff Ratio Non-clinical employees are not revenue drivers

15 Visit/Patient Growth Rates Are visits growing faster than patients? Is demand growing?

*Capital Link Performance Benchmarking Toolkit

“Evolving” Key Metrics

Determine Debt Capacity

Interest Rate #Years 2017 2018 2019 2020

Funds Available for Debt Service $951,047 $850,221 $1,022,554 $1,000,037

Rent rebate below $951,047 $850,221 $1,022,554 $1,000,037

Funds Available for Debt Service after

applying D.S.C. Require. of 1.25 $760,838 $680,177 $818,043 $800,030

Debt Supported by Adjusted Cash Flow 6.00% 20 $8,726,747 $7,801,574 $9,382,891 $9,176,276

Debt Capacity Sensitivity Analysis

Sources & Uses of Project Funds

Identifying Financial Resources

• Grants/Gifts

• New Market Tax Credits (NMTC)

• Federal/State Funds

• Cash Reserves

• Community Development Financial Institutions (CDFI)

• Foundations (PRI)

• Bank Loan

• Tax-Exempt Bonds

• HRSA Loan Guarantee

• US Department of Agriculture (USDA)

Financing Options

New Market Tax Credits

• Federal program authorized in 2000 and renewed repeatedly since 2006

• To date $43.5 billion in investment authority allocated to approximately 900 awardees, called “Community Development Entities” (CDEs) – due to repeat awards, there are about 325 distinct CDEs who have won

• Program renewed for 5 years (2015 – 2019) with additional $17.5 billion in investment authority

• Between 2003 and 2016, $45 billion in direct NMTC investments were made in businesses and these NMTC investments leveraged over $75 billion in total capital investment

NMTC: Background & Overview

• Health center capital projects are a highly desirable asset type for NMTC investors because of:

- Geography: usually located in qualified low-income census tracts which are considered to be “severely distressed” – rural census tracts are also desirable

- Mission: provide multiple positive community benefits

- Compliance: seen as low-risk for violating NMTC regulations, e.g. non-qualified businesses or uses

- Financial Stability: healthcare is seen as stable and growing industry that can support long-term debt

NMTC: Community Health Centers

• “Tax Credit Investment” represents dollars that don’t need to be repaid

• Investors purchase NMTCs in exchange for tax benefits – don’t require any cash return on investment

• Subsidy from NMTCs equates to roughly 20-25% of total project cost

• Loans are usually structured with interest-only payments for first seven years

• Can be used with a variety of financing sources, loan guarantees, and certain other tax credit programs

NMTC: Benefits

• Complex structures

- Three tiers of financing, with multiple parties

- No two NMTC deals look exactly alike (despite efforts to streamline)

- Takes longer to close than anyone initially thinks

- High transaction costs (but worth it when you consider equity)

• Compliance: reporting requirements for 7-year period

• Takes great coordination & patience!

NMTC: Costs

• Basic Eligibility - Look up census tract by street address – various mapping tools- Median family income of tract must be equal to or less than 80% of AMI (Area Medium Income); or- Poverty rate of households within tract must be equal to or greater than 20%

• Severely Distressed (the bar that most projects need to reach)- Poverty rate greater than 30% or- Median family income less than 60% of AMI or- Two of a list of 17 other criteria

• Targeted Populations Rule (more difficult to qualify)- Census tract MFI must be lower than 120% of AMI and- At least 50-60% of income derived from patients that are <80% of AMI and/or- Employees or owners of the “business” are low-income individuals

How Does Your Project Qualify?

• Community Development Entities (CDEs) Apply for Tax Credits- “Allocations” of tax credits awarded by the CDFI Fund, usually on annual basis

- CDEs define type of uses, geography, highly distressed %, projects anticipated

- Each allocation represents the amount of total project investment that can be used to generate NMTCs for tax credit investors (actual tax credit amount is 39% of the allocation)

- CDEs are motivated to deploy allocations quickly, to qualify for next round

• Getting your project in front of CDEs, Investors, and Lenders- Business plan/financial forecast for underlying CHC operations in new site

- Site control, design development, and other evidence of ‘shovel readiness’

- Project budget well formulated, with feedback from a contractor

• Underwriting and Closing Process

How Do NMTCs Get To You?

