Debt Financing for CA Clinics:  Weighing   the Options Presented by Tony Skapinsky Project Consultant, Capital Link Novemb...
Agenda <ul><li>Role of Debt Financing in Capital Projects </li></ul><ul><li>Lender Considerations </li></ul><ul><li>Workin...
Role of Debt Financing in Capital Projects <ul><li>Most health center capital projects funded with a combination of “equit...
Lender Considerations: Creditworthiness <ul><li>Lenders want to make a loan assuming that it can be paid back (w/ interest...
Lender Considerations: (Historical & Projected Financial Ratios) <ul><li>Financial Performance </li></ul><ul><ul><li>Margi...
Lender Considerations: Debt Capacity <ul><li>Debt Capacity depends on: </li></ul><ul><li>Consistent and/or improving finan...
Working with Lenders <ul><li>Put your best foot forward </li></ul><ul><ul><li>A well-crafted business plan goes a long way...
Debt Funding Sources: Private Sector   Debt & Credit Enhancement <ul><li>Banks </li></ul><ul><ul><li>Pros & Cons </li></ul...
Debt Funding Sources: Federal Debt & Credit Enhancement <ul><li>USDA </li></ul><ul><ul><li>Direct loans, loan guarantees, ...
Debt Funding Sources: State-Based   Debt & Credit Enhancement <ul><li>Tax-exempt bonds through CHFFA  </li></ul><ul><ul><l...
Debt Funding Sources: State- Based   Debt & Credit Enhancement <ul><li>Cal-Mortgage Program Credit Enhancement </li></ul><...
Investment in a Healthy California Program (IHCP) <ul><li>Tax-exempt Bond Issue </li></ul><ul><li>WellPoint Inc.’s $200 mi...
New Markets Tax Credits (NMTC) <ul><li>Program set up to bring in private capital to low-income communities </li></ul><ul>...
NMTC Leveraged Transaction <ul><li>Combines debt and equity </li></ul><ul><li>Reduces cost to borrower </li></ul><ul><li>P...
Leverage Lender Investment Fund Managing Entity Costs, Reserves Servicing CDE Health Center QEI NMTC Equity Investor Loan ...
Debt Funding Sources:  Healthy California (NMTC) <ul><li>Collaborative effort of NCB Impact Capital, Impact Community Capi...
Healthy California:  Overview <ul><li>$20 million pool </li></ul><ul><li>Loan Terms and Conditions: </li></ul><ul><ul><li>...
Other NMTC Options <ul><li>NMTC structured deals can offer very favorable terms outside of existing programs such as “Heal...
Deciding What’s Best for Your Center:   Factors to Consider <ul><li>Location/Eligibility </li></ul><ul><ul><li>Urban or Ru...
Weighing the Options 1.25% - 1.0 to 2.0% plus closing costs 1% Fees 3% 4.5% + 5/10Treasury plus 2- 4.% w/resets 3% Interes...
Weighing the Options 1.5% plus closing costs 6% fixed; Const. loans @ 7% 25 years $1.5-$3 million Healthy California (NMTC...
Special Issues:   Debt Financing and Capital Campaigns <ul><li>Timing is critical! </li></ul><ul><li>Expenses must be matc...
Debt Financing and Capital Link: Services Supported by CCI <ul><ul><li>Preliminary Project Planning </li></ul></ul><ul><ul...
Debt Financing & Capital Link: Services available on fee basis  (continued) <ul><li>Market Assessment </li></ul><ul><li>Sp...
Contacting Capital Link <ul><li>In California: </li></ul><ul><ul><li>Tony Skapinsky & Steven Slezak </li></ul></ul><ul><ul...
