Capital Project Financing, Loan Guarantees, Stimulus Funding, and Grant Opportunity Success

Stories

March 19, 2010

LRGHealthcare – Laconia Campus

John Weaver/Seth Gabarro – DiGiorgio Associates Inc.Phil Chaput – LRGHealthcareJeffrey Sacks – Nixon Peabody LLPLarry Brown – DAIMike Kessler - DAI

Results of Economic Downturn

First recession in decades that has negatively affected healthcare financingBanks are in crisis-much more conservative with funding capital projectsHealthcare must remain competitiveLack of access to capital has challenged financing for facility, equipment and technology needs as well as meet obligations on existing debtHealthcare facilities are looking for alternative funding sourcesMoody’s has a negative outlook for the US not-for-profit hospital sectorThe weakened economy remains and recovery of not-for-profit hospitals will likely be delayed until after the broad economy healsMany hospitals have to update their infrastructure and making rooms sensitive to patient needs and advancing technology remains a priorityMore than 49% of hospitals are financing smaller construction projects from existing cash reserves

Capital Project Funding Sources - Overview

Conventional Sources of Capital

Alternative Funding Sources- HUD 242- USDA- New Market and Historic Tax Credits- Stimulus Grants

Grants and Fundraising- Robert Wood Johnson Foundation- Baldrige Award- Kresge Foundation

Specialty Funding Sources- Energy/Wood Fuels Grants

HUD Backed Financing

HUD-Housing & Urban Development

Established in 1965

FHA (Federal Housing Administration) a division of HUD

Not a funding agency is the largest government insurer of mortgages in the world

HUD insures loans resulting in lower interest rates

HUD insures up to 90% of the loan

Lenders bear minimal risk because HUD is insuring debt

Eligibility for HUD 242 Backed Financing

Facility must be an acute care hospital with no more than 50% of patient days attributable to the following services:

-chronic convalescence and rest, drug and alcoholic, epileptic, nervous and mental, mental deficiency and tuberculosis

-for Critical Access Hospitals this restriction does not applyIf state has a CON process, CON must be issued or pending Must grant FHA-insured lender a first mortgage on the entire hospital including property, plant, equipment, and receivables Must be willing to make monthly payments into a Mortgage Reserve Fund that will build to a balance equal to two years of debt service after ten yearsAverage operating margin for last 3 fiscal years to be greater than or equal to 0Average debt service coverage ratio greater than or equal to 1.25Design/Build projects must have mortgage amounts under $30 million

HUD 242 Loan Fees/Requirements

Loan to value may not exceed 90%

Maximum loan term 25 years

One-time fee of .8% of loan amount

Annual premium of .5% of remaining balance

Hospital must be able to provide first mortgage lien on the hospital’s real estate

When justified by circumstances, financial margins may be varied

Applying for HUD Backed Funding

Choose a lender-FHA maintains a list of lenders who are active in the hospital mortgage insurance program

Preliminary Review-FHA will perform a free preliminary review of the hospital and project to make sure that basic eligibility criteria are met

Pre-Application Meeting-If the hospital passes the preliminary review, the lender and representatives of the hospital are invited for a pre-application meeting

Submit Application-Please refer to the Applicant's Guide or the Applicant's Guide for Critical Access Hospitals

Underwriting-conducted by staff members of FHA

Commitment-If the hospital and project meet FHA's requirements and the FHA Commissioner approves the application, a commitment for mortgage insurance is issued

Closing-FHA counsel assists the mortgage lender, hospital, and their legal representatives to close the loan

HUD – Pre-Construction and Construction

Owner and CM should meet with HUD before the GMP process to have an understanding of the requirements.  Some specifics of the HUD process outlined below:

- A preferred list of trade bidders is allowable, but they must meet the pre-established prequalification requirements

- All subcontractors who meet the prequalification requirements must be allowed to bid- Trade bids must be solicited and opened publicly- Award must go to the lowest bidder- Prevailing Rate Requirements (David Bacon Act) apply- HUD must approve, but is not a party to, the contract-Surety performance and payment bond required from CM

During construction, HUD staff members monitor and approve loan draws and perform monthly site visits

Final Endorsement-Once construction is completed and the final draw has been made, the final mortgage amount is established and amortization begins

Case Study: LRGHealthcare – Lakes Region General Hospital

LRGHealthcare – Lakes Region General Hospital, is an acute care, 137 bed facility located in Laconia, New Hampshire, and a long-standing client of DiGiorgio Associates Inc.

