Debt Financing for CA Clinics: Weighing the Options
Presented byTony Skapinsky
Project Consultant, Capital LinkNovember 2, 2006
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Agenda Role of Debt Financing in Capital
Projects Lender Considerations Working with Lenders Overview of Debt Funding Sources Deciding What’s Best for Your Center Debt Financing and Capital Campaigns Q&A
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Role of Debt Financing in Capital Projects Most health center capital projects
funded with a combination of “equity” and debt
Debt extends a clinic’s ability to move ahead with a project in the near term and pay for it over its useful life
Debt is only a feasible option if you can prove to a lender you can pay it back!
“Sources of Funds” must equal “Uses of Funds”
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Lender Considerations: Creditworthiness
Lenders want to make a loan assuming that it can be paid back (w/ interest)
5 C’s: Capacity (management), Credit, Collateral, Competition/Customers, and Cash-flow coverage
Does the project make sense? Lender’s less concerned about “mission”
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Lender Considerations:(Historical & Projected Financial Ratios)
Financial Performance Margins; Revenue Growth; Revenue
Sources Financial Condition
Current Ratio; Days Cash; Leverage A/R Days; A/P Days Debt Capacity
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Lender Considerations:Debt Capacity
Debt Capacity depends on: Consistent and/or improving financial
performance over time Adequate cash flow to support debt
Debt Service Coverage Ratio (DSCR) = Change in Net Assets + Depreciation + Interest Expense / Interest Expense + Current Maturities LTD
Typical DSCR Requirement = 1.25
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Working with Lenders Put your best foot forward
A well-crafted business plan goes a long way toward “getting to yes”
Make the banks compete for your business! Negotiate terms and covenants
Make sure you understand the covenant requirements Test them against your “worst case” projections
You don’t have a deal until you have a commitment letter
Read your loan documents and make sure you understand them!
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Debt Funding Sources:Private Sector Debt & Credit Enhancement
Banks Pros & Cons
CPCA Capital Loan Programs up to $600,000 (limited availability) @ 3% for 5 yrs.
Community Development Finance Institutions (www.cdfifund.gov) NCB Impact Capital Rural Community Assistance Corp. Lenders for Community Development Non-Profit Finance Fund
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Debt Funding Sources:Federal Debt & Credit Enhancement USDA
Direct loans, loan guarantees, and grant programs
Communities of 20,000 population or less eligible Loans as low as 4.5% Terms as long as 40 years Guarantees as much as 90%
HRSA/BPHC Loan Guarantee Program 80% guarantee on loans by non-federal lenders
(cannot be used with tax-exempt bonds)
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Debt Funding Sources:State-
Based Debt & Credit Enhancement Tax-exempt bonds through CHFFA
Minimum size ~$5 million for standalone financings; Possibility of pools for multiple borrowers with
minimum needs of $500,000 $1-$5 million individual also possible Tax-Exempt Equipment Lease Program for
equipment financings > $500,000 Other Issuers
Issuances through California Communities, Association of Bay Area Governments, and other Joint Powers Authorities or Municipal Authority
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Debt Funding Sources:State- Based Debt & Credit Enhancement
Cal-Mortgage Program Credit Enhancement Mainly used in conjunction with tax-exempt
bonds Help II Loan Program (CHFFA)
$25,000 - $500,000 3% fixed rates; amortizations up to 15 yrs Total Revenues must be less than $20
million
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Investment in a Healthy California Program (IHCP) Tax-exempt Bond Issue WellPoint Inc.’s $200 million investment
portfolio to include investments in California Clinics
For Low-Income Urban and Rural Underserved Communities
Financing from $1-$7 million Highly competitive interest rates Conduit Issuer is California Communities
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New Markets Tax Credits (NMTC) Program set up to bring in private capital
to low-income communities Administered by Treasury's Community
Development Financial Institutions (CDFI) Fund.
Program authorized to allocate to CDEs the authority to issue to their investors up to the aggregate amount of $16 billion in equity
In four rounds to date, the CDFI Fund has made 233 awards totaling $12.1 billion in tax credit authority.
