A Guide To Capital Funding Options For Public Hospital Districts, Rural Hospital And/Or Critical Access Hospitals In Washington State Association of Washington Public Hospital Districts Keeping Quality Care Local A publication funded by the Association of Washington Public Hospital Districts and developed by consulting firms The Lakes Group and Moss Adams LLP.
INTRODUCTION The majority of Public Hospital Districts in the State of Washington are, or will shortly, be in the need of capital financing to replace aging physical plants, operating systems and clinical equipment to meet the increasing safety and environment of care standards required by state, federal and accrediting agencies. In additions, there is a mandate for information systems (IS) that provide privacy (HIPAA) financial, clinical and operational interfaces required by state and federal agencies as well as third party payers and liability insurers. All of these requirements are and will have a major impact on hospitals and health systems due to the cost. The need for capital outside of existing institutional financial reserves to address these mandatory upgrades is additionally impacted by the continuing decrease in third party reimbursement for clinical services and reduced returns on investment income. For these reasons, the Association of Washington Public Hospital Districts leadership decided to seek assistance in developing this guide to assist AWPHD members to find and access capital funds to replace or upgrade aging physical plants, operating systems, clinical equipment and/or information systems. DISCLAIMER Information in this resource directory has been gathered from numerous resources and is intended to be a guide for hospitals to identify potential sources of capital financing. These resources are listed for reference only and are not intended as endorsement by the Association of Washington Public Hospital Districts or the consulting firms of The Lakes Group or Moss Adams LLP. While this directory is as comprehensive, regarding funding mechanisms, as the researchers could make it, it is not exhaustive, either to funding mechanisms or funding resources. The directory includes detailed financing information for only one or two sources for each particular type of funding mechanism, rather than attempting to include information for every source. If other funding mechanisms or funding sources are identified by AWPHD members/staff, or if other financial sources feel they have been overlooked, this information should be forwarded to the Executive Director, AWPHD to be considered as potential addenda to this publication. There is a blank resource template in Appendix 2 of this resource guide that can be used to provide the information recommended for addenda to this AWPHD publication. A Guide to Capital Funding Options 1
It should also be noted that capital funding from state and federal government resources is a very fluid resource. As this publication went to print, there were some legislative actions at the federal level that focused on assisting rural facilities to maintain financial viability and improve physical plants and information systems. AWPHD and WSHA resources will monitor these actions and provide timely feedback to the membership if this legislative support becomes a reality. This guide is intended to provide accurate information, but it should not be used as a replacement for or override individual institutions financial advisors or auditing firms. ACKNOWLEDGEMENTS The Association of Washington Public Hospital District would like to thank the following contributors to this publication: `! Phil Sandifer and Leah Kliger, The Lakes Group (425) 576-9935 SandiferCP@aol.com! Paul Onerheim and Alan Limpo, Moss Adams LLP (425) 259-7227 paulo@mossadams.com; alanl@mossadams.com! Dave Berk, Principal, Rural Health Financial Network, Inc. www.ruralhealth.net! Brad Berg, Foster Pepper & Shefelman PLLC (206) 447-8970 bergb@foster.com! Wendy Ray, Manager, Member Services, AWPHD (206)216-2516 wendyr@awphd.org A Guide to Capital Funding Options 2
TABLE OF CONTENTS SECTION I. Solicitation of Information... 5 Organizations Contacted for Potential Capital Access. (Completed requests for information [templates] are found in Section II.) SECTION II. Specific Capital Funding Resources... 7 A. Commonly Used Capital Funding Options... 9-48 B. Less Common Capital Funding Options... 49-84 C. Charitable Trust and Foundation Capital Resources... 85-100 D. Capital Issues From the Federal Perspective... 101-106 SECTION III. Pain & Agony (Reality Check) in Accessing Capital Financing... 107-111 A. General Recommendations to Consider Prior to Seeking Formal Financing... 107 (Specific requirements for accessing capital from each listed resource are found in the completed templates found in Section II.) B. Lessons Learned (Project Construction and Funding Hints)...107-111 SECTION IV. Addenda...113 A. New Capital Access Funding Options, New Resources or Feedback to AWPHD Following Initial Publication APPENDICES... 115-127 1. Glossary... 115-123 2. Blank Addendum Template... 125-127 A Guide to Capital Funding Options 3
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SECTION I Solicitation of Information for the Directory A. Organizations Contacted as Sources for Potential Capital Funding Assess The following organizations were contacted to provide information for one or more types of capital funding options. Not all organizations responded to the request for information. The organizations that did respond are represented in Section II of this directory. AMDC Corporation Bank of America, Public Sector Banking Bank of America Securities LLC Ben B. Cheney Foundation CapitalSource DASCO Companies, LLC Economic Development Administration, U.S. Department of Commerce Fleet Capital Leasing Healthcare Finance GE Capital Healthcare Financial Services Johnson Controls, Inc. McKinstry Company Energy Services M.J. Murdock Charitable Trust The Norcliffe Foundation Office for the Advancement of Telehealth Office of Community and Rural Health, Washington Department of Health Office of Insured Health Care Facilities HUD 242 Program Office of Special Programs, Health Resources and Services Administration PACCAR Foundation PaineWebber, Inc. The Seattle Foundation Seattle-Northwest Securities Corporation Sun Capital HealthCare, Inc. Union Pacific Foundation United States Department of Agriculture United States Department of Agriculture, Rural Utilities Telemedicine Loans/Grants U.S. Department of Housing and Urban Development HUD 232 Program U.S. Department of Housing and Urban Development HUD 242 Program U.S. Bancorp Piper Jaffray Washington Health Care Facilities Authority Washington Health Foundation Washington State Department of General Administration Washington State Treasurer s Office A Guide to Capital Funding Options 5
