STATE OF CONNECTICUT HEALTH AND EDUCATIONAL FACILITIES AUTHORITY. Minutes of Authority Meeting March 26, 2001

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1 STATE OF CONNECTICUT HEALTH AND EDUCATIONAL FACILITIES AUTHORITY Minutes of Authority Meeting March 26, 2001 The State of Connecticut Health and Educational Facilities Authority met in session at the Authority s office at 10 Columbus Boulevard, Hartford, Connecticut at 2:02 p.m. on Monday, March 26, The meeting was called to order by Barbara Rubin, Chair, of the Board of Directors of the Authority, and upon roll call, those present and absent were as follows: PRESENT: ABSENT: ALSO PRESENT: John A. Barone, Vice-Chairman John Biancamano William J. Cibes, Jr. Benson R. Cohn (Rep. Marc S. Ryan) Patrick A. Colangelo Leslie O Brien, Executive Assistant for Policy, Office of the State Treasurer (Rep. Denise L. Nappier) Barbara Rubin, Chair James R. Birle Phyllis C. DeLeo Laurence R. Smith, Jr. Richard D. Gray, Executive Director, Jeffrey A Asher, Managing Director/CFO, David A. Williams, Managing Director, Diana Hughes, Accounting Manager, Eileen MacDonald, Manager, Administrative Services, Michael Morris, Manager, New Business, Cynthia D. Peoples, Senior Financial Analyst, and Jennifer P. Smyth, Document Analyst, of Connecticut Health and Educational Facilities Authority John Augustine, Senior Vice President, of Lehman Brothers John D. Yarbrough, Esq., of Carmody & Torrance Edmund See, Esq., of Day, Berry & Howard Laurie Hall, Esq., of Hawkins, Delafield & Wood Mary W. Ervin, Associate, and Debbie Schnedler, Vice President, of Lamont Financial Services Corp.

2 STATE OF CONNECTICUT HEALTH AND EDUCATIONAL FACILITIES AUTHORITY Minutes of Authority Meeting March 26, 2001 Bernadette M. Puleo, Vice President, of P.G. Corbin & Company, Inc. Stephanie Gibson, Managing Director, of Public Financial Management Edward J. Samorajczyk, Jr., Esq., of Robinson & Cole LLP Coleman H. Casey, Esq., of Shipman & Goodwin LLP Eric P. Taylor, Esq., of Whitman Breed Abbott & Morgan The Notice of Regular Meeting was read and ordered spread upon the Minutes of this Meeting and filed for the record.

3 BOARD OF DIRECTORS MEETING March 26, 2001 The Meeting was called to order by Barbara Rubin, Chair, at 2:02 p.m. MINUTES Upon motion duly moved and seconded, the Minutes of the Regular Meeting of the Board of Directors Meeting of February 26, 2001 were unanimously approved. According to established guidelines, which call for the approval of outstanding Committee Minutes to be approved by the full Board if the committee has not met for a period of six months, Minutes from three Committees were presented for review and approval. The Minutes of the Consultant Committee Meeting of July 18, 2000, upon motion duly moved and seconded, were unanimously approved. The Minutes of the Finance Committee Meeting of October 23, 2000 were presented, a motion was made and seconded, which motion was unanimously approved. Minutes of the Human Resource Committee Meeting of July 2, 2000 were submitted, moved and seconded; all Members present voted their approval. PRELIMINARY STAFF MEMORANDUM Wesleyan University Issue, Series D Mr. Asher stated that he would review the preliminary information for the $92.7 proposed Series D Issue for Wesleyan University, then Mr. John Augustine, Senior Vice President, of Lehman Brothers would discuss the concept of a Dutch Auction. Staff will seek approval for the transaction, which will be issued on the credit of the University, at the April Board meeting. The financing will provide for the refinancing of the 1988 Series C issue with an outstanding balance of $31.6 million, and a variety of capital projects, including acquisition and demolition of the Long Lane School. Staff s recommendation for approval will be contingent on written confirmation of Wesleyan s ratings of AA+ and Aa2 by Standard & Poor s and Moody s, respectively. The University s balance sheet is strong, with $9.5 million in cash and equivalents as of June 30, 2000, and approximately $605 million in investments. Unrestricted Net Assets of $511.4 comprise 74% of Wesleyan s Total Net Assets of $691 million. Endowment spending level appears reasonable between 4.5% and 5%. Wesleyan received a record number of applicants this year at 6,862. Fall 2000 acceptance ratio was 27%, and the matriculation ratio was 38%. Median for SAT scores is an average of 1,360. The initial interest rate from bond sizing calculated by Lehman Brothers assumes a 5% rate, which is higher than expected through the Dutch auction process. Final structure and terms for the transaction have not been established. Annual debt service is estimated at approximately $5.2 million, with a proposed balloon payment to be made in the last year. Security will include a General Obligation Pledge of the University, but no Minutes of the Board of Directors Meeting March 26,