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NMTC Leveraged Transaction Combines debt and equity Reduces cost to borrower Potential for substantial debt
forgiveness, “soft second” mortgages or other benefits
Emerging as primary NMTC structure
Leverage Lender
Investment Fund
Managing EntityCosts,
Reserves
Servicing
CDE
Health Center
QEI NMTC
Equity Investor
LoanLoan
paymentsTax Credits
Investment
Loan Payments
New Building
NMTC
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Debt Funding Sources: Healthy California (NMTC) Collaborative effort of NCB Impact
Capital, Impact Community Capital, CPCA Ventures and CCI
Creates long-term, low interest, fixed rate financing for CA clinics
Began in 2005 Limited availability
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Healthy California: Overview $20 million pool Loan Terms and Conditions:
Loan Size: $1.5 - $3 million Interest Rate: 6% fixed (permanent loans);
7% fixed (construction loans) Term & Amortization: up to 25 years Up to 90% Loan-to-Value Ratio Facility must be located in NMTC-eligible
areas May require establishment of Special Purpose
Entity (SPE) to hold real estate
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Other NMTC Options NMTC structured deals can offer very
favorable terms outside of existing programs such as “Healthy California”
In the most recent funding round (2006), 19 organizations that serve California were awarded a total of $1.44 billion in tax credits.
For more information, please visit the following website: www.cdfifund.gov and search on NMTC
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Deciding What’s Best for Your Center: Factors to Consider Location/Eligibility
Urban or Rural? 330 or not? NMTC or Empowerment Zone-eligible or not?
Size of Loan Interest rate and “all-in” rate Credit Strength/Need for Credit Enhancement
Spotty financial performance? Much larger loan than clinic could have supported historically? Loan-to-Value issues?
Relative need for long-term vs. shorter term financing and/or fixed vs. variable
Interface with capital campaign
Weighing the Options
OPTIONSCPCA Loan Programs
Banks USDA Help II (CHFFA)
Loan Size
Up to $600,000
up to $5.0 million
No maximum
Up to $500,000
Max. Term
5 years 7 to 10 years
40 years 15 years
Interest Rate
3% 5/10Treasury plus 2- 4.% w/resets
4.5% + 3%
Fees 1% 1.0 to 2.0% plus closing costs
- 1.25%
Weighing the Options
OPTIONSTax-Exempt
Bonds (Private
Placement)
Tax-Exempt Bonds (Public
Offering)
IHCP(T/E Bonds)
Healthy California(NMTC)
Loan Size
$1-$5 million $5 - $20+ million
$1-$7 million
$1.5-$3 million
Max. Term
15-20 Years 30 years 20 years 25 years
Interest Rate
Fixed T/E rates
4 to 5+% fixed
2-3% below conventional
6% fixed; Const. loans @ 7%
Fees 2% 3% of total P&I plus 3-5% for closing costs
2% (rough est.)
1.5% plus closing costs
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Special Issues: Debt Financing and Capital Campaigns Timing is critical! Expenses must be matched with cash
resources Multi-year campaigns can create challenges
“Trust me” doesn’t work well with banks! May be able to obtain “bridge financing” to cash-flow
multi-year campaigns Negotiate “equity in first” provisions
Watch out for “no call provisions” and/or prepayment penalties (sometimes you can’t avoid them!)
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Debt Financing and Capital Link:Services Supported by CCI
Preliminary Project Planning Preliminary Feasibility Analysis
Financial strengths and weaknesses, debt capacity analysis
Capital Project Work Plan On-site visit to map necessary steps to
completing a capital project Process, TA resources, Timeline and Budget Provided by Capital Link or Capital Incubator
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Debt Financing & Capital Link:Services available on fee basis (continued)
Market Assessment Space and Program Planning Lease vs. Buy Analysis Federal Appropriation Grants Assistance Financial Projections and Business Plans Financing Assistance
Analysis of Debt Options & Lender RFPs Lender Negotiations/Loan Closings Loan Guarantee Applications
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Contacting Capital Link In California:
Tony Skapinsky & Steven SlezakProject ConsultantsCapital Link
979 Osos Street, Suite B3San Luis Obispo, CA 93401(805) 544-2355 (or -2345)[email protected]