Learning Collaborative: Funding. Evaluating Financing Options and Fundraising Plans. Jonathan Chapman Director, CHC Advisory Services.

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1 Learning Collaborative: Funding Evaluating Financing Options and Fundraising Plans Jonathan Chapman Director, CHC Advisory Services July 12,

2 Capital Link Launched in 1995, nonprofit, HRSA national cooperative partner Offices in CA, CO, MA, ME, MO, SC 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 Learning Collaborative Overview For health centers anticipating a capital project in one to five years. Six interactive learning sessions that will provide practical direction and tools for planning, financing, and completing a capital project. One hour learning sessions between March and August 2018, scheduled monthly. Conducted via webinars and face-to-face during NACHC conferences in March and August. 3

4 Learning Collaborative Overview Readiness and Planning: Organizational and Financial Planning: Evaluating Your Market and Determining Your Operating Model and Space Requirements Developing a Business Plan and Financial Forecast Design and Development: Assembling and Managing a Project Team Funding: Evaluating your Financing Options and Fundraising Plans Implementation: Managing a Project and Lessons Learned 4

5 Why Compare Financing Options? 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 5

6 Things to Consider Before You Finance 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? 6

7 Assessing Risk at the Edges 7

8 Financing Components Financing Components Considerations Grants/Gifts New Market Tax Credits (NMTC) State Funds US Department of Agriculture (USDA) HRSA Loan Guarantee Foundations Bank Loan Tax-Exempt Bonds Cash Reserves Lease vs Loan 8

9 Conventional Bank Loan Hypothetical $10,000,000 project 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) 9

10 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 10

11 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 11

12 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! 12

13 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) 13

14 Tax Exempt Bonds With NMTC State Issuing Authority Private Purchase by Bank Requires a Municipal Advisor 14

15 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 15

16 TE Bond: NMTC Sources of Funds: TE Bonds....$ 8,000,000 NMTC...$ 2,000,000 Total..$10,000,000 Annual Debt Service..$312,000 16

17 Foundation PRI Program Related Investment With NMTC Private Purchase (Non-profit foundations) 17

18 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 yrs Interest rate of 3.0% 18

19 Foundation: PRI and NMTC Sources of Funds: PRI...$ 8,000,000 NMTC....$ 2,000,000 Total..$10,000,000 Annual Debt Service....$ 240,000 19

20 More NMTC? YES NO 20

21 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 21

22 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) 22

23 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) 23

24 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! 24

25 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 25

26 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 26

27 NMTC Hypothetical FQHC Project Assumes $10 Million in Project Costs Equity Investor Bank or TE Bond Debt Equity investment ~ $3 million $4+ million in tax credits NMTC Fund LLC Lender $8 million Leverage Loan Tax credits & distributions to pay Leverage Lender CDE LLC $11 million investment into CDE Fees & Reserves ~$1 million Loan payments $10 million in loans A Loan : $8 million B Loan : $2 million Eligible CHC or Special Purpose Entity established by CHC Weighted Average Cost of Capital ~ 5.2% in current market; ~$520,000 interest-only for 7 yrs; refi $8 million after 7 years 27

28 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 28

29 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 29

30 Current Opportunity Now is always the best time to make CDEs and other financing parties aware of your project Get your project in front of CDEs as they utilize their current allocation and/or as they prepare for the next allocation. 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$! 30

31 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 And Capital Project Fundraising 31

32 Capital Project Fundraising 32

33 Capital Project Fundraising Mission: To provide innovative healthcare for all, with the goal of African American health equity. Challenge: Marin County has the greatest racial disparity in income/housing in California. Melanie Hamburger Development Director 33

34 Capital Project Fundraising 2006: Clinic created by grassroots effort 2011: Became FQHC 2015: Hired first development director 2016: Expanded from 2 to 4 sites (funded from savings) 2017: Purchase building; mortgage is first debt in 12 yr : $6,686,880 annual budget : 20-30% annual growth in revenue & patients 34

35 Capital Project Fundraising Three key components: 1. Cultivate major gifts from individuals Major is relative: goal is a 10 fold increase in $ over 3 years. 2. Reach new audiences Partner with like-minded organizations and businesses. 3. Involve board members Challenge when 50% are low-income; engage through donor stewardship and outreach events. 35

36 DIY Resources Capital Link s Capital Planning & Financing Guides Business Plan and Work Plan Manuals NMTC Program Spotlights Navigating a Capital Development Venture 36

37 Learning Collaborative Closing Session August 26 or 27, webinar and in person Implementation Managing a Project and Lessons Learned Poll for attendance/preferences Session information and registration 37

38 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 38