4 Mortgage or Gross Receipts Pledge. Covenants will be modified to include provisions for the event of a rating downgrade to below AA- or Aa3. Such requirements may include a springing Debt Service Reserve Fund, a Liquidity Test, and Sinking Fund installments. A brief discussion followed concerning Authority guidelines for the required rating level for issuing unenhanced transactions without a Debt Service Reserve Fund. Mr. Williams stated that in health care, a middle AA rating for both S&P and Moody s is required to consider an unenhanced issue without a Debt Service Reserve Fund, but no specific requirements have been established by the Authority in the education sector. Mr. Augustine stated that an interest rate near the current Bond Market Index of 3.5% is anticipated for the Dutch auction. Historically over the last 20 years, the rate for Dutch auctions has been in the range of 4.20%. Ms. Rubin then asked Mr. Augustine to present the information on the Dutch auction process. He stated that this type of financing is a form of a variable rate, which is reset every 35 days or every 7 days. The benefit of the Dutch auction to the institution is that investors do not have the ability to put the bonds back to the institution, which is allowed under the traditional seven-day variable rate bond. The put feature requires a liquidity facility, such as a letter of credit. Under the Dutch auction, rates are reset at an auction, and the initial purchasers of the bonds are aware that they cannot opt out of the structure unless someone else takes their bonds out through the auction process. The Dutch variable rate is somewhat of a hybrid between a long-term and short-term financing. The term Dutch signifies a sharing of the cost, because the highest resulting bid is the rate that benefits all the bondholders. Mr. Augustine further stated that the rates on the bonds sold under a Dutch auction can reach 15 basis points higher than put bonds, without the put feature and possible expense of a liquidity facility. An additional feature that will be included in the Wesleyan transaction will allow for the ability to move from solely a 35-day auction to a 7-day auction, which bridges the gap between the put bonds and the 35-day bonds. Options for bidding investors under the Dutch auction can include 1) hold at market for which the existing indicates a willingness to retain the securities regardless of the rate resulting from the auction; 2) bid to hold whereby the bondholder will retain the bonds at or above a specified minimum rate; bid potential is when a potential investor submits a bid to buy at or above a specified minimum rate; and 4) sell occurs when an existing bondholder submits an order to sell securities regardless of the rate resulting from the auction. The Dutch auction includes investors such as corporate and high net worth individuals, looking for an extra yield that would not be gained on a traditional put bond. Universities favor the Dutch auction, because they do not have to maintain a higher level of liquidity or pay the letter of credit fees. The bullet structure allows the Bonds to be callable at par, which provides flexibility to the institution. Projects may therefore be undertaken in anticipation of gifts, for which the University may use to pay down a portion of the bonds. Minutes of the Board of Directors Meeting March 26,