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Section II Specific Capital Funding Resources Each completed template from a potential capital funding resource indicates whether the funding option is applicable to public hospital districts, critical access hospitals and/or rural not-for-profit hospitals (defined as hospitals with 100 or fewer beds). Some, or even many, of the template headings are not applicable to a specific funding option or resource. Contact information has been provided for each funding resource to enable the user of the directory to direct inquiries or requests for applications to the funding resource. More than one resource has been included for some of the funding options. NOTE: If public hospital district is checked and critical access hospitals and/or rural hospitals are also checked, then the critical access or rural hospital must be a public hospital district to qualify for that funding resource. A. Commonly Used Capital Funding Options! Unlimited Tax General Obligation Bonds (Limited to Public Hospital Districts) 2 Resources! Limited Tax General Obligation Bonds (Limited to Public Hospital Districts) 2 Resources! Tax-Exempt Revenue Bonds 2 Resources! HUD 242 Loan Insurance Program (Hospitals)! HUD 232 Loan Insurance Program (Nursing Homes, Hospices, etc.)*! Tax-Exempt Equipment Loan! Tax-Exempt Equipment Operating Lease! Tax-Exempt Equipment Capital Lease 2 Resources! Tax-Exempt Equipment Capital or Operating Lease! Taxable Equipment Capital Lease! Taxable Third-Party Equipment Capital Lease * No template at this time A Guide to Capital Funding Options 7
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A. Commonly Used Capital Funding Options A Guide to Capital Funding Options 9
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Funding Type: Unlimited Tax General Obligation Bonds Available to ( x as applicable) X Public Hospital Districts Not-For-Profit Hospitals X Critical Access Hospitals X Less than 100 Beds (rural) Amount of Funding Available Limitations on Use of Funds Interest Rate Range of Loan Maturity Dates Typical Cost of Funding Time From Application to Funding Typical Covenants Collateral Requirements Voter approval limits the funding. In addition, the statutory limit on the amount of outstanding general obligation debt is 2.5% of assessed value. Tax exempt bond proceeds must be used to construct/improve healthcare facilities or acquire equipment for a public purpose, as determined by IRS regulations. Fixed interest rates for each maturity are set on the day of pricing, at market levels on that date. UTGO interest rates are lower than either LTGO or revenue bond rates for the same issuer. Bonds can be sold with final maturities of 1-30 years, depending on the average life of the project being funded, and the hospital s debt structuring needs. Costs of issuance generally range from 2-3% of the paramount of the bonds. The process of issuing bonds, including drafting legal and disclosure documents typically takes 6-12 weeks. This work often begins prior to the election if there is a reasonable indication that voters will approve the issue. There are generally no specific covenants related to revenues or the operation of the hospital because UTGO bonds are secured by and paid from an excess levy. UTGO bonds are secured by the full faith and credit of the District. There is no explicit pledge of revenues or property. Credit Enhancement Requirements There is no requirement that the bonds obtain credit enhancement. UTGO bonds can be sold using the District s rating, or no rating. A Guide to Capital Funding Options 11
Reserve Account Requirements Trust Account Requirements Annual Reporting Requirements There is no requirement for a debt service reserve fund for tax-backed issues. There is no trustee requirement, although the country treasurer typically holds the bond fund, deposits taxes and forwards debt service payments, as required. A continuing disclosure requirement for issues of $1,000,000 or more requires submission of financial/ other data plus notification of certain material events to national repositories. Prepayment Limitations Typically the bonds are not callable for the first 10 years, but can be advance refunded by depositing sufficient funds in an escrow account until the call date. Public Vote Requirement Application Process Unusual Funding Characteristics Deadline for Using Funds For Lease Arrangements Date title transfers Capital or Operating Lease Grant Parameters Purpose and activities Low to high grant range UTGO bonds need 60% voter approval, with election validation requirements. There is no formal application process, but the bonds are subject to credit review by the underwriter, rating agency (if any) and insurance company (if any). UTGO bonds are unusual in that they require a public vote. IRS rules require an expectation that proceeds will be spent within three years. A Guide to Capital Funding Options 12
Organization Providing Information Name of Organization U.S. Bancorp Piper Jaffray Contact Person Tom Whitson Anne Watanabe Contact s Position Managing Director Assistant Vice President E-mail Address twhitson@pjc.com awatanabe@pjc.com Phone Number (206) 287-8826 (206) 287-8821 Fax Number (206) 287-8895 (206) 287-8895 Organization Website www.pjc.com General Comments/Observations A Guide to Capital Funding Options 13