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Debt Financing for CA Clinics: Weighing the Options

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Debt Financing for CA Clinics: Weighing the Options

  1. 1. Debt Financing for CA Clinics: Weighing the Options Presented by Tony Skapinsky Project Consultant, Capital Link November 2, 2006
  2. 2. Agenda <ul><li>Role of Debt Financing in Capital Projects </li></ul><ul><li>Lender Considerations </li></ul><ul><li>Working with Lenders </li></ul><ul><li>Overview of Debt Funding Sources </li></ul><ul><li>Deciding What’s Best for Your Center </li></ul><ul><li>Debt Financing and Capital Campaigns </li></ul><ul><li>Q&A </li></ul>
  3. 3. Role of Debt Financing in Capital Projects <ul><li>Most health center capital projects funded with a combination of “equity” and debt </li></ul><ul><li>Debt extends a clinic’s ability to move ahead with a project in the near term and pay for it over its useful life </li></ul><ul><li>Debt is only a feasible option if you can prove to a lender you can pay it back! </li></ul><ul><li>“ Sources of Funds” must equal “Uses of Funds” </li></ul>
  4. 4. Lender Considerations: Creditworthiness <ul><li>Lenders want to make a loan assuming that it can be paid back (w/ interest) </li></ul><ul><li>5 C’s: Capacity (management), Credit, Collateral, Competition/Customers, and Cash-flow coverage </li></ul><ul><li>Does the project make sense? </li></ul><ul><li>Lender’s less concerned about “mission” </li></ul>
  5. 5. Lender Considerations: (Historical & Projected Financial Ratios) <ul><li>Financial Performance </li></ul><ul><ul><li>Margins; Revenue Growth; Revenue Sources </li></ul></ul><ul><li>Financial Condition </li></ul><ul><ul><li>Current Ratio; Days Cash; Leverage </li></ul></ul><ul><li>A/R Days; A/P Days </li></ul><ul><li>Debt Capacity </li></ul>
  6. 6. Lender Considerations: Debt Capacity <ul><li>Debt Capacity depends on: </li></ul><ul><li>Consistent and/or improving financial performance over time </li></ul><ul><li>Adequate cash flow to support debt </li></ul><ul><ul><li>Debt Service Coverage Ratio (DSCR) = Change in Net Assets + Depreciation + Interest Expense / Interest Expense + Current Maturities LTD </li></ul></ul><ul><ul><li>Typical DSCR Requirement = 1.25 </li></ul></ul>
  7. 7. Working with Lenders <ul><li>Put your best foot forward </li></ul><ul><ul><li>A well-crafted business plan goes a long way toward “getting to yes” </li></ul></ul><ul><li>Make the banks compete for your business! </li></ul><ul><li>Negotiate terms and covenants </li></ul><ul><ul><li>Make sure you understand the covenant requirements </li></ul></ul><ul><ul><li>Test them against your “worst case” projections </li></ul></ul><ul><li>You don’t have a deal until you have a commitment letter </li></ul><ul><li>Read your loan documents and make sure you understand them! </li></ul>
  8. 8. Debt Funding Sources: Private Sector Debt & Credit Enhancement <ul><li>Banks </li></ul><ul><ul><li>Pros & Cons </li></ul></ul><ul><li>CPCA Capital Loan Programs </li></ul><ul><ul><li>up to $600,000 (limited availability) </li></ul></ul><ul><ul><li>@ 3% for 5 yrs. </li></ul></ul><ul><li>Community Development Finance Institutions ( www.cdfifund.gov ) </li></ul><ul><ul><li>NCB Impact Capital </li></ul></ul><ul><ul><li>Rural Community Assistance Corp. </li></ul></ul><ul><ul><li>Lenders for Community Development </li></ul></ul><ul><ul><li>Non-Profit Finance Fund </li></ul></ul>
  9. 9. Debt Funding Sources: Federal Debt & Credit Enhancement <ul><li>USDA </li></ul><ul><ul><li>Direct loans, loan guarantees, and grant programs </li></ul></ul><ul><ul><li>Communities of 20,000 population or less eligible </li></ul></ul><ul><ul><li>Loans as low as 4.5% </li></ul></ul><ul><ul><li>Terms as long as 40 years </li></ul></ul><ul><ul><li>Guarantees as much as 90% </li></ul></ul><ul><li>HRSA/BPHC Loan Guarantee Program </li></ul><ul><ul><li>80% guarantee on loans by non-federal lenders (cannot be used with tax-exempt bonds) </li></ul></ul>
