Developing a Community Health Center Capital Project Plan and Budget - Part Two

Transcription

1 Developing a Community Health Center Capital Project Plan and Budget - Part Two Jonathan Chapman Director, CHC Advisory Services June 27,

2 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 229 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 2

3 Capital Planning and Financing Options PART ONE Readiness and Planning Evaluating Your Market and Operating Model & Space Requirements PART ONE Developing a Business Plan and Financial Forecast Evaluating your Financing Options 3

4 Assessing Risk at the Edges 4

5 Financial Feasibility and Sustainability Historical Performance (3 years audited) 5-7 Year Forecast Project Budget Sources and Uses Financing Structure 5

6 Balance Sheet 6

7 Income 7

8 Cash Flow 8

9 Patient Revenue 9

10 Employment 10

11 Sources & Uses of Project Funds 11

12 Business Plan Outline Executive Summary History and Operations Market Description and Analysis Management and Governance The Capital Project Financial Operations and Pro Forma Appendix 12

13 Financing Components Financing Components Considerations Grants/Gifts New Market Tax Credits (NMTC) State Funds US Department of Agriculture (USDA) Foundations Bank Loan Tax-Exempt Bonds Cash Reserves HRSA Loan Guarantee 13

14 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) 14

15 Conventional Bank Loan Sources of Funds: Bank Loan.$8,000,000 Other...$2,000,000 Total $10,000,000 Annual Debt Service (P&I).$655,032 15

16 New Markets Tax Credits Program Investment that isn t repaid Provide 20% of total project cost Eligibility Finding a Community Development Entity (CDE) Application and awards 16

17 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! 17

18 Bank Loan: NMTC, Interest Only Sources of Funds: Bank Loan..$8,000,000 NMTC...$2,000,000 Total...$10,000,000 Annual Debt Service.$520,000 (for 7 years) 18

19 Tax Exempt Bonds With NMTC State Issuing Authority Private Purchase by Bank Requires a Municipal Advisor 19

20 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 20

21 TE Bond: NMTC Sources of Funds: TE Bonds....$ 8,000,000 NMTC...$ 2,000,000 Total..$10,000,000 Annual Debt Service..$312,000 21

22 Foundation PRI Program Related Investment With NMTC Private Purchase (Non-profit foundations) 22

23 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% 23

24 Foundation: PRI and NMTC Sources of Funds: PRI...$ 8,000,000 NMTC....$ 2,000,000 Total..$10,000,000 Annual Debt Service....$ 240,000 24

25 More NMTC? YES NO 25

26 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 recently renewed for 5 years ( ) 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 26

27 NMTC: Community Health Centers Health center capital projects are a highly desirable asset type for NMTC 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 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 financing structure) 27

28 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 7 years Can be used with a variety of financing sources, credit enhancement and certain other tax credit programs (HTC) 28

29 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 you (or anybody else) think - High transaction costs (but worth it when you consider subsidy) Compliance: reporting requirements for 7-year period Takes great coordination & patience! 29

30 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 30

31 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 31

32 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 CHCs - 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 32

33 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 an allocation 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 33

34 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 allocation and/or 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$! 34

35 Window of Opportunity Low Interest Rates still for now Government Financing Programs still available - Tax Exempt Bonds (tax bill) - NMTC (tax bill) - USDA Federal Funding Possibilities 35

36 Scenario Modeling 36

37 Why Scenario Planning? Complexity (or Lack Thereof) Tests Assumptions Requires Much Less Time than Pilot Programs Lower Costs than Larger Scale Planning and Execution Hints at Consequences Enhances Our Thought & Decision Processes Reduces (Publicly) Reactionary Responses Does Not Have to be Precise to be Right 37

38 Financial Sensitivity Impact of Medicaid Eligibility & Value-Based Healthcare Basic Assumptions - Payer Mix - Reimbursement - Expenses 38

39 Financial Sensitivity: Medicaid Eligibility 39

40 Financial Sensitivity: Medicaid Eligibility 40

41 Financial Sensitivity: Medicaid Eligibility 41

42 Financial Sensitivity: Medicaid Eligibility 42

43 Financial Sensitivity: Medicaid Eligibility 43

44 Financial Sensitivity: Medicaid Eligibility 44

45 Financial Sensitivity: Value-Based Reimbursement 45

46 Financial Sensitivity: Value-Based Reimbursement 46

47 Financial Sensitivity: Value-Based Reimbursement Initial Budget 47

48 Financial Sensitivity: Value-Based Reimbursement 48

49 Financial Sensitivity: Value-Based Reimbursement Actual Payment 49

50 Financial Sensitivity: Value-Based Reimbursement 50

51 Scenarios for Specific Metrics/Goals Operating Revenue per Visit Operating Margin Provider Productivity 51

52 Today s Scenario Considerations? Competitors Service Lines Market Share Contract Negotiations Value of Enabling Services and Non-Traditional Touches Patient Engagement Collaborations 52

53 DIY Resources Capital Link s Debt Capacity & Revenue Modeling Tools Capital Planning & Financing Guides Strategic Planning & Benchmarking Toolkits Business Plan and Work Plan Manuals Cost of Care Trends & Snapshot Reports (coming soon) Webinar: Capital Project Plan & Budget - Part One 53

54 Questions? Contact Jonathan Chapman Director of CHC Advisory Services Visit us Online: 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 54