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Funding Type: Unlimited Tax General Obligation Bonds Available to ( x as applicable) X Public Hospital Districts Not-For Profit Hospitals X Critical Access Hospitals X Less than 100 Beds (rural) Amount of funding Available Limitations on Use of Funds Interest Rate Range of Loan Maturity Dates Typical Cost of funding Time from Application to Funding Typical Covenants Collateral Requirements There are certain statutory limitations. Consult with legal counsel Must be used to construct, improve or purchase health care facilities http://www.bloomberg.com/markets munibondyield.html Fixed term, often 20 to 30 years Approximately 2.25% of the bonds sold Approximately 90 days after voter approval Generally limited as bonds are supported by property tax revenues Collateralized by the full faith and credit of the District Credit Enhancement Requirements None Reserve Account Requirements Trust Account Requirements Annual Reporting Requirements Prepayment Limitations Public Vote Requirement Application Process Unusual Funding Characteristics Deadline for Using Funds None Property tax revenues to repay bonds held by County Treasurer National Data Bank reporting requirements) Determined in consultation with Bond Underwriter (Typically 10 year call) Generally requires a 60% voter approval with election validation requirements Bond Counsel (Election & Bond Resolution) Limited to Public Hospital Districts Three years (longer periods allowed with restrictions) A Guide to Capital Funding Options 15
For Lease Arrangements Date title transfers Capital or Operating Lease Grant Parameters Purpose and activities Low to high grant range Organization Providing Information Name of Organization: Bank of America Securities LLC Contact Person: Jim Blumenthal Contact s Position: Vice President E-mail Address: james.w.blumenthal@bankofamerica.com Phone Number: (206) 358-8920 Fax Number: (206) 358-8818 Organization Website: www.bankofamerica.com General Comments/Observations There are certain technical limitations on the amount of general obligation bonds that may be issued. The Hospital should consult with legal counsel familiar with the issuance of general obligation bonds when it begins to contemplate general obligation bond financing. A Guide to Capital Funding Options 16
Funding Type: Limited Tax General Obligation Bonds Available to ( x as applicable) X Public Hospital Districts Not-For-Profit Hospitals X Critical Access Hospitals X Less than 100 Beds (rural) Amount of Funding Available Limitations on Use of Funds Interest Rate Range of Loan Maturity Dates Typical Cost of Funding Time From Application to Funding Typical Covenants Collateral Requirements Total LTGO debt limited to 0.75% of District assessed value. Must be used to equip or improve health care facilities. www.bloomberg.com/markets/munibondyield.html Fixed term often 20 to 30 yrs, not to exceed 40 yrs Approximately 2.25% of the bonds sold Approximately 90 days after board approval Generally limited as bonds are supported by tax revenues. Collateralized by the regular taxing authority of the district. Credit Enhancement Requirements None Reserve Account Requirements Trust Account Requirements Annual Reporting Requirements Prepayment Limitations Public Vote Requirement Application Process Unusual Funding Characteristics Deadline for Using Funds For Lease Arrangements Date title transfers Capital or Operating Lease None Tax revenues to repay bonds held by County Treasurer. National Data Bank reporting requirements Determined in consultation with Bond Underwriter None None Limited to Public Hospital Districts Three years A Guide to Capital Funding Options 17
Grant Parameters Purpose and activities Low to high grant range Organization Providing Information Name of Organization Seattle-Northwest Securities Corporation Contact Person Lindsay Sovde Contact s Position Associate Vice President E-mail Address lsovde@snwsc.com Phone Number (206) 628-2875 Fax Number (206) 343-2103 Organization Website www.seattlenorthwest.com General Comments/Observations There are certain technical limitations on the amount of general obligation bonds that may be issued. The hospital should consult with legal counsel familiar with the issuance of general obligation bonds when it begins to contemplate general obligation bond financing. A Guide to Capital Funding Options 18
Funding Type: Limited Tax General Obligation Bonds Available to ( x as applicable) X Public Hospital Districts Not-For-Profit Hospitals X Critical Access Hospitals X Less than 100 Beds (rural) Amount of Funding Available Limitations on Use of Funds Interest Rate Range of Loan Maturity Dates Typical Cost of Funding Time From Application to Funding Typical Covenants Collateral Requirements Annual debt service should be projected as less than amount of district s regular levy. The regular levy rate itself is subject to numerous statutory limitations, including junior taxing district limits. In addition, the maximum amount of outstanding LTGO debt is 0.75% of assessed value and total UTGO/LTGO is 2.50% of assessed value. Tax exempt bond proceeds must be used to construct/improve healthcare facilities or acquire equipment for a public purpose, as determined by IRS regulations. Fixed interest rates for each maturity are set on the day of pricing, at market levels on that date. LTGO rates are higher than UTGOs but lower than revenue bond rates. Bonds can be sold with final maturities of 1-30 years, depending on the average life of the project being funded, and the hospital s debt structuring needs. Costs of issuance generally range from 2-3% of the par amount of the bonds. The process of issuing bonds, including drafting legal and disclosure documents typically takes 6-12 weeks. There are generally no specific covenants related to revenues or the operation of the hospital. LTGO bonds are secured by the full faith and credit of the district, with essentially a first lien on the district s regular levy and a junior lien (after any revenue bonds) on district revenues. Credit Enhancement Requirements There is no requirement that the bonds obtain credit enhancement. LTGO bonds can be sold using the district s rating, or no rating. A Guide to Capital Funding Options 19
