Facilities modernization and renovation of a medical facility.
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A hospital's renovation project can be financed through a diversity of financing techniques. Although the traditional vehicle for hospital capital financing is long-term, fixed-rate debt, there are a growing number of short-term financing alternatives that can provide greater flexibility and generate debt service savings. The author describes some of the new short-term financing techniques, as well as the advantages and disadvantages of short- versus long-term financing.
By applying financial management techniques that are more traditionally associated with corporate businesses, an Illinois hospital was able to generate the funds needed for a new replacement facility at a time when the money market was especially tight. The authors explain the structure of the hybrid financing package they used, and how such a strategy enabled the hospital to generate $61 million in capital at an interest rate almost 5 percent below prime.
As access to capital tightens, more hospitals are exploring the benefits of partnerships with private companies. A California hospital, burdened by the long-term debt it incurred for a medical office building, worked together with its medical staff and an outside real estate developer. By selling the building to the developer, not only was the hospital able to finance a much-needed expansion and reconstruction project, but the hospital's medical staff had an opportunity to become limited partners in the ownership of the building.
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As hospitals search for means of financing renovation during the next decade, physicians will represent a source of capital through tax-shelter financing. Limited partnerships, condominiums , and joint ventures in acquiring medical equipment or syndicating existing facilities are among the most promising investment vehicles for taking advantage of tax benefits that normally do not apply to nonprofit institutions. In a hospital-physician limited partnership, tax deductions are passed through to the partners, of which there are two kinds: general partners and limited partners. Income (or loss) and tax credits from the entire venture can be divided among the partners and reflected on an individual limited partner's tax return. Rather than shouldering the whole cost of renovating a medical office building, thereby losing the potential tax credit, a hospital could carry out the renovation through a limited partnership with physicians. This would reduce the hospital's capital costs and debt requirements, maintain its credit, and enable it to take advantage of the depreciation deduction. In a condominium venture, the individual physician actually owns the office within which he or she works. As with the limited partnership, the hospital will want to restrict physicians' ability to dispose of their ownership interests.(ABSTRACT TRUNCATED AT 250 WORDS)
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The Department proposes to modify its regulations governing the maximum mortgage principal amount that it will insure for a new or rehabilitated hospital. Under its existing regulations, the Department can insure a mortgage in any amount that does not exceed 90 percent of HUD's estimate of the replacement cost of the hospital (including major movable equipment). Under the proposal, however, the loan to replacement cost ratio would vary for insured mortgages on projects where the replacement cost exceeds 100 million dollars. In essence, the mortgagor's equity requirements would be required to increase as the principal obligation sought to be insured increased. This proposal is intended to (a) mitigate the possibility of large-scale defaults in future years; (b) ensure the long-term adequacy of the Department's insurance fund, and (c) avoid undue concentration of insurance commitments in a relatively small number of projects.
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