5 Ms. Rubin asked whether the underwriter assumes the risk in the rollover in the traditional weekly variable rate market. Mr. Augustine replied that in that instance, the underwriter is simply a remarketing agent, but Lehman has provided underwriting for the rollover period on behalf of the Authority. Mr. Asher asked what would happen should an auction fail. Mr. Augustine replied that the primary reason an auction would fail is if there were not enough buyers participating in the auction. One reason for lack of investor interest could be a perception that the credit was deteriorating. Bond documents establish a default rate set at the underlying rating of the institution, and the bonds do not revert to the institution or the Authority. In a worst case scenario, bonds would be converted to a traditional variable rate or a fixed rate. Responding to a question regarding interest rate for the bond yield being approximately the current LIBOR rate plus 200%, Mr. Augustine stated that today s rate would therefore be around ten or eleven percent. Further discussion followed, with a question related to the use of enhancement. Mr. Augustine replied that the Dutch auction process allows for unenhanced issuance down to a BBB level, which allows the client to save the fees for the liquidity product. Dr. Barone asked for a chart comparison of costs related to the Dutch auction versus enhancement and LOC fees to be presented with Staff s request for approval at the April meeting. In the current market, short-term rates are at a historic low, but the Institution s outlook is that those rates will improve over time. The structure of the Series D issue also has established the provision to convert the bonds to a fixed rate, should there be a change in the variable rate market. Under the auction structure, notice must be given to bondholders that the institution will call the bonds in 45 days. This advance notice allows bondholders one auction period to sell their shares, and allows the institution to convert the issue to fixed rate bonds. Mr. Augustine stated that the auction agent does receive a fee, usually approximately 3 basis points annually. The Wesleyan issue will be bid for auction services, and the University hopes to achieve a lower than 3 basis point fee bid. Ms. Rubin asked Mr. Augustine for Lehman s view of current interest rates and the overall outlook. Lehman Brothers economists feel that federal fund rates will go as low as four percent, which is another one percent from current rates. There appears to be some resistance at the five percent level for long-term tax-exempt bonds. Ms. Puleo asked why would Wesleyan not refinance the Series C at a fixed rate rather than structure it under the Dutch auction. Mr. Augustine replied that the University feels that the variable rate will provide a better interest rate until the long-term rate stabilizes, hopefully at a better rate than current market conditions. Mr. Augustine provided Members with an interest rate report, and thanked the Board and Staff for accommodating Wesleyan s accelerated schedule for issuance. CURRENT AND PENDING BOND ISSUES Minutes of the Board of Directors Meeting March 26,

6 Mr. Morris reviewed the Financing Forecast, which includes new applications for Bristol Hospital for a $15 million issue to finance a new surgical center, and the $95 million Wesleyan Series D, which will be presented today. The Series G Trinity College issue will close this week. Staff expects an application in the near future from Yale University for new financing in an amount between $200 and $250 million, which may be presented for final approval in May. The University of Hartford $6.0 million EasyLease project received a 10-year rate at 4.39%. Mr. Gray reported that Staff is receiving an increased number of calls from smaller not-for-profit institutions, which may or may not qualify for CHEFA financing. It appears that the nonprofit community has an increased awareness of the Authority s products, and Staff is providing the usual analysis for these potential clients. There was no new information on the Summary of Financings. The reports were accepted as information. INTEREST RATE UPDATE Mr. Williams reported on interest rates, stating that the Revenue Bond Index is currently down from 5.52% last month to 5.38%. Ten-year Treasuries are also down, from 5.15% to 4.85%, following the reduction by the Fed. The 90-day LIBOR rate is also down to 4.86% from 5.31%. The thirty-year Treasury rate is currently at approximately 5.36%. Mr. Williams stated that The Bond Buyer listed today the top 100 hospitals, as measured by financial ranking and patient care. Hartford Hospital and Saint Francis Hospital were in the top 100 hospitals included in the article. Ms. Rubin asked Mr. Gray to comment on the recent article in The Hartford Courant that reported that hospitals would lose money under the Governor s proposed budget. Mr. Gray replied that reports indicate some hospitals will show a net loss under the Governor s proposed budget. Mr. Gray compared the OPM and CHA model, which shows a $10 million difference in the overall effect of the budget on Connecticut hospitals. The OPM analysis indicates that the hospitals will show a profit of approximately $2.2 million, while the CHA report indicates an overall loss of about $10 million. Individual hospitals may fare much worse, with the largest expected loss estimated at $6.0 million. Mr. Gray applied the CHA assumptions to CHEFA s analysis of its hospital portfolio, and the proposed budget does not initiate any covenant triggers, and no hospital will fail to meet its Debt Service Coverage Ratio. Mr. Gray reported that he initiated a meeting with DSS, OCHA, OPM and CHEFA in order to promote the use of a single analytical model for the Governor s proposed budget effect on Connecticut hospitals. The next step in discussions will be to meet with the Governor on the analysis findings. The Chair then questioned Staff about the information on the reported loss at Eastern Connecticut Health Network, which appears to be a one-time event. Mr. Gray responded that ECHN does have capital, and has represented to the Authority that this is a one-time reported loss, and they are taking steps to improve operations. An independent consultant will be engaged to help in planning. Initially, ECHN requested to only utilize a consultant for review of Accounts Receivable and billing position, but CHEFA insisted Minutes of the Board of Directors Meeting March 26,

