9/26/2012 How to Finance your Capital Project: A Case Study Marty Lynch I LifeLong Medical Care Andra Lichtenstein I Capital Incubator Virginie Arnaud Le Pape| NCB Capital Impact Learning Objectives  What resources are needed to manage your facility project  How to determine your plan of finance  How to analyze debt financing options  The ins & outs of New Market Tax Credits financing  Lessons learned from one CHC LifeLong Medical Care FQHC in Alameda, Contra Costa & Marin Counties Serving over 44,000 low income patients • • • • • 75% at or below 100% of FPL • Payor Mix: 10 primary care clinics 2 adult day health centers 2 dental clinics 2 school based health centers • Supportive housing program 11% 8% 28% 53% Medi-Cal Uninsured Private Medicare 1 9/26/2012 LifeLong Medical Care  Gray Panther roots  Serves all ages -- special interest in elder care  Pioneer in integrating behavioral care with medical care – reattaching the head to the body Facilities Planning  Aging facilities  Art of projecting need  Where to build? Neighborhood vs. central  Long term space needs vs. affordability  What is right amount of debt to assume vs debt capacity? Decision Making Process  Board & staff engagement  Data informed decision making  Difficult for Board/staff to understand New Market Tax Credit vs Bonds 2 9/26/2012 Integrated Capital Activities • • • • • What, where why? Market Analysis Financial Feasibility Key players Plan of finance • • • • Short term loans Long term loans Commitment Letter Loan documents • Predevelopment • Design • Land Use • Environmental Facilities Planning Bricks & Mortar Financing Capital Campaign • Campaign counsel • Feasibility Study • Campaign Comm. • Quiet/Public phases Key Players • • • • Internal Project Lead Board Planning Committee Board Senior Management •Internal project lead •Architect •Construction manager Facilities Planning Bricks & Mortar Financing Capital Campaign • Internal project lead • Consultant (Capital Incubator) • Lawyer •Internal project lead •Development staff •Volunteers •Capital consultant Capital Incubator  Assists health centers in managing capital projects and in obtaining debt financing  Broad health center experience Consultant: Axis CH, Brookside CHC, LifeLong, Native American HC, Sonoma Valley CHC, Southeast HC, The Effort, Women’s CC, Community Clinics Initiative Staff: LifeLong 10 years  Independent consultant: Not affiliated with any financing institution 3 9/26/2012 Why a Financial Advisor?  Complex financing and planning decisions  Expertise or resources usually not in-house  Independent: Be sure no conflict of interest No incentive or interest in an organization’s decision to borrow, its selection of a lender or financing type, or the ultimate size of a loan  Can play supportive negotiating and translating role between borrower and lender Determine Plan of Finance Equity Debt Internal Funds Government grants Capital Campaign Short term loans Long term debt Using your own funds Pros and Cons of a Capital Campaign Is debt right for your organization? What level of debt? • NMTC • Tax-exempt bonds • Commercial loans Shop and Compare  Banker pitches  Side-by-side comparison All-in costs Net present value comparison  What’s right for another HC may not be right for you What financing or team you used for another project may not work for this one  Final choice: As well as the numbers, must have the right feel and fit, intellectual capital, trust 4 9/26/2012 Tax Exempt Bonds  Very low interest rates  Long terms/maturities  High up-front cost, especially <$10Million  Credit enhanced to get best rates Cal Mortgage Loan Insurance • Best LTV Letter of Credit Tax exempt loan New Market Tax Credits  Must be in low income census tract  7 year interest only loans  Moderate interest rate but can be lowered through Borrower participation  High upfront cost, especially <$5Million  Potential for up to 25% debt forgiveness NCB Capital Impact: Leader in CHC Financing  Non-profit organization (CDFI)  Mission to improve health care conditions for lowand moderate-income families  More flexibility than a bank  Financing for CHC’s >25 years : $628 million  CPCA Ventures & Emergency Loans 5 9/26/2012 NCB Capital Impact: Good Fit for your CHC? Loan Structure and Collateral  # patients  Payor Mix  New services  New jobs  Cash flow  Debt Service Coverage Ratio (DSCR) Debt Capacity  Collateral  Strong board  Experienced management  Equity Social Impact  Loan-to-Value (LTV)  Risks? NCB Capital Impact: Understanding CHC Challenges  Know health centers’ business model  Not deterred by financial risks faced by most health centers public funding slim operating margins Health Care Reform Federal & State budget deficits NMTC - Advantages  Attracts private sector investor dollars  Potential for 20-25% debt forgiveness  Below market interest rate  Lower down payment and collateral requirements  Possibility to leverage grants and cash reserves to maximize the “free equity” 6 9/26/2012 NMTC - Challenges  Credits are limited and very competitive  Structures are complex  Closing a NMTC deal is complicated, timeconsuming and expensive  Refinancing is needed after 7 years  Financing is not very flexible, no pre-payment possibility Simplified NMTC Structure Loan to Fund Loans $7.5 m Investment Fund $10 million Equity $2.5 m Bank Investor Loan to Fund Community Development Entity (CDE) Annual NMTC US Treasury Interest only loans Note A = $7.5 m Note B = $2.5 m less fees LifeLong Medical Care Receives a $10 million loan Recap: Milestone Steps Master planning Assemble the team Determine plan of finance Select long term financing type Closing the deal 7 9/26/2012 Lessons Learned  Size of project: Affordability vs. Space to grow into  Relocation issues  Difficulty of projecting demand & payor mix  Importance of strong balance sheet going into the project  HRSA subordination isn’t quick or easy Lessons Learned  You don't know how to do this even if you've been a successful clinic executive for years. You need experts to counsel you.  Use consultants you can absolutely trust  Lawyer for the health center  Financial consultant  Staying on track and closing the deal  Coordinating timelines and funders More Space = Better Patient Care Before Size After 11,700 sqf 19,500 sqf Floors 1 3 Exam rooms 14 27 30,000/yr 53,000/yr Visit capacity 8 9/26/2012 Contact Information Marty Lynch, Chief Executive Officer LifeLong Medical Care [email protected] Andra Lichtenstein, Principal Capital Incubator Tel 510-526-2852 [email protected] Virginie Arnaud Le Pape, Director of Underwriting NCB Capital Impact Tel 510-496-2236 [email protected] 9