Jonathan Chapman - AACHC

2019 Capital Link 1www.caplink.org

Steps to Successful Capital Planning and Financing

Jonathan Chapman

Director, CHC Advisory Services

April 17, 2019


Capital Link

• Launched in 1995, nonprofit, HRSA national cooperative partner

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

• Over $1.1 billion in financing for at least 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


Steps to Success

• Strategic Planning

• Financial Strength

• Operational & Clinical Excellence

• Assessing Market Opportunity

• Developing a Business Plan

• Identifying Financing Resources

• Project Planning Expertise


Strategic Planning

Mission and Values

Mission Reaffirmation and

Sustainability

•Who are we?•What do we want to be?

•Are we ready?

Self-Assessment

•What conditions are affecting us now?

•What about the future?

Environmental Scan •What are our

possible “futures”?

•How might these “futures” impact us?

Impact Evaluation

•What must we achieve for success?

Goal Setting•What are the steps to take?

•Measures of success?

Action Plan

Capital Link’s Strategic Planning Toolkit http://www.caplink.org/resources/publications

Presenter

Presentation Notes

An overview of the process…from the strategic planning toolkit…using as a guide

http://www.caplink.org/resources/publications


Financial Strength

• Historical Performance (3 years audited)

• Organizational Budget/Projections

• Benchmarks/Strategic Goals


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

$0.00

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

Presenter

Presentation Notes

Explanation…plus our website that calculates debt capacity per year


Operational and Clinical Excellence

• Operational and clinical excellence are necessary before expanding capacity.

• Analyze productivity and patient utilization.

• Clarify your operational model.

• Evaluate your programs.


“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


Market Opportunity

• 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.


Developing a Business Plan

• Health Center 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)- 5-8 year forecast- Project budget- Sources and uses- Financing structure


Balance Sheet


Income


Cash Flow


Patient Revenue


Employment


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)


New Market Tax Credits


NMTC: Background & Overview• 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: Community Health Centers• 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: Benefits

• “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: Costs

• 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!


How Does Your Project Qualify?• 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 Do NMTCs Get To You?• 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


Leveraging Grant Funds through NMTC

• 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


Steps to Obtain NMTC Financing

• 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


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

Presenter

Presentation Notes

Just an intro…because no one ‘gets it’ the first time


Current Opportunity

• 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$!


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 (LGP)

Presenter

Presentation Notes

Note that LGP is the only current capital development resource that HRSA has available, and this is likely to be the case for the foreseeable future


Eligibility

• 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, continued

• 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


How might the LGP benefit my health center?

• 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!

Presenter

Presentation Notes

Note that although everyone wants a lower interest rate, interest rate should not be your only consideration! Another very important consideration is that this guarantee is offered by HRSA at no cost to health centers. That’s a free insurance policy!


Process for Applying for LGP


Pre-Application Consultation• 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 [email protected], 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

mailto:[email protected]

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


Application Development and Submission• 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

Presenter

Presentation Notes

This is the longest “segment” of the process, and one that is largely within the health center’s control. The goal is to do all the things you need to do to get a commitment from a lender. At the end of this stage, you are ready to submit your LGP application to HRSA.


Application Development and Submission, continued

• 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

Presenter

Presentation Notes

Note that HRSA is still finalizing these details, but this is what we expect, based on our conversations with HRSA to date.


Application Review by HRSA

• 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

Presenter

Presentation Notes

HRSA is working to greatly streamline their review process by relying heavily on the lender’s due diligence. Lender Coordinator, working with HRSA, will act like a Senior Credit Officer at a bank, reviewing and approving the underlying due diligence, but not starting from scratch. 60-90 day review process or shorter is HRSA’s goal, assuming receipt of a complete application.


Loan Closing

• 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

Presenter

Presentation Notes

Lender will manage closing, using their own documents, which should cut down on time and legal costs associated with loan closing.


Available Technical Assistance• As HRSA’s National Cooperative Agreement partner, Capital Link can

provide a range of technical assistance to health centers applying to the LGP

- 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 with HRSA subsidy• 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

Presenter

Presentation Notes

Working through our National Cooperative Agreement with HRSA, HRSA has charged us with helping to develop a robust pipeline of health centers applying to the program. We have a range of support we can provide, from shorter duration assistance, answering questions and helping to point you in the right direction, if that’s all you need—or more intensive assistance, including help in accelerating your design process, putting together financial projections, developing specific aspects of your business plan. We have a limited amount of HRSA funding available to support these costs, so if you are interested in more intensive assistance for near-term projects, let us know ASAP, since this funding is limited and will be allocated according to a variety of factors, including your interest in moving ahead rapidly with your application.

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


Financing Comparisons


“Stacking” Available Financing Sources

Financing Structure Considerations Can Mean SignificantProject Cost Differences Over Time


Example

A New $10,000,000 Health Center Project


Conventional Bank Loan

• 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


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 (for 7 years)


Tax Exempt Bonds

• With NMTC

• State Issuing Authority

• Private Purchase by Bank

• Requires a Municipal Advisor


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 (for 7 years)


Foundation PRI

• Program Related Investment

• With NMTC

• Private Purchase (Non-profit foundations)


Foundation and NMTC

• 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: PRI and NMTC

Sources of Funds:

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

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


Project Planning Expertise

• 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


Related Resources

• Debt Capacity & Revenue Modeling Tools

• Capital Planning & Financing Guides

• Strategic Planning & Benchmarking Toolkits

• Business Plan and Work Plan Manuals

• Learning Collaboratives

• Recorded and Upcoming Webinars

http://www.caplink.org/


Contact:

Questions?

Visit us online at 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

[email protected]

Director of CHC Advisory ServicesJonathan Chapman

http://www.caplink.org/

http://www.capitallinksblog.blogspot.com/

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Jonathan Chapman - AACHC