7 on a full review. Staff was aware of this potential loss some time ago, and will continue to monitor the credit. Mr. Gray further commented that the Governor s budget is not yet finalized, and the fact that there are discussions and consideration of review of the underlying Medicaid rates and Medicaid managed care is a positive factor. Urban hospitals that serve an uncompensated care population will be adversely affected under the current analysis of the proposed budget. SALES REPORT Ms. Puleo presented the Sales Report for the Trinity College Issue, Series G, which sold on March 15. The AAA rated, $15 million fixed rate bonds were insured by Ambac, and Advest was the lead underwriter. Timing of the market was opportune, in that the equity market had experienced significant losses that week, and investors were seeking government issuance. A one-day retail-only period was held which generated strong interest and lowered the overall borrowing cost. The Series G issue serial bonds priced seven basis points through he MMD, which is the true industry bench for AAA uninsured issuance. In reply to a question on the comparison of similar issues, Ms. Puleo stated that although the recent issues shown in the comparison were priced in the prior week, market conditions were slightly better, but not noticeably so. Mr. Asher reported that Trinity College had expected a 5% rate, and thus was very pleased with the results of the sale. CHEFA POLICY AND GUIDELINES Substitution of Enhanced Debt Ms. Rubin stated that she requested a separate discussion of this issue, which initially was included with the memo for the Loomis Chaffee issue. Mr. Morris called Members attention to the summary for the proposed policy for substitution of enhanced financing with unenhanced debt. The policy will reflect in the final draft that this policy applies only to independent schools, not any other sectors of CHEFA financing. Reasons for consideration under this policy include an upgrade of an institution s underlying rating, demonstrated by favorable market conditions and the strength of the schools capital campaigns. The resulting credit upgrades by S&P and Moody s have not carried through to the bond insurers, reflected in the continued high premiums charged by the insurers. Another reason for a credit to be considered for a change from enhanced to unenhanced debt are economic reasons including, the level of net present savings, and cost of issuance economies of scale associated with issuance of new debt. Also, a downgrade in the letter of credit provider would result in an increase in the interest rate to the client. Under a liquidity facility, an institution may choose to convert to a fixed rate following a credit upgrade in an attractive interest rate environment. Minutes of the Board of Directors Meeting March 26,

8 Proposed standards for allowing substitution include: 1) a minimum Net Present Value Savings of 5% for a refunded issue; 2) a minimum underlying rating of A2 and A by Moody s and S&P, respectively; 3) a Debt Service Coverage test of 1.30 times; 4) an Unrestricted Net Assets to Debt test of 1.0 times; 5) an Additional Debt Test of the annual debt service not to exceed 10% of Unrestricted Revenues; and 6) Security Provisions, including mortgage, a fully funded Debt Service Reserve Fund, and a Gross Receipts Pledge. Following a brief discussion, Mr. Gray responded to Members question regarding the application of this policy to other CHEFA lines of business. He stated that, given the current state of health care, he would prefer to review any request for substitution of enhanced credit with unenhanced issuance on a case-by-case basis. All Members present indicated their approval to adopt the new guidelines for independent schools to consider the substitution of unenhanced debt for previously issued enhanced debt. CONSENT AND BOND ISSUE AUTHORIZATION RESOLUTIONS Child Care Facilities, Series E Ms. Peoples presented the Staff memo recommending Board approval for the fourth Child Care Facilities Loan Fund pooled tax-exempt bond issue. The $3.8 million issue will include two facilities, Thames Valley Council for Community Action ( TVCCA ) and Winsted Area Child Care Center, Inc. Included in the staff memo is a summary of the comparative statistics for the previous pools, as requested from the February meeting. Additional information is also included on the Guarantee Loan Fund Program and the Small Direct Program. Ambac has provided an insurance commitment at a fee of 78 basis points. The Capitalized Interest requirement has been eliminated, as in Pool #3. The pooled Debt Service Reserve Fund will be funded from sources other than bond proceeds. As of February 28, 2001, the balance in the Debt Service Reserve Fund is approximately $2.76 million, including interest earnings. Both TVCCA and Winsted will purchase land, and mortgages will be required on the projects. TVCCA s plans to construct a 12,000 square foot facility represents $2.5 million of the Series E Child Care Issue. The new center will provide for a total of 104 children, including 59 Head Start, 38 DSS (16 infant/toddler), 4 School Readiness and 3 private pay slots. TVCCA has received a debt service commitment from DSS for 83.1% of total debt service. TVCCA s equity contribution consists of $195,000 for the land purchase from agency funds and a $200,000 grant from Head Start. The $1.0 Winsted portion of the bond issue will provide for construction of a 9,000 square foot facility. Winsted s new center will provide for 32 infant/toddlers, sixteen of which will be funded by DSS. In addition, DSS will subsidize 15 of the 40 current slots for preschool children. Winsted will begin a summer day child care program for children which is independent of their day care program. The DSS debt service commitment for this project is 76.5 percent of total debt service. Winsted has secured over $230,000 in Minutes of the Board of Directors Meeting March 26,