Reserve Account Requirements Trust Account Requirements Annual Reporting Requirements There is no requirement for a debt service reserve fund for tax-backed issues. There is no trustee requirement, although the country treasurer typically holds the bond fund, deposits taxes and forwards debt service payments, as required. A continuing disclosure requirement for issues of $1,000,000 or more requires submission of financial/ other data plus notification of certain material events to national repositories. Prepayment Limitations Typically the bonds are not callable for the first 10 years, but can be advance refunded by depositing sufficient funds in an escrow account until the call date. Public Vote Requirement Application Process Unusual Funding Characteristics Deadline for Using Funds For Lease Arrangements Date title transfers Capital or Operating Lease Grant Parameters Purpose and activities Low to high grant range None There is no formal application process, but the bonds are subject to credit review by the underwriter, rating agency (if any) and insurance company (if any). None IRS rules require an expectation that proceeds will be spent within three years. A Guide to Capital Funding Options 20
Organization Providing Information Name of Organization U.S. Bancorp Piper Jaffray Contact Person Tom Whitson Anne Watanabe Contact s Position Managing Director Assistant Vice President E-mail Address twhitson@pjc.com awatanabe@pjc.com Phone Number (206) 287-8826 (206) 287-8821 Fax Number (206) 287-8895 (206) 287-8895 Organization Website www.pjc.com General Comments/Observations A Guide to Capital Funding Options 21
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Funding Type: Tax-Exempt Revenue Bonds Available to ( x as applicable) X Public Hospital Districts X Not-For-Profit Hospitals X Critical Access Hospitals X Less than 100 Beds (rural) Amount of Funding Available Limitations on Use of Funds Interest Rate Range of Loan Maturity Dates Typical Cost of Funding Time From Application to Funding Typical Covenants Collateral Requirements The credit factors, which determine a hospital s debt capacity, include debt service coverage, debt-tocapitalization and days-cash-on hand. A healthcare banker should be able to review a district s financial statements and advise on a maximum amount of revenue bonds that could be issued. Tax exempt bond proceeds must be used to construct/improve healthcare facilities or acquire equipment for a public purpose, as determined by IRS regulations. Fixed interest rates for each maturity are set on the day of pricing, at market levels on that date. Variable rate bonds, with weekly re-sets may also be issued. Bonds can be sold with final maturities of 1-30 years, depending on the average life of the project being funded, and the hospital s debt structuring needs. Costs of issuance generally range from 2-3% of the par amount of the bonds. The process of issuing bonds, including drafting legal and disclosure documents typically takes 8-16 weeks. Covenants may include a rate covenant (e.g. 1.25x), a liquidity covenant (e.g. 60 days cash on hand), an additional bonds test for issuing future parity bonds, quarterly financial reporting, maintenance of insurance, etc. Nonprofit hospitals are often required to provide a mortgage on real property, while districts are legally precluded from doing so. Credit Enhancement Requirements There is no requirement that the bonds obtain credit enhancement, but there is almost always a financial benefit to purchasing bond insurance for fixed rate bonds. A Guide to Capital Funding Options 23
Reserve Account Requirements Trust Account Requirements Annual Reporting Requirements The market expects a debt service reserve funded at maximum annual debt service. For districts there is no requirement for a trustee. A nonprofit must have a trustee. A continuing disclosure requirement for issues of $1,000,000 or more requires submission of financial/ other data plus notification of certain material events to national repositories. Prepayment Limitations Typically the bonds are not callable for the first 10 years, but can be advance refunded by depositing sufficient funds in an escrow account until the call date. Public Vote Requirement Application Process Unusual Funding Characteristics Deadline for Using Funds For Lease Arrangements Date title transfers Capital or Operating Lease Grant Parameters Purpose and activities Low to high grant range None For districts there is no formal application, but the bonds are subject to credit review by the underwriter, rating agency (if any) and insurance company (if any). None IRS rules require an expectation that proceeds will be spent within three years. Organization Providing Information Name of Organization U.S. Bancorp Piper Jaffray Contact Person Tom Whitson Anne Watanabe Contact s Position Managing Director Assistant Vice President E-mail Address twhitson@pjc.com awatanabe@pjc.com Phone Number (206) 287-8826 (206) 287-8821 Fax Number (206) 287-8895 (206) 287-8895 Organization Website www.pjc.com GENERAL COMMENTS/OBSERVATIONS A Guide to Capital Funding Options 24
Funding Type: Tax-Exempt Revenue Bonds Available to ( x as applicable) X Public Hospital Districts X Not-For-Profit Hospitals X Critical Access Hospitals X Less than 100 Beds (rural) Amount of Funding Available Limitations on Use of Funds Interest Rate Range of Loan Maturity Dates Typical Cost of Funding Time From Application to Funding Typical Covenants Collateral Requirements The credit factors, which determine a hospital s debt capacity, include debt service coverage, debt-tocapitalization and days-cash-on hand. A healthcare banker should be able to review a district s financial statements and advise on a maximum amount of revenue bonds that could be issued. Tax exempt bond proceeds must be used to construct/improve healthcare facilities or acquire equipment for a public purpose, as determined by IRS regulations. Fixed interest rates for each maturity are set on the day of pricing, at market levels on that date. Variable rate bonds, with weekly re-sets may also be issued. Bonds can be sold with final maturities of 1-30 years, depending on the average life of the project being funded, and the hospital s debt structuring needs. Costs of issuance generally range from 2-3% of the par amount of the bonds. The process of issuing bonds, including drafting legal and disclosure documents typically takes 8-16 weeks. Covenants may include a rate covenant (e.g. 1.25x), a liquidity covenant (e.g. 60 days cash on hand), an additional bonds test for issuing future parity bonds, quarterly financial reporting, maintenance of insurance, etc. Nonprofit hospitals are often required to provide a mortgage on real property, while districts are legally precluded from doing so. Credit Enhancement Requirements There is no requirement that the bonds obtain credit enhancement, but there is almost always a financial benefit to purchasing bond insurance for fixed rate bonds. A Guide to Capital Funding Options 25
