funding - caplink.org

Learning Collaborative Session 4

Duncan McGillivray Project Consultant

May 5, 2021

FundingEvaluating Your Financing Options & Fundraising Plans

2021 Capital Link www.caplink.org 2

Capital Link Overview


Planned Sessions & Topics

Readiness & Assessment

Planning

Design & Development

Funding

Implementation: May 26

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Today’s Agenda

Why Compare Financing Options

Financing Sources

New Markets Tax Credits &

HRSA LGP

Funding: Evaluating Financing Options and Fundraising Plans


Why Compare Financing Options?

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Funding: Evaluating Financing Options and Fundraising Plans

• To determine eligibility• To estimate long term sustainability and feasibility• To strengthen the organization and relationships• To gauge opportunity and opportunity costs


Things to Consider Before You Start

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• Longevity of the terms?

• True, total cost of the financing?

• Calculated risk to health center?

• Would this project go forward otherwise?

• Is this project realistic?

POLL: Potential Financing Options


We are considering the following funding sources.

1. Traditional Loans

2. New Markets Tax Credits

3. Tax-Exempt Bonds

4. A Combination of the Above

5. Other/Unknown/None of the Above

Financial Feasibility and Sustainability

• Historical Performance (3 years audited)

• 5-8 Year Projectionstand-aloneconsolidatedAnnual Debt Service

• Project Budget

• Sources and Uses

• Financing Structure


Preliminary Project Costs

• 75% Hard Costs (includes 10% contingency)

• 15% Soft Costs (includes 5% contingency)

• 10% FFE

• Per SF Hard Cost varies across Country: ranges $200 to $400

• Average 20K SF New Facility = $6M Hard Costs; $1.2M Soft Costs; $800K FFE = Total Estimated Project Cost $8,000,000


• Grants/Gifts• New Markets 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 Sources and Resources


Combining the Best Financing Sources

Financing Structure Considerations Can Mean Significant Project Cost Differences Over Time


Example: A New $10 Million Health Center Project


Conventional Bank Loan

• Loan is 70% of project value: $7,000,000• Interest rate is 6% with 15 year amortization• Where will the remaining $3,000,000 come from?

• Sale of existing building?• Hospital contribution?• State (opportunity zone grant)? • Capital Campaign / local foundations?• Other Government grant ?• Cash the HC can afford to invest ?


Conventional Bank Loan

Source Funds:

Bank Loan…….$7,000,000Other……….…..$3,000,000Total……………$10,000,000

Annual Debt Service (P&I)………………$708,840


Bank Loan with NMTC

• NMTC “net benefit” approximately 20% of project budget

• $2,000,000 subsidization from NMTC’s Program

• Now only need another $1,000,000

• The NMTC subsidy can leverage many other capital sources, not just bank loans


Bank Loan Leveraged w/NMTCs

Sources of Funds:

Bank Loan………$7,000,000NMTC….………...$2,000,000Other……………..$1,000,000Total……………..$10,000,000


Tax-Exempt Bonds

• With other options

• NMTC

• State issuing municipal authority

• Private purchase by bank

• Requires Engaging Licensed Bond Advisors


Tax Exempt Bonds and NMTC’s

• NMTC net benefit approximately 20% of project cost

- $2,000,000

• TE Bonds - $7,000,000

• Interest rate – 4.0 % (fixed 10 years); 15 YR AMORT

* ANNUAL P&I = $621,336 (VS. $708,840 CONV.

LOAN)


TE Bonds Leveraged with NMTC’s

Sources of Funds:

TE Bonds…..…..$ 7,000,000NMTC….…….….$ 2,000,000Other…………….$ 1,000,000Total………….….$10,000,000

Annual Debt Service……$621,336


Program Related Investment and NMTCs

• NMTC subsidy approximately 20% of project budget: $2,000,000

• PRI Loan for $7,000,000

• Interest rate of 3.0%

• 40 year term

• PRI investments/loans further the tax exempt missions of a foundations; interest rates may be even lower


Foundation PRI and NMTC

Sources of Funds:

Loan …………………..…..$ 7,000,000NMTC….……..……………$ 2,000,000Other……………………….$ 1,000,000Total………………………..$10,000,000Annual Debt Service…..$ 300,708


• 4.0% interest during the construction period

• 2.215% interest AFTER construction period

• 40 year amortization


USDA Loan – rural project sites only

New Markets Tax Credits- NMTCs -

New Markets Tax Credits - Summary

• “Gross Tax Credit Equity Investment” includes NMTC transaction costs + a portion of dollars don’t need to be repaid after 7 years (the project cost subsidy = your NET BENEFIT)

• Investors purchase NMTCs in exchange for tax benefits –investors get their IRR from their tax benefits over 7 year period

• Subsidy/ “Net Benefit” from NMTCs roughly 20% of the project cost (assumes allocation = project cost)

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


NMTC’s: Background & Overview

• Federal program authorized in 2000 and renewed repeatedly since 2006

• To date about $61 billion in investment authority allocated to approximately 1,105 awardees, called “Community Development Entities” (CDEs) – due to repeat awards, there are about 325 distinct CDEs who have won

• $3.5 Billion was Allocated July 2020

• $5 Billion to be Awarded in July 2021 and annually thru 2025 2021 Capital Link www.caplink.org 25

NMTC’s: Community Health Centers

• Health center capital projects are a highly desirable asset type for NMTC’s investors

• Geography: CHCs are usually located in qualified low-income census tracts which are considered to be “severely distressed” due to higher poverty and/or lower median family incomes – rural census tracts are also desirable

• Mission: CHCs provide multiple positive community benefits – positive health outcomes, economic impacts, other related services

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

• Financial Stability: healthcare is seen as stable and growing industry that can support long-term debt (often needed as part of the NMTC’s financing structure)


NMTC’s: Challenges

• 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 you (or anybody else) think• High transaction costs (but the NMTC related costs don’t

directly come out of the health center’s pocket); many expert advisors needed

• Compliance: reporting requirements for 7-year period

• Takes great coordination & patience!


