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Presented by : Terry Glasscock, Senior Project Consultant, Capital Link

Capital Financing: Strategies and Tools For Success . Health Choice Network Of Florida June 2014. Presented by : Terry Glasscock, Senior Project Consultant, Capital Link. In truth, there has never been a better time to initiate a capital project.

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Presented by : Terry Glasscock, Senior Project Consultant, Capital Link

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  1. Capital Financing: Strategies and Tools For Success Health Choice Network Of Florida June 2014 Presented by: Terry Glasscock, Senior Project Consultant, Capital Link

  2. In truth, there has never been a bettertime to initiate a capital project. Nor will there likely be a better time for years to come.

  3. Window of Opportunity Lowest Interest rates Stagnated building costs Strategic Changes Ahead (Medicare and Medicaid) Government Financing Programs NMTC and FDA

  4. #1. Interest Rates

  5. Rates Today Five Years Ago Interest Rates • Fed Funds – 0% • TE Bond - .25% • Prime – 3.25% • Inflation - 0% I’ll bet Five Years From Now???won’t see lower interest rates in your life time Fed Funds – 3.00% TE Bond -4.5% Prime – 5.0% Inflation – 4%

  6. #2. Building Costs

  7. Building Costs Building Costs Inflation rate – 1% Construction bids – at or under budget

  8. #3. Strategic Changes Ahead

  9. Healthcare Costs • 1900 – 3% GDP (Gross Domestic Product). • 1964 – 6% GDP. • 1994 – 15% GDP. • 2020 – 25% GDP. • Per person expenditure for healthcare: • 1965 - $205 • 2000 - $4637 • 2010 - $8233 Office of Economic and Cooperative Development

  10. Social Security, Medicare & MedicaidOutlays as a Percentage of GDP 1990-2075 Source: C. Eugene Steurle and Adam Carasso, (Budget Crisis at the Door), The Urban Institute, 2003. Based on data from the Congressional Budget Office, “A 125Year Picture of the Federal Government’s Share of the Economy, 1950-2075,” July 3, 2002, table 2.

  11. Influences:Federal Receipts vs Entitlement Spending (As percent of GDP) Source: C. Eugene Steurle and Adam Carasso, (Budget Crisis at the Door), The Urban Institute, 2003 Based on data from Budget of the U.S. Government, FY 2004 and CBO’s “Analysis of the President’s Budget, FY 2004.”

  12. Federal Government Spending Medicaid Medicare S.S. 43% Medicaid Medicare S.S. 20%

  13. Congress’ own Commission on Entitlement Reform reported that SS, Medicare, Medicaid andinterest on the national debt will exceed all federal income by 2030

  14. Entitlement programs cannot be sustained at current levels! Medicaid, Medicare, S.S. Will be altered! The Window of Opportunity Will Close.

  15. So, How Can I Do This? • Business Plan • Financial Forecasting • Funding Considerations • Financing Options

  16. Business Plan and Financial Forecast Critical!

  17. Components of a Business Plan • CHC description and background • Market analysis and Growth potential • Organizational experience and structure • Project Details • Financial history and forecast

  18. Business Plan: Financial Section • Financial Feasibility • Historical Performance (three years audited) • 5-7 year Forecast • Project budget • Sources and Uses • Financing Structure

  19. Modeling the Impact of Your Capital investment Project • How will the project enhance your ability to be financially successful over the long-term? • Increased Volumes • Higher cost reimbursement • Higher profile/fundraising • Improved recruitment/retention/ productivity

  20. Sources & Uses Of Project Funds

  21. Funding

  22. Equity/ Grant Funding

  23. Financing Components Fed Grant Grants/Gifts NMTC State Funds TE Bonds Foundation CCHN Ventures Loan Bank Loan HRSA LGP USDA

  24. Combining the BestFinancing Sources • Structure considerations mean big financial differences!

  25. Let’s assume a $10,000,000 project.

  26. Conventional Bank Loan

  27. Conventional Bank Loan • Loan 80% of project value - $8,000,000 • Interest rate 6.5% with 25 year amortization • Where will the remaining $2,000,000 come from? • Sale of existing building? • Hospital contribution? • State? • Capital Campaign? • Government grant

  28. 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

  29. New Markets Tax Credits

  30. NMTC Magic!

  31. NMTC Hypothetical CHC ProjectAssumes $10 million in Project Costs Bank or TE Bond Debt Equity Investor Lender Equity investment ~ $3 million $8 million Leverage Loan $4.29 million in tax credits (39% over 7 years) NMTC Fund LLC Tax credits & distributions to pay Leverage Lender $11 million investment into CDE CDE LLC Fees & Reserves ~$1 million $10 million in loans Loan payments “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

  32. New Markets Tax Credits • “Investment” that isn’t repaid • 20% of total project cost • Finding a Community Development Entity (CDE) • Application and awards

  33. 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!

  34. 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

  35. USDA • Usable with other options • Population 20,000 or under • Loan guarantee 90% • Direct Loan 3.5% for 40 years

  36. USDA Direct Loan Structure • Loan will be 80% of project Cost - $8,000,000. • Roughly 3.5% interest rate with 40 year amortization. • Where will the remaining $2,000,000 come from?

  37. USDA Direct Loan Sources of Funds: USDA Loan……..$ 8,000,000 Other…………….$ 2,000,000 Total……………...$10,000,000 Annual Debt Service………..$ 371,982

  38. Tax Exempt Bonds • With other options • NMTC • State issuing authority • Private Purchase by Bank

  39. Tax Exempt Bonds and NMTC • NMTC investment approximately 20% of project cost - $2,000,000 • TE Bonds for the balance - $8,000,000 interest onlyfor 7 years • Interest rate – 3.9% (fixed 10 years) • No need for additional financing

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

  41. Foundation PRI • Program Related Investment • With NMTC • HRSA LG • Private Purchase (Non-profit Foundations)

  42. Foundation and NMTC • NMTC investment approximately 20% of project cost - $2,000,000 • 80% federal guarantee • No need for additional financing • Loan for the balance - $8,000,000 interest only for 7 years • Interest rate – 3.0%

  43. Foundation: HRSA LG and NMTC Sources of Funds: Tax Bonds……...$ 8,000,000 NMTC….……….$ 2,000,000 Total……………..$10,000,000 Annual Debt Service………..$ 240,000

  44. Project Feasibility Analysis • Paid for by HRSA • Will analyze using the examples shown above with your financial and project information • Will show how much you can comfortably borrow under each scenario. • What we will need from you: • Description of the project • 3 years of audits • Price of project • Street address of site • Business and Market analysis loans also available through CCHN Ventures.

  45. Terry Glasscock tglasscock@caplink.org

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