Reserve Account Requirements Amount of Funding Available Limitations on Use of Funds Interest Rate Range of Loan Maturity Dates Typical Cost of Funding Time From Application to Funding Typical Covenants Collateral Requirements The market expects a debt service reserve funded at maximum annual debt service. The credit factors, which determine a hospital s debt capacity, include debt service coverage, debt-tocapitalization and days-cash-on hand. A healthcare banker should be able to review a district s financial statements and advise on a maximum amount of revenue bonds that could be issued. Tax exempt bond proceeds must be used to construct/improve healthcare facilities or acquire equipment for a public purpose, as determined by IRS regulations. Fixed interest rates for each maturity are set on the day of pricing, at market levels on that date. Variable rate bonds, with weekly re-sets may also be issued. Bonds can be sold with final maturities of 1-30 years, depending on the average life of the project being funded, and the hospital s debt structuring needs. Costs of issuance generally range from 2-3% of the par amount of the bonds. The process of issuing bonds, including drafting legal and disclosure documents typically takes 8-16 weeks. Covenants may include a rate covenant (e.g. 1.25x), aliquidity covenant (e.g. 60 days cash on hand), an additional bonds test for issuing future parity bonds, quarterly financial reporting, maintenance of insurance, etc. Nonprofit hospitals are often required to provide a mortgage on real property, while districts are legally precluded from doing so. Credit Enhancement Requirements There is no requirement that the bonds obtain credit enhancement, but there is almost always a financial benefit to purchasing bond insurance for fixed rate bonds. A Guide to Capital Funding Options 26
Reserve Account Requirements Trust Account Requirements Annual Reporting Requirements The market expects a debt service reserve funded at maximum annual debt service. For districts there is no requirement for a trustee. A nonprofit must have a trustee. A continuing disclosure requirement for issues of $1,000,000 or more requires submission of financial/ other data plus notification of certain material events to national repositories. Prepayment Limitations Typically the bonds are not callable for the first 10 years, but can be advance refunded by depositing sufficient funds in an escrow account until the call date. Public Vote Requirement Application Process Unusual Funding Characteristics Deadline for Using Funds For Lease Arrangements Date title transfers Capital or Operating Lease Grant Parameters Purpose and activities Low to high grant range None For districts there is no formal application, but the bonds are subject to credit review by the underwriter, rating agency (if any) and insurance company (if any). None IRS rules require an expectation that proceeds will be spent within three years. Organization Providing Information Name of Organization U.S. Bancorp Piper Jaffray Contact Person Tom Whitson Anne Watanabe Contact s Position Managing Director Assistant Vice President E-mail Address twhitson@pjc.com awatanabe@pjc.com Phone Number (206) 287-8826 (206) 287-8821 Fax Number (206) 287-8895 (206) 287-8895 Organization Website www.pjc.com GENERAL COMMENTS/OBSERVATIONS A Guide to Capital Funding Options 27
A Guide to Capital Funding Options 28
Funding Type: Tax-Exempt Revenue Bonds Available to ( x as applicable) X Public Hospital Districts X Not-For-Profit Hospitals X Critical Access Hospitals X Less than 100 Beds (rural) Program Amount of Funding Available Limitations on Use of Funds Interest Rate Range of Loan Maturity Dates Typical Cost of Funding Time From Application to Funding Typical Covenants Collateral Requirements The Washington Health Care Facilities Authority offers a variety of tax-exempt bond issues to meet healthcare organizations capital financing needs. The Authority offers traditional fixed interest rate financing as well as variable rate financing. Limited only by borrower s debt capacity. Funds to be used for capital facilities and equipment of healthcare providers. Varies according to credit quality and term and type of bonds being issued i.e. fixed or variable. See Washington Health Care Facilities Authority web page at www.whcfa.wa.gov for current interest rates. Up to 30 years Less than 2% of amount financed Approximately 90 days from time all parties are ready to proceed. Authority bond issues are generally insured or backed by a letter of credit in order to obtain the lowest interest rates in the market. The credit enhancer negotiates terms with the borrower. Recent terms include mortgage against borrower s facilities, and some type of liquidity pledge. In order to measure ongoing operational success, Authority maintains a profit/cushion test. Credit enhancers often seek a security interest in borrower s gross receivables and a mortgage against borrower s facilities. A Guide to Capital Funding Options 29
Credit Enhancement Requirements Obtaining credit enhancement has been and continues to be a very cost-effective method to reduce the overall debt service costs to the borrower. Bond issues rated less than A need some type of credit enhancement to reach the A level in order to be sold to the public. Even borrowers with AA ratings find the costs of credit enhancement are far outweighed by the lower debt service costs. Bond issues rated less than A or not rated are typically sold directly to institutional investors. Reserve Account Requirements Trust Account Requirements Annual Reporting Requirements Prepayment Limitations Public Vote Requirement Application Process Negotiated with credit enhancer. Unexpended bond proceeds, bond debt service fund, and any required reserve account held by bond trustee. Bond trustee administers the bond issue post issuance. Quarterly to credit enhancer. At least annual, more often quarterly to bondholders. Annual to Authority. Typically no prepayment for 10 years for fixed rate bond issues. No limitations on variable rate bond issues. Prepayment terms are generally set by market at time of bond issue. None for not-for-profit hospitals or for issuance of revenue bonds or limited tax general obligation bonds by public hospital districts. Application to Washington Health Care Facilities Authority. Unusual Funding Characteristics Deadline for Using Funds For Lease Arrangements Date title transfers Capital or Operating Lease Established by applicable federal tax law. Generally three years from date of issuance. A Guide to Capital Funding Options 30