  10. 10. Debt Funding Sources: State-Based Debt & Credit Enhancement <ul><li>Tax-exempt bonds through CHFFA </li></ul><ul><ul><li>Minimum size ~$5 million for standalone financings; </li></ul></ul><ul><ul><li>Possibility of pools for multiple borrowers with minimum needs of $500,000 </li></ul></ul><ul><ul><li>$1-$5 million individual also possible </li></ul></ul><ul><ul><li>Tax-Exempt Equipment Lease Program for equipment financings > $500,000 </li></ul></ul><ul><li>Other Issuers </li></ul><ul><ul><li>Issuances through California Communities, Association of Bay Area Governments, and other Joint Powers Authorities or Municipal Authority </li></ul></ul>
  11. 11. Debt Funding Sources: State- Based Debt & Credit Enhancement <ul><li>Cal-Mortgage Program Credit Enhancement </li></ul><ul><ul><li>Mainly used in conjunction with tax-exempt bonds </li></ul></ul><ul><li>Help II Loan Program (CHFFA) </li></ul><ul><ul><li>$25,000 - $500,000 </li></ul></ul><ul><ul><li>3% fixed rates; amortizations up to 15 yrs </li></ul></ul><ul><ul><li>Total Revenues must be less than $20 million </li></ul></ul>
  12. 12. Investment in a Healthy California Program (IHCP) <ul><li>Tax-exempt Bond Issue </li></ul><ul><li>WellPoint Inc.’s $200 million investment portfolio to include investments in California Clinics </li></ul><ul><li>For Low-Income Urban and Rural Underserved Communities </li></ul><ul><li>Financing from $1-$7 million </li></ul><ul><li>Highly competitive interest rates </li></ul><ul><li>Conduit Issuer is California Communities </li></ul>
  13. 13. New Markets Tax Credits (NMTC) <ul><li>Program set up to bring in private capital to low-income communities </li></ul><ul><li>Administered by Treasury's Community Development Financial Institutions (CDFI) Fund. </li></ul><ul><li>Program authorized to allocate to CDEs the authority to issue to their investors up to the aggregate amount of $16 billion in equity </li></ul><ul><li>In four rounds to date, the CDFI Fund has made 233 awards totaling $12.1 billion in tax credit authority. </li></ul>
  14. 14. NMTC Leveraged Transaction <ul><li>Combines debt and equity </li></ul><ul><li>Reduces cost to borrower </li></ul><ul><li>Potential for substantial debt forgiveness, “soft second” mortgages or other benefits </li></ul><ul><li>Emerging as primary NMTC structure </li></ul>
  15. 15. Leverage Lender Investment Fund Managing Entity Costs, Reserves Servicing CDE Health Center QEI NMTC Equity Investor Loan Loan payments Tax Credits Investment Loan Payments New Building NMTC
  16. 16. Debt Funding Sources: Healthy California (NMTC) <ul><li>Collaborative effort of NCB Impact Capital, Impact Community Capital, CPCA Ventures and CCI </li></ul><ul><li>Creates long-term, low interest, fixed rate financing for CA clinics </li></ul><ul><li>Began in 2005 </li></ul><ul><li>Limited availability </li></ul>
  17. 17. Healthy California: Overview <ul><li>$20 million pool </li></ul><ul><li>Loan Terms and Conditions: </li></ul><ul><ul><li>Loan Size: $1.5 - $3 million </li></ul></ul><ul><ul><li>Interest Rate: 6% fixed (permanent loans); 7% fixed (construction loans) </li></ul></ul><ul><ul><li>Term & Amortization: up to 25 years </li></ul></ul><ul><ul><li>Up to 90% Loan-to-Value Ratio </li></ul></ul><ul><ul><li>Facility must be located in NMTC-eligible areas </li></ul></ul><ul><ul><li>May require establishment of Special Purpose Entity (SPE) to hold real estate </li></ul></ul>
  18. 18. Other NMTC Options <ul><li>NMTC structured deals can offer very favorable terms outside of existing programs such as “Healthy California” </li></ul><ul><li>In the most recent funding round (2006), 19 organizations that serve California were awarded a total of $1.44 billion in tax credits. </li></ul><ul><li>For more information, please visit the following website: www.cdfifund.gov and search on NMTC </li></ul>