9 resources for their equity contribution, some of which are in-kind services such as demolition, concrete, etc. and a $30,000 reduction in the cost of the land. Ms. Peoples then reviewed the summary information for Pool #4 compared to the previous three child care tax-exempt pooled issues. The summary includes information on average square foot per slot at $118.5 for Pool #4. Construction cost per square foot is $158.29, but is high for TVCCA ($196.97/sq. ft.) compared to Winsted ($107.33). The cost difference is due to the types of construction for each facility. Costs for the TVCCA project are similar to two projects in Pool #3, Manchester ($185.77), and Southfield ($183.17), and one project in Pool #2, Family Center of Bristol ($192.34). Total construction costs for Pool #4 are high, due to TVCCA s project costs, but are comparable to total costs in Pool #2. Financing costs per slot are significantly higher than the average for Pool #3, due to approximately $3,846 in cost per slot for land acquisition and equipment for the TVCCA facility. Equity contributions for Pool #4 are lower than the two previous pools, at 17.15%. Pool #3 equity contributions were 23% and 36% for Pool #1. Debt Service Coverage Ratios for both facilities is strong at above 1.4 times. Average Debt Service support to be provided by DSS for the Series E issue is 81.21%. A brief discussion followed, including questions regarding the disparity in construction costs between the two projects. Mr. Asher replied that in addition to differences in building materials, such as brick versus a vinyl sided wood structure, the Winsted project does not provide any area for gross motor activities. There being no further discussion, the Chair introduced Resolution (Child Care Facilities Program Issue, Series E, Authorizing), which Resolution was read and considered. Mr. Colangelo moved adoption of Resolution No , which motion was seconded by Mr. Cohn. Upon roll call, the Ayes, Nays, and Abstentions were as follows: AYES NAYS ABSTENTIONS John A. Barone None None John Biancamano William J. Cibes, Jr. Benson R. Cohn Patrick A. Colangelo Leslie O Brien Barbara Rubin The Chair then declared Resolution adopted (see Appendix A, Resolution ). Minutes of the Board of Directors Meeting March 26,