NMTCs Hypothetical FQHC ProjectAssumes $10 Million in Project Costs

Equity Investor

Sub-CDE LLC

Equity investment ~ $3.5 million

Affiliated Entity of HC (“SPE”)

Fees & Reserves ~$1 million

Investment Fund

$11 million investment into sub-CDE (QEI)

$10 million in loans – QLICI Loans

Bank or TE Bond Debt

“A Loan”: $7.5 million“B Loan”: $2.5 million

$7.5 millionLeverage Loan

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

Lender (bank)

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

Tax credits & distributions to pay Leverage Lender

Loan payments

HC Leveraged

Lender (Sponsor)

Project


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 Median 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 such as “Medically Underserved Area” or Opportunity Zone or SBA Hubzones, Promise Zones, etc.


How Do NMTC’s Get To Your Project ?

• Community Development Entities (CDEs) Apply for Tax Credits

• Get “Pitch Package” in front of CDEs, Investors, and Lenders

• 7-8 year consolidated financial projections + stand alone new site; Sources & Uses; preliminary NMTC leveraged structure for discussion purposes

• Project budget well formulated; architect’s preliminary budget & schematics

• Project Summary: Site control, design development, evidence of ‘shovel readiness’, estimated construction time table; estimated permit timeline environment/city/other); key project management (including NMTC advisors); list of positive community impacts including jobs created

• Business Plan

• Underwriting and Closing Process (3 months “rule of thumb” / typical timeline)


How to get your project considered

• Get your project in front of CDEs before they submit their Oct 2021 applications.

• Get your project budget estimate and business plan (including 7-8-year projections)

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

• Success can mean MILLION$!


HRSA LGP “Big Picture”


• Originally authorized by Congress the HRSA LGP offers loan guarantees for the construction, renovation, and modernization of medical facilities operated by Section-330-funded health centers.

• The guarantee can cover up to 80% of the principal and accrued interest on loans made by non-federal lenders. No limit on loan size—loans for projects of $5-7 million or more have been typical

• Congress appropriated new funds for the program in 2018, enabling HRSA to update and modernize the LGP to provide guarantees for almost $900 million in new loans to health centers.

Purpose and Benefits of HRSA LGP


• Enhance a health center’s credit profile, reducing a lender’s risk, allowing them to lend to health centers under more favorable terms than otherwise possible.

• For some centers, this might mean the difference between getting a “yes” vs. “no” from a lender

• For others, the guarantee may allow the lender to offer a lower interest rate, a longer fixed-rate term, a higher loan-to-value ratio and/or the lender might accept less collateral

Why Might I Need a HRSA Loan Guarantee?


• Your health center has experienced financial ups and downs.

• Your health center’s ability to repay a loan is dependent upon a higher level of provider productivity than you’ve previously achieved.

• Your health center is in a rural area where it is more difficult to recruit and retain providers, and your loan is predicated on your ability to increase the number of providers.

More Reasons You May Need a HRSA Loan Guarantee


• The scale of your project is large compared to your current operations and past debt capacity.

• The appraised value of your project is likely to be less than the cost to build.

• Weak economic conditions make lenders leery of lending in “risky sectors.”

Preparation to Submit HRSA Loan Guarantee Application


• Pre-Application Consultation with HRSA LGP Staff AFTER site control and you have at least a BASIC PLAN for your project

• Ideally AFTER lender has reviewed loan guarantee agreement docs

• These steps are not required but strongly recommended

Pre-Application Prep


• Market Assessment - A clear understanding of the market you wish to serve.

• Strategy Development - An overarching strategy to meet the market’s needs.

• Project Planning - A detailed and specific plan for your project.• Financial Planning - A detailed outline of costs and financial

projections.• Project Team Development - An experienced team of internal

and external experts.• BUSINESS PLAN - REQUIRED.• Lender’s legal has reviewed HRSA LGP guarantee agreement

docs in advance

Resources Available

Capital Link’s

• Outlines for Financing Options

• Debt Capacity & Revenue Modeling Tools

• Capital Planning & Financing Guides

• Strategic Planning & Benchmarking Toolkits

• Business Plan and Work Plan Manuals

• Recorded and Upcoming Webinars


http://www.caplink.org/

Questions?


Next Session

Capital Link - Planning and Financing a Capital Project to Accommodate Integrated Care Learning Collaborative (caplink.org)

Implementation - Managing a Project and Lessons LearnedWednesday, May 26, 2021, 1:00-2:00 PM EST

For the final session, participants will be provided with expert advice about managing the project itself. Considering the steps and activities discussed thus far, participants will ideally have a good perspective of the level of involvement that both staff and partners may have from planning through implementation. In addition to further addressing planning, construction, and operational phases of a project and how they are interconnected, staff from a health center who have successfully completed a recent capital project will share their experiences, lessons, and suggested best practices.

https://www.caplink.org/trainings-and-programs/learning-collaboratives/capital-projects-lc

Contact Us

Visit us Online: www.caplink.org

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Duncan McGillivray

Project Consultant

[email protected]


http://www.caplink.org/

mailto:[email protected]

funding - caplink.org

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