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Financing Your Hospital Construction Project

By CME on Sep 9, 2014 12:21:12 PM

ID-1009160Success in design and construction of healthcare facilities is dependent on many factors, including a strong focus on the patient experience, application of cutting edge technology, adherence to a schedule, and strict control of the budget.  The most critical factor in assuring the successful completion of a construction project is obtaining adequate financing to cover all of the actual construction costs, along with the attendant equipment costs to properly outfit the newly constructed space. In addition, with procurement costs consuming between 30% and 50% of total project funds, allowances need to include in the construction budget for shipping, storing, delivering, and installing the equipment.  In addition, the involvement of reliable clinical consultants, along with space and equipment planners may be of great benefit to the success of the project.

However, when all is said and done, you need the funds to work on the project. Here are four common sources of funding for hospital construction projects:

  • Unlimited Tax General Obligation Bonds (UTGOBs)

These funds are available for public hospitals, Critical Access Hospitals, and less-than-100-beds rural hospitals; non-profit hospitals cannot access these funds.  The amount of funding available is limited by voter approval.  These funds can only be used to construct and/or improve healthcare facilities, or to acquire equipment for “public” use.  The interest rates for the bonds are fixed and guided by day of pricing and market trends on that day.  The process of issuing UTGO bonds typically takes between 6 and 12 weeks.  There are neither collaterals nor covenants to worry about because UTGO bonds are secured and paid for from an excess levy.

  • Limited Tax General Obligation Bonds (LTGOBs)

LTGO bonds, like UTGOBs are available for public district hospitals, Critical Access Hospitals, and less than 100 beds rural hospitals and also are not available for not-for-profit hospitals.  The funds must be used to improve and/or equip healthcare facilities and are usually available approximately 90 days from the date of approval.  The main difference between UTGO and LTGO is that LTGO bonds are taxed while UTGO bonds are not.  Although tax revenues support both LTGO and UTGO bonds, regular taxing authorities collateralize LTGO bonds.  The bonds can mature within 20 to 30 years but must not exceed 40 years.

  • Tax Exempt Revenue Bonds (TERBs)

TER bonds are available for public district hospitals, critical Access hospitals, less than 100 beds rural hospitals, and non-profit hospitals.  The amount of funding available depends on credit factors that determine the hospitals debt capacity including, among other things, debt service coverage and days of cash-on-hand.  Again, the funds must be used to improve and/or construct healthcare facilities or acquire equipment for public hospitals.  The loans mature within 1-30 years depending on the life cycle of the project in question and are usually available 8-16 days from date of approval. Covenants are present and may include, among other things, quarterly financial reporting and maintenance of insurance.  Not-for-profit hospitals are required to provide a mortgage on real property as collateral.

  • HUD 242 Loan Insurance Program

Finally, the HUD 242 Program can also provide funds for hospital construction projects.  The funds are available for public district hospitals, critical access hospitals, less than 100 beds rural hospitals as well as not-for-profit hospitals. There is no limit as to how much a project may be awarded; however, every cent provided must be used in construction financing, remodeling, expansion, refinancing modernization and/or purchase of equipment.  Loans are available between 60 and 120 days from date of approval and mature within 25 years of the date of issuance.  Typical covenants include transfer of assets and annual audits and the first mortgage on the entire facility is required as collateral.

For all the options, the cost of issuance is set at approximately 2-3% of the par amount of the bonds.

With over 30 years of providing medical products and equipment service to the healthcare industry, Claflin Medical Equipment is the only full-service, direct-to-site distributor.  If you’re planning a renovation or new facility build, contact us.  Our mission is to work with you and for you, offering project planning assistance and procurement cost-effective solutions.

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Image courtesy of: Michelle Meiklejohn/ Freedigitalphotos.com

Topics: hospital construction project, financing hospital construction, Bonds, Loans

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