10 Loomis Chaffee School Issue, Series D Ms. Peoples began the presentation of the Loomis Chaffee issue that was presented in October for preliminary review. The projects to be included in the transaction have changed slightly, and will now include refinancing of the $11 million Series B issue; renovations and expansion of the gymnasium; improvements to the electrical substation in support of the gymnasium complex; and renovation and expansion of the School s hockey rink. Staff has received Moody s written confirmation of Loomis A2 rating with a stable outlook, which is based in part on the School s strong market position. Other factors attributed to the rating include: 1) The balance of enrollment with 55% boarding and 45% day students, which puts the School in a unique position in the event of unexpected market shifts that may affect enrollment; 2) Good selectivity and matriculation ratios, and favorable attrition rates, providing ample enrollment flexibility; 3) The size of its boarding population as compared to its competition s complete enrollment; and 4) strong SAT scores and college placement with highly selective institutions. Moody s cited an expectation of maintaining continued balanced operations and noted Loomis Chaffee s diversified revenue base, with tuition revenues at 66%, endowment income of 17%, and gifts at 15%. Moody s also noted Loomis expendable resources at $65 million being ample to cover three years operating expenses. The School s total financial resources of $97 million are attributable to strong fundraising and investment returns. Loomis also anticipates the launch of the quiet phase of a new $150 million capital campaign. The School will be more leveraged following the new financing than the other A2 rated schools, but based on the School s growth, the debt level should be manageable. Mr. Morris reviewed security provisions for Series B bondholders. Funds from the refunding will be placed in AAA rated government securities. Security provisions in the new Series D include a mortgage, a Debt Service Reserve Fund and a Pledge of Gross receipts. Representations had previously been made to Loomis of a savings target of three percent for the refunding. Currently, Staff s recommendation would be a four or five percent target, but is recommending approval based on the School s previous understanding for a lower target. Mr. Morris pointed out the difference between the net present value benefits at both the 5% and 4% levels. The total net present value savings at 5% yields $512,000, or $20,5000 annually, while the 4% level yields $413,000, or $16,500 annually. Mr. Morris further stated that this request for approval is a one-time variation to CHEFA s guidelines for a lower savings target on a refunded issue. A brief discussion followed, and Mr. Gray concurred that a five percent savings could be achieved by the time the issue enters the market for sale, and Loomis is a good client. There being no further discussion, the Chair introduced Resolution (Loomis Chaffee School Issue, Series D, Authorizing), which Resolution was read and considered. Dr. Barone moved adoption of Resolution No , which motion was seconded by Mr. Cohn. Minutes of the Board of Directors Meeting March 26,

11 Upon roll call, the Ayes, Nays, and Abstentions were as follows: AYES NAYS ABSTENTIONS John A. Barone None None John Biancamano William J. Cibes, Jr. Benson R. Cohn Patrick A. Colangelo Leslie O Brien Barbara Rubin The Chair then declared Resolution adopted (see Appendix A, Resolution ). United Methodist Homes Issue, Series A Mr. Williams gave the report on the United Methodist Homes of Sharon, Inc. and recommended approval of the up to $8.5 million issue to purchase the 88-SNF bed nursing home from Sharon Health Care. The expected size of the transaction is $7.7 million, supported by a five-year letter of credit from First Union National Bank. First Union s ratings are A+/Aa3 long term, and A-1/P-1 short term. The closing documents require that the $7.9 million outstanding 1994 Sharon Health Care SCRF issue be defeased with the issuance of the United Methodist Homes Series A. The total outstanding will be reduced by amounts held in reserve through the SCRF and Working Capital funds, for a net amount to be defeased of approximately $6.33 million, plus any market adjustment for the value of the defeasance escrow. Changes in the transaction since the preliminary information provided at the February 16 Board meeting include the establishment of a Working Capital Fund of between $750,000 to $775,000 financed by Series A proceeds. The balance of the funds will be contributed by the Institution by July 15, UMH will now provide a 10% equity contribution, either in cash or subordinated debt. This will be used to cover the purchase price of the net working capital from Sharon Health Care, and also mediate private-use issues related to the purchase price of the adjacent land parcel. Also, the equity contribution will cover costs of issuance in excess of two percent of the issue, of approximately $90 to $100 thousand. The 20% collateral guarantee by the UMH parent has been restructured to include a margin security fund of ten percent of the issue, the 10% cash equity contribution to UMH Sharon, and the Authority s required Working Capital Fund. UMH will also provide short-term liquidity of up to $750,000, or 10% of the issue, if and to the extent UMH Sharon needs cash for operating purposes. The reason for the short-term liquidity commitment is that the bank does not want draws from the Working Capital Fund, because it is part of the collateral. Minutes of the Board of Directors Meeting March 26,