• Grant funds can be “lent” through the NMTC structure

- Health center acts as a leverage lender, converts grant to a loan

- Doing so replaces “hard debt” with “soft debt”

- Maximizes value of grant by generating NMTC equity investments on grant dollars

- Lowers financing costs for health centers

- HRSA capital grants can be used in this way, via utilizing a bridge loan mechanism

• Use of HRSA Grants in NMTC Requires Permission from HRSA

Leveraging Grant Funds through NMTC

• Project eligibility- Census tract & high distress

• Size matters: >$5 million

• Lining up one or more CDEs- Getting on a “pipeline list”

• Improving your chances of getting a commitment from a CDE- Site control?- Severely distressed census tract? - Know your leverage loan needs (soft vs. hard debt); explore hard debt alternatives- Hire financial advisor experienced in NMTC transactions (Not for the faint of

heart!)- Get your Business Plan/Financial Forecast done as soon as possible

Steps to Obtain NMTC Financing

NMTC Hypothetical FQHC ProjectAssumes $10 Million in Project Costs

Equity Investor

CDE LLC

Equity investment ~ $3 million

Eligible CHC or SPE “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

Tax credits & distributions to pay Leverage Lender

Loan payments

SPE pays below 2% interest-only for 7 yrs; Loan A refi after 7 years; Loan B extinguishment of debt in YR 8

• Now is the best time to make CDEs and other financing parties aware of your project

• Get your project in front of CDEs before they exhaust their current/upcoming allocation and submit their 2019 application.

• Get your project budget estimate and business plan (including financial forecast)

• If your project is not ready to begin next year start the process anyway! Most successful NMTC recipients begin a year in advance.

• Success can mean MILLION$!

Current Opportunity

HRSA Loan Guarantee Program

• Originally authorized by Congress in 1997

• Congress appropriated new funding for the program in 2018, allowing HRSA to update and modernize the program to provide guarantees on ~$900 million in new loans to health centers

• Guarantee covers up to 80% of the principal amount of loans- Mitigates risk to lenders, allowing them to:

• Make loans that they otherwise would not• Improve the terms and conditions they can offer to health centers

HRSA Loan Guarantee Program - Relaunched

• Borrower must be a Section 330-funded health center

• Many types of projects are eligible- “Medical facilities” operated by a health center

• Interpreted broadly: Any facility consistent with the health center’s scope of project (i.e. medical, dental, BH, substance use treatment, vision, enabling, pharmacy, administrative offices, call center, wellness services, etc.)

Eligibility

• Most costs are eligible:- Land and building purchases - Renovation and new construction costs - Equipment and “fit out” costs - Limited refinancing of existing debt - Capitalizable pre-development costs - Financing and consultant fees - Capitalized interest during construction - Limited working capital during a start-up phase - Land and equipment, but only if part of a construction, renovation or modernization project

• No maximum or minimum size

Eligibility, continued

• Lower interest rate- Less cash to the lender = more cash for your program

• Longer fixed rate term- More certainty in a rising interest rate environment

• Higher Loan-to-Value Ratio- Lower up-front cash contribution to the project

• Lower collateral requirements- More assets unencumbered for other lenders

• More lenient covenants

• There’s no fee for this guarantee!

How might the LGP benefit my health center?

Process for Applying for LGP

• Not required, but highly recommended!- Gives you (and HRSA) an opportunity to gain a better understanding of the process and any

special issues or requirements you may need to address with your specific project

• Process:- Send an email to LGProgram@hrsa.gov, providing the following information:

• Health center name and H80 Award Number• Anticipated Project Scope• Type of construction activity (i.e. new construction, renovation, new site, replacement

facility)• Total project cost• Financing needs and potential lender(s) and• Timeline and status of project planning and financing

https://bphc.hrsa.gov/programopportunities/loan-guarantee-program.html

Pre-Application Consultation

• To submit an application, you must have a loan commitment from a lender

• So “application preparation” really means completing all the planning processes you normally would to obtain a lender commitment: Market Assessment Site selection Project team development Program, staff and space planning Architectural and engineering work Project budget development Business Plan development Plan of finance and financial projections Lender identification and negotiations

Application Development and Submission

• Health center must initiate the application, but the lender will also be required to submit information directly to HRSA

• Details still being finalized, but likely process is this:- Health center requests HRSA’s consideration of a guarantee and submits loan commitment

letter, outlining terms and conditions of the proposed loan, signed by health center.

