Borrowing for an expansion: today's basics.There are four main ways of debt financing Debt Financing When a firm raises money for working capital or capital expenditures by selling bonds, bills, or notes to individual and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise to repay nursing home construction and expansion: bank loans, tax-exempt bond Tax-exempt bond A bond usually issued by municipal, county, or state governments whose interest payments are not subject to federal and, in some cases, state and local income tax. tax-exempt bond See municipal bond. issues (non-profits only), Federal Housing Administration Federal Housing Administration (FHA) Federally sponsored agency chartered in 1934 whose stock is currently owned by savings institutions across the United States. The agency buys residential mortgages that meet certain requirements, sells these mortgages in packages, and insures (FHA See Federal Housing Administration. FHA See Federal Housing Administration (FHA). )-insured mortgages, and loans from real estate investment trusts (REITs). Your choice will depend on many factors and local circumstances CIRCUMSTANCES, evidence. The particulars which accompany a fact. 2. The facts proved are either possible or impossible, ordinary and probable, or extraordinary and improbable, recent or ancient; they may have happened near us, or afar off; they are public or , although these tend to fall into ten general categories (see "10 Keys to Financing," p. 42). Before analyzing the choice to this extent, however, some familiarity with the basic ground rules of each type of financing will be helpful. Basic Information Required In order to properly prepare to apply for a construction or refinancing Refinancing An extension and/or increase in amount of existing debt. loan you first want to analyze your projects's financial feasibility and pull together the basic information that a lender will need. The primary tool for this analysis is a realistic--not optimistic--five- to ten-year financial forecast which includes a balance sheet, income statement, and cash flow statement. For refinancing, expansion, or renovation of an existing facility, three years of occupancy and payor mix data and audited financial statements will need to be included. Also you will need to explain any future assumptions that differ from the facility's past performance. Other important information includes a summary of competitor facilities and their occupancy levels and, if available, payor mix and proposed expansion projects. Finally, resumes of key management and development team members, a detailed list of proposed project costs, and a project timeline
Timeline may refer to:
Bank Loans The key step in obtaining a bank loan is to familiarize yourself with the bank's credit criteria. Determine the bank's loan-to-cost and loan-to-value requirements, its parameters for amortization and maturity, and its collateral requirements. Loan-to- cost and -value requirements will determine how much equity versus debt the bank will let you use in financing your project. Amortization parameters determine how rapidly your project will pay back the bank's principal. Generally, the longer the amortization period, the lower the annual debt service requirements. A lower debt service helps make the project more financially feasible. The bank's maturity requirements in conjunction with its amortization parameter (1) Any value passed to a program by the user or by another program in order to customize the program for a particular purpose. A parameter may be anything; for example, a file name, a coordinate, a range of values, a money amount or a code of some kind. determines your project's refinancing risk In banking and finance, refinancing risk is the possibility that a borrower cannot refinance by borrowing to repay existing debt. Many types of commercial lending incorporate bullet payments at the point of final maturity; often, the intention or assumption is that the borrower . If the bank loan amortization period extends beyond the bank loan maturity, you will need to refinance Refinance 1. When a business or person revises their payment schedule for repaying debt. 2. Replacing an older loan with a new loan offering better terms. Notes: When a business refinances they typically extend the maturity date. the remaining principal at the maturity of the loan. Refinancing could present problems if at the time of maturity your project is not meeting its financial forecast, lenders are generally reticent to lend to nursing homes, or interest rates have increased significantly. Collateral requirements determine whether a mortgage on your project's property, together with a lien lien, claim or charge held by one party, on property owned by a second party, as security for payment of some debt, obligation, or duty