  19. 19. Deciding What’s Best for Your Center: Factors to Consider <ul><li>Location/Eligibility </li></ul><ul><ul><li>Urban or Rural? </li></ul></ul><ul><ul><li>330 or not? </li></ul></ul><ul><ul><li>NMTC or Empowerment Zone-eligible or not? </li></ul></ul><ul><li>Size of Loan </li></ul><ul><li>Interest rate and “all-in” rate </li></ul><ul><li>Credit Strength/Need for Credit Enhancement </li></ul><ul><ul><li>Spotty financial performance? </li></ul></ul><ul><ul><li>Much larger loan than clinic could have supported historically? </li></ul></ul><ul><ul><li>Loan-to-Value issues? </li></ul></ul><ul><li>Relative need for long-term vs. shorter term financing and/or fixed vs. variable </li></ul><ul><li>Interface with capital campaign </li></ul>
  20. 20. Weighing the Options 1.25% - 1.0 to 2.0% plus closing costs 1% Fees 3% 4.5% + 5/10Treasury plus 2- 4.% w/resets 3% Interest Rate 15 years 40 years 7 to 10 years 5 years Max. Term Up to $500,000 No maximum up to $5.0 million Up to $600,000 Loan Size Help II (CHFFA) USDA Banks CPCA Loan Programs OPTIONS
  21. 21. Weighing the Options 1.5% plus closing costs 6% fixed; Const. loans @ 7% 25 years $1.5-$3 million Healthy California (NMTC) 2% (rough est.) 2-3% below conventional 20 years $1-$7 million IHCP (T/E Bonds) 3% of total P&I plus 3-5% for closing costs 2% Fees 4 to 5+% fixed Fixed T/E rates Interest Rate 30 years 15-20 Years Max. Term $5 - $20+ million $1-$5 million Loan Size Tax-Exempt Bonds (Public Offering) Tax-Exempt Bonds (Private Placement) OPTIONS
  22. 22. Special Issues: Debt Financing and Capital Campaigns <ul><li>Timing is critical! </li></ul><ul><li>Expenses must be matched with cash resources </li></ul><ul><li>Multi-year campaigns can create challenges </li></ul><ul><ul><li>“ Trust me” doesn’t work well with banks! </li></ul></ul><ul><ul><li>May be able to obtain “bridge financing” to cash-flow multi-year campaigns </li></ul></ul><ul><ul><li>Negotiate “equity in first” provisions </li></ul></ul><ul><li>Watch out for “no call provisions” and/or prepayment penalties (sometimes you can’t avoid them!) </li></ul>
  23. 23. Debt Financing and Capital Link: Services Supported by CCI <ul><ul><li>Preliminary Project Planning </li></ul></ul><ul><ul><ul><li>Preliminary Feasibility Analysis </li></ul></ul></ul><ul><ul><ul><ul><li>Financial strengths and weaknesses, debt capacity analysis </li></ul></ul></ul></ul><ul><ul><ul><li>Capital Project Work Plan </li></ul></ul></ul><ul><ul><ul><ul><li>On-site visit to map necessary steps to completing a capital project </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Process, TA resources, Timeline and Budget </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Provided by Capital Link or Capital Incubator </li></ul></ul></ul></ul>
  24. 24. Debt Financing & Capital Link: Services available on fee basis (continued) <ul><li>Market Assessment </li></ul><ul><li>Space and Program Planning </li></ul><ul><li>Lease vs. Buy Analysis </li></ul><ul><li>Federal Appropriation Grants Assistance </li></ul><ul><li>Financial Projections and Business Plans </li></ul><ul><li>Financing Assistance </li></ul><ul><ul><li>Analysis of Debt Options & Lender RFPs </li></ul></ul><ul><ul><li>Lender Negotiations/Loan Closings </li></ul></ul><ul><ul><li>Loan Guarantee Applications </li></ul></ul>
  25. 25. Contacting Capital Link <ul><li>In California: </li></ul><ul><ul><li>Tony Skapinsky & Steven Slezak </li></ul></ul><ul><ul><li>Project Consultants </li></ul></ul><ul><ul><li>Capital Link </li></ul></ul><ul><ul><li>979 Osos Street, Suite B3 </li></ul></ul><ul><ul><li>San Luis Obispo, CA 93401 </li></ul></ul><ul><ul><li>(805) 544-2355 (or -2345) </li></ul></ul><ul><ul><li>[email_address] </li></ul></ul><ul><ul><ul><li>[email_address] </li></ul></ul></ul>
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