Grant Parameters Purpose and activities Low to high grant range Organization Providing Information Name of Organization Washington Health Care Facilities Authority Contact Person John Van Gorkom Contact s Position Executive Director E-mail Address johnvg@whcfa.wa.gov Phone Number 360.753.6185 Fax Number 360.586.9168 Organization Website www.whcfa.wa.gov General Comments/Observations The Authority has a wide range of experience in a variety of financing methods. A Guide to Capital Funding Options 31
A Guide to Capital Funding Options 32
Funding Type: HUD 242 Loan Insurance Program Available to ( x as applicable) X Public Hospital Districts X Not-For-Profit Hospitals X Critical Access Hospitals X Less than 100 Beds (rural) Amount of Funding Available Limitations on Use of Funds Interest Rate Range of Loan Maturity Dates Typical Cost of Funding Time From Application to Funding Typical Covenants Collateral Requirements NO LIMIT Hospital construction financing, refinancing, modernization, remodeling, equipment, expansion AA bond rates 25 years One-time fees total 0.8% of the loan amount. Fixed annual premium is 0.5% of remaining balance. 60 to 120 days Transfer of assets, annual audits, etc. First mortgage on entire facility Credit Enhancement Requirements Reserve Account Requirements Trust Account Requirements Annual Reporting Requirements Prepayment Limitations Public Vote Requirement Application Process Unusual Funding Characteristics Deadline for Using Funds For Lease Arrangements Date title transfers Capital or Operating Lease Grant Parameters Purpose and activities Low to high grant range Two years debt service within 10 years. Reserve account Annual certified audits Determined in consultation with bond underwriter. None Yes None Determined by lender A Guide to Capital Funding Options 33
Organization Providing Information Name of Organization U.S. Department of Housing and Urban Development Contact Person John F. Whitehead Contact s Position Operations Manager E-mail Address John_F._Whitehead@HUD.gov Phone Number (202) 708-0599 Fax Number (202) 401-8860 Organization Website www.hud.gov/funds/healthcarefacility.cfm General Comments/Observations The Federal Housing Administration helps hospitals access affordable financing for capital projects. Since the program began in 1968, FHA has insured over 300 hospital mortgages for a total in excess of $9 billion. Clients range from relatively small hospitals to some of the nation s most prestigious teaching hospitals. FHA insurance enables clients to enhance their creditworthiness because their debt is backed by the full faith and credit of the Unites States Government. In fact, FHA- Insured hospitals usually obtain the lowest interest rate available to their segment of the market. A Guide to Capital Funding Options 34
Funding Type: Tax-Exempt Equipment Loan Available to ( x as applicable) X Public Hospital Districts X Not-For-Profit Hospitals X Critical Access Hospitals X Less than 100 Beds (rural) Program Amount of Funding Available Limitations on Use of Funds Interest Rate Range of Loan Maturity Dates Typical Cost of Funding Time From Application to Funding Typical Covenants Collateral Requirements GE Capital/ASAP is a tax-exempt loan program offered jointly by Washington Health Care Facilities Authority and General Electric Capital Corporation (GECC). Up to $7 million. (Exact amount to be determined by GECC.) Funds can be used to purchase various equipment including medical and diagnostic equipment,computers, telecommunications equipment, energy upgrades, and minor installation and renovation costs. The program is not limited to GE equipment as other vendors equipment can also be financed with this program. Tax-exempt. Rate determined by GECC based upon life of equipment and financial strength of borrower. Loan is amortized over the useful life of the equipment. Less than 2% of amount financed. Typically 60 days from application to funding. Pay the lease payments. Security interest in equipment financed. Credit Enhancement Requirements None Reserve Account Requirements Trust Account Requirements Annual Reporting Requirements Prepayment Limitations Public Vote Requirement None Depository Bank holds proceeds until spent. Annual to GECC and Authority. Negotiated with GECC. None for not-for-profit hospitals or for issuance of revenue bonds or limited tax general obligation bonds by public hospital districts. A Guide to Capital Funding Options 35
Application Process Unusual Funding Characteristics Deadline for Using Funds For Lease Arrangements Date title transfers Capital or Operating Lease Grant Parameters Purpose and activities Low to high grant range Application to Washington Health Care Facilities Authority and GECC. Available to a variety of health care providers. Program will fund other vendors equipment. Established by applicable federal tax law and GECC. Typically within one year. At loan payoff Organization Providing Information Name of Organization Washington Health Care Facilities Authority Contact Person John Van Gorkom Contact s Position Executive Director E-mail Address johnvg@whcfa.wa.gov Phone Number (360) 753-6185 Fax Number (360) 586-9168 Organization Website www.whcfa.wa.gov General Comments/Observations A Guide to Capital Funding Options 36