owed by that second party. on its revenues, is deemed to be sufficient security for the loan. The advantages to bank loans include a relatively simple application and credit review process, fast approval or disapproval, straightforward documentation, and relatively simple debt structures. Disadvantages include banks' reliance on appraisals, unfamiliarity with state reimbursement Reimbursement Payment made to someone for out-of-pocket expenses has incurred. systems, short amortization and maturities, and confusion over whether to treat the loan as a real estate loan or one to a health care corporation. Tax-Exempt Bonds Tax-exempt bonds are issued by a municipality MUNICIPALITY. The body of officers, taken collectively, belonging to a city, who are appointed to manage its affairs and defend its interests. , state, or government authority. That entity then loans the proceeds to a nonprofit A corporation or an association that conducts business for the benefit of the general public without shareholders and without a profit motive. Nonprofits are also called not-for-profit corporations. Nonprofit corporations are created according to state law. nursing home corporation. Typically, an investment bank purchases (underwrites) the bonds from the government entity and resells them. Bond issues usually contain 30-year maturities and are structured with level debt service payments (similar to a house mortgage). Most are secured by a first mortgage and lien on project revenues. Because the interest income is tax exempt for the investor, interest rates are lower than those of bank loans. The primary advantage of bonds is that they provide access to a segment of the capital market different from that of a commercial bank. When banks are suffering from capital shortages, regulatory pressure to reduce loan volume, or lack of capacity for new health care loans, bond investors will still typically want to buy bonds and finance nursing homes. Also, underwriters examine feasibility studies The analysis of a problem to determine if it can be solved effectively. The operational (will it work?), economical (costs and benefits) and technical (can it be built?) aspects are part of the study. Results of the study determine whether the solution should be implemented. rather than real estate-based appraisals to determine adequacy of loan security and project credit. The primary disadvantages of a bond issue are the number of entities and complexity involved in structuring the various documents and the time required to prepare and review those documents. Real Estate Investment Trusts Generally REITs obtain their capital by selling stock, or debt, to the public. The funds obtained are then lent to borrowers. Several REITs specialize spe·cial·ize v. 1. To limit one's profession to a particular specialty or subject area for study, research, or treatment. 2. To adapt to a particular function or environment. in nursing home loans. Most REITs prefer to lend for refinancing, expansion, and renovation, rather than start-ups. A significant part of their capital is obtained from short- and medium-term debt offerings (one to ten years), so they prefer to make loans with medium-term maturities (five to ten years). The key feature distinguishing REIT REIT See: Real Estate Investment Trust REIT See real estate investment trust (REIT). loans from other sources of financing is the participation terms. A borrower generally is required to pay a portion of the project's positive cash flow in addition to the upfront points and ongoing interest payments. An advantage of REITs specializing in nursing home loans is that they are familiar with industry trends and the analysis of nursing home loan requests. These REITs are a ready source of cash for projects that meet their credit criteria. On the other hand, REITs, because of the participation aspect of their loans, tend only to lend to the healthiest projects. Federal Housing Administration-Insured Loans Under Section 232 of the National Housing Act of 1959, the federal government is able to insure Insure can mean:
 d), a pre-Qur'anic prophet of Islam. Hud unsuccessfully exhorted his South Arabian people, the Ad, to worship the One God. ) regional offices. FHA insurance is available to
both profit and nonprofit nursing homes. Since the FHA will insure
payments of interest and principal for a 40-year fixed-interest-rate
amortization and maturity, these loans usually are made by lenders in
the public debt markets--tax-exempt bonds and the Government National
Mortgage Association-rather Association--rather commercial or savings
banks savings bank, financial institution that, until recently, performed only the following functions: receiving savings deposits of individuals, investing them, and providing a modest return to its depositors in the form of interest. .