LRGH received capital loan and refinancing amounts equaling $142 million. This is a savings of $26 million during the life of the loan

LRGH submitted a $42 million CON for the first phase implementation of the $95 million Facility Master Plan we completed with the hospital in 2006. DAI then completed Construction Documents for implementation of Phase I of the Master Plan

DAI and MBI assisted LRGH with HUD financing deliverables

Case Study: LRGHealthcare – Lakes Region General Hospital

HUD Process from a Facilities Manager’s Perspective

Involvement of Facilities Department in Process

ALTA Surveys

Phase 1 Environmental Surveys

Benefits of the Affiliation Financially

Alternative Funding Sources – USDA

USDA offers direct cash funding of projects as well as a separate guaranteed loan backingEligible to towns with population under 20,000To qualify, non-profits must not have sufficient project fundsLow program entry cost with no application fee and a one-time 1%

processing feeDirect Community Facility loans currently at 4% fixed interest rate for up to 40 years.With a desire to move quickly, the local processing goal is 60-90 days after

receipt of a certified auditStaff engineer and field inspection are provided freeUSDA together with the Farm Credit Administration can issue a whole Rural Hospital Bond Package

www.usda.gov

Alternative Funding Sources – USDA

USDA Rural Development mission includes support for facility improvements at Hospitals, medical clinics, assisted living, medical and vocational rehabilitation centers, and community support services such as child or adult day care

Their objective is to provide credit enhancement to help finance community facilities in rural areas to serve much-needed medical care

The Community Facilities Program offers 3 financing options; Guaranteed Loan Program, Direct Loan Program and a Grant Program

USDA guarantees up to 90% of any loss against principal or interest

Eligible purposes of the funds include construction to improve or to enlarge essential community facilities

Reasonable professional fees associated with the project such as legal, engineering, architectural services, and feasibility studies may be included

USDA will consider Direct Lending in combination with Guaranteed Lending providing the community a low overall cost funding sourcewww.usda.gov

Alternative Funding Sources – USDA

For those projects receiving other assistance and have revenue sources (Sales tax, Property Tax, General Obligation and revenue Bonds) they receive a priority consideration for selection. Guaranteed Community Facilities loans are eligible to meet CRA (Community Reinvestment Act) requirements of Commercial Banks and Savings & Loans Institutions.

Loans may be sold on the secondary market through an assignment of guarantee, increasing the Lender of Record’s return on investment

There is no maximum loan limit; the amount is determined upon project feasibility, repayment ability, and reasonable project cost

Loan approval can occur in 30-60 days

The Community Facility program repayment period extends to a maximum of 40 years

Interest rates can differ for the guaranteed portion of the financing from the non-guaranteed financing component

www.usda.gov

Alternative Funding Sources – New Market Tax Credits

The purpose of the New Market Tax Credit is to encourage investment in poorer communities by giving the investor tax credits to improve its return on relatively riskier investments in low income communities.

The New Market Tax Credit was adopted in 2000, and is seen in Section 45D of the Internal Revenue Code.

This program is administered through the “Community Development Financial Institutions Fund”, a department of the U.S. Treasury.

Tax credits reduce a taxpayer’s tax liability “dollar for dollar”. Almost all investors are corporations. For example, if a tax payer owes $1 million in taxes and has $500,000 in tax credits, the tax payer only has to pay $500,000 in cash. The rest is paid with these credits.

Alternative Funding Sources – New Market Tax Credits

Tax credits are not actually bought and sold. Instead, the investor becomes a partner of a partnership or member of an LLC, and gets a “K-1” that tells it how much tax credit it has been allocated for the year.

When the economy is bad, tax payers don’t owe much tax, so there is less demand for tax credits.

Pricing for New Market Tax Credits has declined from about $.72 per credit dollar to about $.68 per credit dollar in the last 18 months.