- Lender submits:• Lender’s credit memorandum, together with the health center’s business plan and

financial projections used to underwrite the loan• A statement outlining the better terms and conditions the lender can offer as a result

of the guarantee

Application Development and Submission, continued

• HRSA expects to rely heavily on the lender’s due diligence to streamline HRSA review process.

• HRSA and its Lender Coordinator will review the lender’s credit memo, acting similarly to a “Senior Credit Officer”

• Once a complete application is submitted, HRSA will generally make a determination of approval or disapproval within 60-90 days

Application Review by HRSA

• The lender will manage the loan closing, using the lender’s standard loan documents and security agreements

• Appraisals and environmental reports will generally be required

• Required HRSA documents will be limited in number and in standard form

• The lender will manage the loan as it would any other loan, reporting periodically to HRSA regarding its status

Loan Closing

• As HRSA’s National Cooperative Agreement partner, Capital Link can provide a range of technical assistance to health centers.

- Short duration assistance: < 4 hours under HRSA contract• General advice and assistance regarding eligibility and readiness; debt capacity analysis; risk

evaluation; determination regarding whether to apply; work plan development; funding source identification; timeline considerations; eligibility for a range of funding sources, including NMTC

- Longer duration assistance: > 4 hours• In-depth assistance: market assessment; site selection; program, staff and space planning;

design consultation; business planning; financial projections; lender identification and negotiation; NMTC structuring and closing

- New resources for LGP applicants will be posted here:

http://caplink.org/services/finance/hrsa-loan-guarantee-program

Available Technical Assistance

Financing Comparisons

Financing Structure

Can Mean Significant Project Cost Differences…and Savings

“Stacking” Available Financing Sources

Example

A New $10,000,000 Health Center Project

Hypothetical Case Study

• Loan is 80% of project value: $8,000,000

• Interest rate is 6.5% with 25 year amortization

• Where will the remaining $2,000,000 come from?- Sale of existing building?- Hospital contribution?- State economic development? - Capital campaign?- Government grant? (such as HIIP)

Conventional Bank Loan

Sources of Funds:

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

Annual Debt Service (P&I) $655,032

• 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 and NMTC

Bank Loan: NMTC, Interest Only

Sources of Funds:

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

Annual Debt Service $520,000 (for 7 years)

• With NMTC

• State Issuing Authority

• Private Purchase by Bank

• Requires a Municipal Advisor

Tax Exempt Bonds

• 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

Tax Exempt Bonds and NMTC

TE Bond: NMTC

Sources of Funds:

TE Bond $ 8,000,000NMTC $ 2,000,000Total $10,000,000

Annual Debt Service $312,000 (for 7 years)

• Program Related Investment

• With NMTC

• Private Purchase (Non-profit foundations)

Foundation PRI

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

• No need for additional financing

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

• Interest rate of 3.0%

Foundation and NMTC

Foundation: PRI and NMTC

Sources of Funds:

PRI $ 8,000,000NMTC $ 2,000,000Total $10,000,000

Annual Debt Service $ 240,000 (for 7 years)

Window of Opportunity

• Low interest rates…still…for now

• Government financing programs available

- Tax Exempt Bonds (tax bill)

- NMTC (tax bill)

- USDA

• Federal funding possibilities

• Be honest about identifying planning strengths and weaknesses

• Consider the skill set and time required of team members

• Undertake a thorough vetting of outside expects

• Prepare and cultivate your leadership and project teams

Project Planning Expertise

DIY Resources

Capital Link’s

• Debt Capacity & Revenue Modeling Tools

• Capital Planning & Financing Guides

• Strategic Planning & Benchmarking Toolkits

• Business Plan and Work Plan Manuals

• Cost of Care Trends & Snapshot Reports

Contact Us

Visit us Online: www.caplink.org

• Learn more about our products and services• Download our free publications and resources• Register for upcoming webinars• Sign up for our e-newsletter, Capital Ink• Subscribe to our blog at capitallinksblog.blogspot.com

Jonathan ChapmanChief Project Office

(970) 833-8513

jchapman@caplink.org

capital planning & financing · 2019. 9. 18. · • launched in 1995, nonprofit, hrsa national...

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