Application for an FHA insured loan is a three-step process: (1) a site analysis and market appraisal, (2) a conditional commitment, (3) a firm commitment. In this process, FHA professionals evaluate demand for the nursing beds; suitability of site; operating assumptions; projects costs; requirements for design, permit, and approval; the ability of the owner or management firm to manage the project; and the ability of the architect and contractor to properly design and build it. The FHA program requires that the borrower contribute for working capital at least 10 percent equity toward the cost and provide certain letters of credit during construction and initial fill-up. FHA fees include 1.3 percent of the loan at closing, an annual servicing fee, and an annual insurance premium equal to one-half of one percent of the principal balance outstanding. The low fixed interest rate and 40-year amortization available through the FHA's program make it very attractive. However, FHA requirements are quite detailed, and the process of application and approval may be more lengthy (generally eight months) and time-consuming than that of other financing methods. Borrowers who use FHA-insured loans must comply with the federal Davis-Bacon wage act. This can increase the cost of building construction. For-profit nursing homes unable to meet a bank's lending standards and unwilling to take on the participating loan requirements of a REIT may find this program quite attractive. Experienced nonprofits with substantial resources may obtain terms almost as attractive, however, through a tax-exempt bond issue. When it comes to an expansion project there are a number of choices for the nursing home planning to go into the debt financing market. However each has its own advantages and disadvantages. There is no substitute for knowledge and experience when it comes to analyzing the possibilities. RELATED ARTICLE: 10 Keys to Financing 1. Equity requirements. Equity represents costs (both construction and non-construction) of a project paid with the borrower's own funds. The minimum percentage of project costs that a lender requires a borrower to pay with equity depends upon the lender's credit criteria, and that amount may be zero for an expansion project. 2. Maturity and amortization features. Maturity represents the term of the loan, and amortization the schedule of principal payment over the term. 3. Debt service coverage ratio The debt service coverage ratio (DSCR), or debt service ratio, is the ratio of net operating income to debt payments on a piece of investment real estate. It is a popular benchmark used in the measurement of an income-producing property’s ability to produce requirements. Each lender imposes minimum requirements for the ratio of existing and anticipated funds available for debt service payments due the lender from the borrower. 4. Working capital requirements Capital requirements Financing required for the operation of a business, composed of long-term and working capital plus fixed assets. . Each lender has requirements for borrower liquidity. A key measure of liquidity is the borrower's existing and anticipated working capital (i.e., current assets Current Assets Appearing on a company's balance sheet, it represents cash, accounts receivable, inventory, marketable securities, prepaid expenses, and other assets that can be converted to cash within one year. minus current liabilities Current Liabilities Usually appearing on a company's balance sheet, it represents the amount owed for interest, accounts payable, short-term loans, expenses incurred but unpaid, and other debts due within one year. ). 5. Management experience requirements. Lenders often use subjective criteria to evaluate management experience. In the first meeting with a lender, detailed questions about the lender's expectations in this area should be asked so that the borrower can determine whether its management team meets the lender's minimum criteria. 6. Variable vs. fixed interest rate levels. Generally, variable rates are lower on a current basis, but they will move up as market interest rates increase; they may also move down. Fixed interest rates allow borrowers to lock-in interest expense over the term of the loan. 7. Collateral and security requirements. Lenders require various levels of collateral, ranging from only a general obligation (promise to repay the loan), to a first mortgage on the financed assets and other property, to a lien on the project revenues and the revenues and investments of other projects. 8. Lender familiarity with a state's reimbursement system. Third-party reimbursement (e.g., Medicaid and Medicare) is a large part of most nursing homes' revenues. Therefore, the level of comfort a lender has with this source of revenue as a key component of the project funds available to pay debt service should be ascertained as·cer·tain tr.v. as·cer·tained, as·cer·tain·ing, as·cer·tains 1. To discover with certainty, as through examination or experimentation. See Synonyms at discover. 2. early in the process. 9. Contractor and architect requirements. For new construction, renovation, and expansion projects, a lender imposes its own requirements for contractor bonds, experience, liquidated damages Monetary compensation for a loss, detriment, or injury to a person or a person's rights or property, awarded by a court judgment or by a contract stipulation regarding breach of contract. . form of construction contract, and architect experience. When evaluating alternative lenders be sure to obtain information about these requirements. 10. Market analysis or appraisal. Each lender performs or asks the borrower to engage a professional to perform a demand analysis demonstrating need for the nursing beds to be built, refinanced, or renovated. Banks may require an appraisal of project value rather than a demand analysis. The borrower must understand the form of analysis and level of demand each lender seeks. Roderic L. Rolett, is Senior Vice President of Herbert J. Sims & Co., and is long-experienced in the financing of nursing home expansions. |
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