12 The Series A transaction will be structured as a 30-year maturity, with one level of debt service until the year 2022, when the Medicaid fair rent rate drops to the minimum level. The second tier of debt service will be until the end of the 30 years, at a lower level. Estimated debt service for the first level is between $525 to $550 thousand per year, and approximately $230 to $260 thousand in the second level. In reply to questions raised by Members at last month s meeting, Mr. Williams addressed contingent liabilities of the UMH parent. The most important is Middlewoods, an Assisted Living facility located in Farmington, CT, owned by Konover Facilities, Inc., with capital costs of $7.8 million. Middlewoods is operated by a for-profit subsidiary of UMH, and UMH provided approximately $800,000 of equity to fund start-up working capital. The UMH Chief Executive Officer refers to the Middlewoods liability as a moral obligation. The obligor for the Middlewoods lease, Middlewoods LLC leases the facility from Konover. Middlewoods LLC is 88% owned by the UMH subsidiary, and would be required to contribute that portion of funds in the event of any capital draws for lease payments or operating deficit. Middlewoods is currently at breakeven or slightly positive cash flow. Staff views Middlewoods as a significant contingent liability of UMH. A second contingent liability is capital expenditures for a Shelton campus which includes independent living, assisted living and nursing home facilities. The potential liability for this project is $3.5 million in total, of which $1.7 to $2.0 had already been committed to the Bishop Wicke nursing home. Another possible contingent liability by UMH is a 30- acre land purchase in Shelton. UMH also has an assisted living project in Norwich in which they have been involved over the last four years with Backus Hospital and other parties. UMH feels that there is a low likelihood of the Norwich project coming to fruition, but the expected equity contribution would be approximately $500,000. Mr. Williams stated that, from a due diligence meeting, he obtained a sense that the senior management of UMH is deal oriented. They have reviewed many projects over the last four years, and have been very selective in those they have chosen. Mr. Williams further stated that Staff s recommendation is contingent on publication of the TEFRA notice and hearing, to be held on April 5. Any change of ownership inspection will be required to be completed in a fixed period of time, according to requirements established in asset purchase agreement. The initial $30,000 of any required changes are to divided between the buyer and seller. Should the inspection require additional charges, payment will be negotiated between the buyer and seller. Another question posed by the Board at the February meeting was whether the IRS could challenge the qualification of the sale of Sharon Health Care to UMH as an acquisition, and if the new issue could be considered a refunding. Bond Counsel told Staff that, in the current environment, the IRS could challenge anything in tax-exempt bond issuance. However, regulations are quite clear that if there is a separate obligor, the bond issue is considered a new financing. Mr. Williams stated that Staff feels that the structure of the UMH Sharon issue is strong, but a marginal credit based on the history of the Sharon facility. The facility will receive Minutes of the Board of Directors Meeting March 26,

13 a $9.00 per day increase in Connecticut Medicaid due to the shared savings for the SCRF, and has received a significant increase of $65.00 per day from Medicare, due to the change from a mixed rate to a fully federal rate. Discussion followed, including the depreciation and two fair rent levels mentioned earlier. The 30-year depreciation date will be in In response to an additional question as to whether there will be any change in the number of Medicaid patients, Mr. Williams replied that the current private pay census is at 16%. UMH is assuming a status quo in terms of patient mix. The facility will be very dependent on what happens to Sharon Hospital. The asset acquisition agreement requires a $1.25 million escrow to be established by the seller, $250,000 of which is for successor liability of prior Medicaid/Medicare payments. An additional $500,000 has been established in the event that Sharon Hospital closes within two years after the sale. Another $500,000 has been established in the event that Sharon Hospital is sold without a non-compete agreement. Mr. Williams further responded that there had been some union activity at the Sharon Health Care facility about one year ago, but the union did not succeed. There is no current union activity at the nursing home facility. There was a brief discussion, and Members all agreed that the UMH Sharon Series A issue is a marginal credit. The Chair then introduced Resolution (UMH Sharon Issue, Series A, Authorizing), which Resolution was read and considered. Mr. Cohn moved adoption of Resolution No , which motion was seconded by Mr. Biancamano. Upon roll call, the Ayes, Nays, and Abstentions were as follows: AYES NAYS ABSTENTIONS John A. Barone None None John Biancamano William J. Cibes, Jr. Benson R. Cohn Patrick A. Colangelo Leslie O Brien Barbara Rubin The Chair then declared Resolution adopted (see Appendix A, Resolution ). CHEFA FINANCIAL OPERATIONS February 2001 Financial Statements Mr. Asher reported on the February 2001 financial statements of the Authority, reporting that income continues to track ahead of budget by approximately $1.7 million. Expenses remain under budget. Minutes of the Board of Directors Meeting March 26,

14 Ms. Rubin asked for an update of the Business Plan to be presented at the April 26 meeting. DATE OF NEXT MEETING The Chair reminded everyone present of the next meeting date, scheduled for April 23, There being no further business, the Board unanimously agreed to adjourn at 3:16 p.m. Respectfully submitted, Richard D. Gray Executive Director Minutes of the Board of Directors Meeting March 26,