Funding Type: Tax-Exempt Equipment Operating Lease Available to ( x as applicable) X Public Hospital Districts X Not-For-Profit Hospitals X Critical Access Hospitals X Less than 100 Beds (rural) Amount of Funding Available $50,000-$100,000,000 Limitations on Use of Funds Interest Rate Range of Loan Maturity Dates Typical Cost of Funding Time From Application to Funding Typical Covenants Collateral Requirements Equipment and related leasehold improvements. Based on borrower s financial strength. Two years up to ten years Tax exempt leases (only third party fees); taxable leases ($0) Two to four weeks turnaround UCC-1 Filing Credit Enhancement Requirements None Reserve Account Requirements Trust Account Requirements Annual Reporting Requirements Prepayment Limitations Public Vote Requirement Application Process Unusual Funding Characteristics Deadline for Using Funds For Lease Arrangements Date title transfers Capital or Operating Lease None None Quarterly interim financial statements and annual audits Negotiable Signed proposal and commitment fee (one month rental). None Operating - All types (dollar out, fair market value, etc.) A Guide to Capital Funding Options 37
Grant Parameters Purpose and activities Low to high grant range Organization Providing Information Name of Organization Fleet Capital Leasing Healthcare Finance Contact Person Bob Thoma Contact s Position Vice President E-mail Address bthoma@fleet-fbcc.com Phone Number (973) 541-2332 Fax Number (973) 541-2699 Organization Website www.fleethealthcare.com/default.asp General Comments/Observations A Guide to Capital Funding Options 38
Funding Type: Tax-Exempt Equipment Capital Lease Available to ( x as applicable) X Public Hospital Districts X Not-For-Profit Hospitals X Critical Access Hospitals X Less than 100 Beds (rural) Program Amount of Funding Available Limitations on Use of Funds Interest Rate Range of Loan Maturity Dates Typical Cost of Funding Time From Application to Funding Typical Covenants Collateral Requirements EZ Lease NRV is a tax-exempt equipment lease financing program. The lease is competitively bid to a number of leasing companies to achieve the lowest interest rate. There is no residual value (NRV) payment due upon lease termination. Up to $20 million Funds can be used to purchase various equipment including medical and diagnostic equipment, computers, telecommunications equipment, energy upgrades, and minor installation and renovation costs. Tax-exempt. EZ Leases are competitively bid out to a variety of leasing companies to achieve the lowest interest rate at that bid time. Rates are generally in line with typical tax-exempt interest rates for various maturities. See Authority web page at www.whcfa.wa.gov for most recent interest rates. Lease is amortized over the life of the equipment Fixed cost not to exceed $25,000 regardless of loan size. Typically 60 days from application to funding. Pay the lease payments. Security interest in equipment financed. Credit Enhancement Requirements None Reserve Account Requirements Trust Account Requirements Annual Reporting Requirements Prepayment Limitations None Depository Bank holds proceeds until spent. Annual report to leasing company and Authority. Set by leasing company in bid, if any. A Guide to Capital Funding Options 39
Public Vote Requirement Application Process Unusual Funding Characteristics Deadline for Using Funds For Lease Arrangements Date title transfers Capital or Operating Lease Grant Parameters Purpose and activities Low to high grant range None for not-for-profit hospitals or for issuance of revenue bonds or limited tax general obligation bonds by public hospital districts. Application to Washington Health Care Facilities Authority. EZ Lease NRV financing leases work like loans. NRV means no residual value is due at end of loan term. Borrower owns equipment at end of loan term. Each EZ Lease is competitively submitted to several commercial lease providers. Borrower selects the interest rate bid it deems desirable (usually the lowest interest rate). Established by applicable federal tax law and leasing company. Typically within one year. At termination of lease Capital Organization Providing Information Name of Organization Washington Health Care Facilities Authority Contact Person John Van Gorkom Contact s Position Executive Director E-mail Address johnvg@whcfa.wa.gov Phone Number (360) 753-6185 Fax Number (360) 586-9168 Organization Website www.whcfa.wa.gov General Comments/Observations The EZ Lease NRV program allows borrowers to competitively shop for the lowest interest rate equipment financing. A Guide to Capital Funding Options 40
Funding Type: Tax-Exempt Equipment Capital Lease Available to ( x as applicable) X Public Hospital Districts X Not-For-Profit Hospitals X Critical Access Hospitals X Less than 100 Beds (rural) Amount of Funding Available $50,000-$100,000,000 Limitations on Use of Funds Interest Rate Range of Loan Maturity Dates Typical Cost of Funding Time From Application to Funding Typical Covenants Collateral Requirements Equipment and related leasehold improvements. Based on borrower s financial strength. Two years up to ten years Tax exempt leases (only third party fees); taxable leases ($0) Two to four weeks turnaround None UCC-1 filing Credit Enhancement Requirements None Reserve Account Requirements Trust Account Requirements Annual Reporting Requirements Prepayment Limitations Public Vote Requirement Application Process Unusual Funding Characteristics Deadline for Using Funds For Lease Arrangements Date title transfers Capital or Operating Lease None None Quarterly interim financial statements and annual audits. Negotiable Signed proposal and commitment fee (one month rental). None Capital - All types (dollar out, fair market value, etc.) A Guide to Capital Funding Options 41
Grant Parameters Purpose and activities Low to high grant range Organization Providing Information Name of Organization Fleet Capital Leasing Healthcare Finance Contact Person Bob Thoma Contact s Position Vice President E-mail Address bthoma@fleet-fbcc.com Phone Number (973) 541-2332 Fax Number (973) 541-2699 Organization Website www.fleethealthcare.com/default.asp General Comments/Observations A Guide to Capital Funding Options 42