New Market Tax Credits apply to any size building project.

Alternative Funding Sources – New Market Tax Credits

An investor capitalizes a “bank” (the Community Development Entity) that pays it back with both cash and tax credits. The combination is enough to give it the desired rate of return. To do this, the CDE has to be approved by the CDFI Fund, and be awarded an allocation of tax credits.

Alternative Funding Sources – Robert Wood Johnson Foundation

Grants to not-for-profits are available through specific calls for proposals

Unsolicited proposals are accepted in three program areas – Building Human Capital, Pioneer and Vulnerable Populations.

Building Human Capital- invests in training of health professionals.

- One goal is to reverse the childhood obesity epidemic by 2015

- Develop policies and programs to expand health coverage

Pioneer – supports innovators to explore cutting edge solutions of health and healthcare.

Vulnerable Populations – programs to transcend the social barriers that stand in the way to better health.

Public Health policy for Americans to have quality public health services and policies that protect, promote and preserve their health.

Equality commitment to improve the quality of health care for all Americans

www.rwjf.org

Alternative Funding Sources – The Baldridge Award

Healthcare sector is part of the nation’s highest recognition for Innovation and Performance Excellence

Award is announced in late November by the President of the United States.

National Institute of Standards and Technology (NIST) award promotes excellence in organizational performance

Criteria helps organizations improve their performance by focusing on three goals: delivering ever-improving value to customers and stakeholders, improving the organization’s overall effectiveness, and organizational and personal learning.

An independent board examines seven areas: leadership; strategic planning; customer focus; measurement, analysis and knowledge management; workforce focus; process management; and results.

Eligibility Certification deadline is April 6, 2010 ; 877/237-9064www.baldrige.nist.gov

Alternative Funding Sources – The Kresge FoundationA foundation that seeks to influence the quality of life for future generations to promote human progress.

Funding methods support facility capital, growth capital, operating support, and program support for our nation’s nonprofit infrastructure.

Awards planning grants and other forms of seed money for new nonprofits.

Makes available signature challenge grants for matching funds.

Health Program – improve access to healthcare for marginalized, particularly low-income and minority populations.

Four values apply: creating opportunity, working in underserved geography, promoting diversity, and strengthening community impact.

Environment Program – Address the challenges of global change focusing on reducing greenhouse-gas emissions, adoption of renewable energy technologies, and adaptive strategies for dealing with climate change.

Community Development – grants in geographically defined rural, urban, and aging suburban neighborhoods and its physical revitalization.

www.kresge.org

Locating Funding Sources – Energy/Wood Fuels Grants

DSIRE is a comprehensive source of information on state, local, utility and federal incentives and policies that promote renewable energy and energy efficiency. www.dsireusa.org

THE CHP Partnership Funding Database tracks federal and state CHP and biomass financial incentives as well as regulations that remove unintended barriers to CHP or biomass project development such as standardized interconnection rules, net metering rules, or output-based regulations. www.epa.gov/CHP/funding/index.html

Fuel Cell Connection – (monthly email) focuses on federal and state-funded fuel cell research and development programs within the U.S. The Connection provides information on funding opportunities and contract awards, as well as legislation that will affect the fuel cell industry. www.usfcc.com

www.grants.gov is your source to find and apply for federal grants.

Specialty Funding Sources – Energy/Wood Fuels GrantsCase Study: Millinocket Regional Hospital

Millinocket Regional Hospital (MRH) in Millinocket, Maine needs to replace boiler.

MRH desires to utilize fuel source other than oil.

State of Maine Department of Conservation, Maine Forest Service request applications for grants to convert oil fired boiler plant to wood fuels.

Grant Highlights:

Open to all Maine public entities including schools, hospitals, state, county, local and tribal governments.

Preference given to Androscoggin, Aroostook, Franklin, Oxford, Penobscot, Piscataquis, Somerset and Washington Counties.

Preparation of grant

Results of initial grant application

Next steps

Open Discussion and Questions

Other Resources

For further information on any of the topics covered in this presentation,

please contact: Larry Brown or Seth

Gabarro(617) 723-7100