Funding Type: Tax-Exempt Equipment Capital or Operating Lease Available to ( x as applicable) X Public Hospital Districts X Not-For-Profit Hospitals X Critical Access Hospitals X Less than 100 Beds (rural) Amount of Funding Available Limitations on Use of Funds Interest Rate Range of Loan Maturity Dates Typical Cost of Funding Time From Application to Funding Typical Covenants Collateral Requirements Unlimited based upon project and credit quality. Tax-exempt purposes (tax Law) Tied to the U.S. Treasury Market or U.S. Swap Market. Based upon useful life of assets being financed (tax law). Tied to the U.S. Treasury Market or U.S. Swap Market 30-45 days depending upon Authority approval requirements and documentation negotiations. Typically no financial covenants First perfect lien on underlying assets being financed. Credit Enhancement Requirements Typically none Reserve Account Requirements Trust Account Requirements Annual Reporting Requirements Prepayment Limitations Public Vote Requirement Application Process Unusual Funding Characteristics Deadline for Using Funds For Lease Arrangements Date title transfers Capital or Operating Lease Typically none Typically none Typically only financial statements Typically 1% per year remaining on the outstanding balance for equipment financings having a term of 6 years or less. Only if required by issuing authority Signed proposal and credit approval Escrow account Close of escrow account (18-36 months) At closing Both available A Guide to Capital Funding Options 43
Grant Parameters Purpose and activities Low to high grant range Organization Providing Information Name of Organization GE Capital Healthcare Financial services Contact Person Bruce Barnum Contact s Position Vice President and Senior Account Manager E-mail Address bruce.barnum@gehfs.com Phone Number (503) 603-1511 Fax Number (503) 603-1512 Organization Website www.fleethealthcare.com General Comments/Observations GECHFS is the nation s largest provider of tax-exempt equipment financing dedicated to the healthcare industry. A Guide to Capital Funding Options 44
Funding Type: Taxable Equipment Capital Lease Available to ( x as applicable) X Public Hospital Districts X Not-For-Profit Hospitals X Critical Access Hospitals X Less than 100 Beds (rural) Amount of Funding Available Limitations on Use of Funds Interest Rate Range of Loan Maturity Dates Typical Cost of Funding Time From Application to Funding Typical Covenants Collateral Requirements $5,000+ for GE Medical Systems equipment $200,000+ for all other Discretionary Based on type of asset financed and customer credit rating. Varies, but can be as short as 48 hours Credit Enhancement Requirements Based on customer credit rating Reserve Account Requirements Trust Account Requirements Annual Reporting Requirements Prepayment Limitations Public Vote Requirement Application Process Unusual Funding Characteristics Deadline for Using Funds For Lease Arrangements Date title transfers Capital or Operating Lease Updated financial statements on an annual basis. Penalties for early termination on all lease products. Signed finance proposal will suffice At end of lease with fair market value payment Capital lease under generally accepted accounting principles A Guide to Capital Funding Options 45
Grant Parameters Purpose and activities Low to high grant range Organization Providing Information Name of Organization GE Capital Healthcare Financial Services Contact Person Leslie Fine Contact s Position Financial Services Account Manager E-mail Address leslie.fine@gehfs.com Phone Number (503) 603-1513 Fax Number (503) 603-1514 Organization Website www.gemedicalsystems.com/services/financial/index.html General Comments/Observations A Guide to Capital Funding Options 46
Funding Type: Taxable Third-Party Equipment Capital Lease Available to ( x as applicable) X Public Hospital Districts X Not-For-Profit Hospitals X Critical Access Hospitals Less than 100 Beds (rural) Amount of Funding Available Limitations on Use of Funds Interest Rate Range of Loan Maturity Dates Typical Cost of Funding Time from Application to Funding Typical Covenants Collateral Requirements Totally dependant upon the credit worthiness of the hospital as defined by the bank or leasing company. Each project is defined individually Rates are competitively quoted subject to a spread over like-term treasuries. 3 to 15 years depending upon credit No up front fees Approximately 60 days None Security interest in the installed equipment is kept by the bank. Credit Enhancement Requirements None Reserve Account Requirements Trust Account Requirements None None Annual Reporting Requirements Prepayment Limitations Public Vote Requirement Application Process Unusual Funding Characteristics Deadline for Using Funds For Lease Arrangements Date title transfers: Capital or Operating Lease: Early termination values will be defined in the agreement. None 90 day (max.) approval process None Upon acceptance by the customer Capital A Guide to Capital Funding Options 47
Grant Parameters Purpose and activities Low to high grant range Organization Providing Information Name of Organization Johnson Controls, Inc. Contact Person Tom Proffitt Contact s Position Manager, Financial Services E-mail Address tom.proffitt@jci.com Phone Number (414) 524-4360 Fax Number (414) 524-5030 Organization Website www.jci.com General Comments/Observations This is a third party lease arrangement wherein the contractual documents are defined between the customer and the leasing company. The same terms and conditions can exist wherein JCI is Lessor but JCI reserves the right to transfer the lease payment stream to a bank or leasing company immediately upon execution of the contract. A Guide to Capital Funding Options 48
B. Less Common Capital Funding Options! Critical Access Hospital Grants! Rural Health Viability Grants! Private Placement Quick Loan Program! Local Option Capital Asset Lending (LOCAL) Program! Revenue and/or Tax Anticipation Loans, Term Loans, Working Capital Loans, Credit and/or Liquidity Enhancement Facilities! USDA Rural Development Community Facilities Direct Loan! USDA Rural Development Community Facilities Loan Guarantees! USDA Rural Development Community Facilities Grant! Energy Saving Performance Contracts 2 Resources! Off-Balance Sheet Synthetic Lease for Medical Office Buildings and Ambulatory Care Facilities! Off-Balance Sheet Synthetic Lease for Medical Facilities! Off-Balance Sheet Synthetic Lease for Equipment! Rural Telemedicine Loans/Grants*! Accounts Receivable Line of Credit! Bridge/Secured Term Loans * No template at this time A Guide to Capital Funding Options 49