The Office of Hospital Facilities published a final rule in the Feb. 5, 2013 Federal Register launching the new FHA Section 242/223(f) refinancing and acquisition program. This program will provide hospitals with access to low, fixed interest rate mortgage loans to refinance their existing debt without requiring new construction or renovation. The new rule will take effect on March 7, 2013.
This program can be used by hospitals that do not have an existing FHA Section 242 insured mortgage. Existing capital debt can be financed if the hard costs are less than 20 percent of the total mortgage amount. Capital debt is defined as "the outstanding indebtedness used for construction, rehabilitation or acquisition of the physical property and equipment of a hospital, including those financing costs approved by the U.S. Department of Housing and Urban Development." Hard costs are defined as "the costs of the construction and equipment, including construction-related fees such as architect and construction manager fees." Approved financing costs include customary legal, organizational and consulting costs as well as interest capitalized during construction, prepayment penalties associated with retiring the hospital's existing debt and termination costs for interest rate protection facilities that are integrated into the original financing.
The changes provided by this new rule will provide a source of needed financing for hospitals that will aid to reduce interest costs, eliminate restrictive debt covenants and stabilize a hospital's financial position so the hospital can continue to provide healthcare to the community it serves.
To qualify for this program, hospitals must:
1. Obtain an aggregate operating margin of at least zero percent, using the three most recent annual audited financial statements.
2. Maintain an average debt service coverage ratio of at least 1.4 times, using the three most recent annual audited financial statements.
If the two requirements above are not met, HUD will recast the operating margin and debt service coverage ratio for the three years by estimating the interest savings when the mortgage is expected to close in lieu of the historical interest costs.
In addition, if financial performance in one of the three years was affected by an exceptional one-time event that substantially altered performance, HUD may calculate the three year performance based on the four most recent years, with the unusual year omitted.
3. Document that it provides an essential healthcare service to the community in which it operates, and its financial performance would be materially improved by refinancing existing capital debt.
The hospital may show that it provides an essential healthcare service to the community by submitting an analysis quantifying how the community would suffer from inadequate access if the hospital were no longer in operation.
The hospital may show that its financial performance would be materially improved by providing documentation of the following:
a. There are limited affordable refinancing vehicles available to the hospital, and
b. The hospital must meet three of the following seven criteria:
Once HUD is satisfied that the above criteria are met the next step in the process is to have a pre-application meeting at HUD's discretion. The pre-application meeting may be held at HUD headquarters in Washington, D.C., or at another site agreeable to HUD and the hospital. This meeting allows the hospital to tell their story, including a summary of the proposed refinancing. It also allows HUD to summarize the application process. If HUD is satisfied that the hospital meets the FHA Section 223(f) requirements, the hospital may be invited to submit a HUD application. The new published rule also revises the existing application process to minimize the administrative burden and the possibility that worthy applicants will be eliminated before their application is given full consideration.
Richard Rollins is partner-in-charge of the Dixon Hughes Goodman Hospital Capital Strategies Group and has more than 30 years of experience in the healthcare industry. During his accounting career, he has provided a broad range of healthcare consulting services including third-party reimbursement, total quality management, business process reengineering and operations improvement. He is a member of HUD's Committee on Healthcare Financing and he communicates regularly with HUD personnel. He has performed a number of feasibility studies for FHA Section 242 financings, USDA loans and bond issuances.
Karen Lloyd is senior manager of the Dixon Hughes Goodman Hospital Capital Strategies Group and has more than 10 years of experience in the healthcare industry. She currently provides debt capacity studies and feasibility models for hospitals and is well-versed in the requirements of the FHA Section 242 mortgage insurance program.
Randy Medlin is a manager in the Dixon Huges Goodman Hospital Capital Strategies Group and has more than 30 years of healthcare financial experience, with 23 of those as a hospital CFO. His experience includes overseeing the financial management of a hospital with $170 million in total assets, coordinating three tax-exempt revenue bond issues, providing financial feasibility for the construction of a new hospital and the completion of a four-phase master facility plan. He is also responsible for the selection and implementation of two hospital information systems, strategic capital planning and he served as chief security officer. He has extensive experience in revenue cycle management, process improvements and strategic planning.
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Who benefits from this program?
This program can be used by hospitals that do not have an existing FHA Section 242 insured mortgage. Existing capital debt can be financed if the hard costs are less than 20 percent of the total mortgage amount. Capital debt is defined as "the outstanding indebtedness used for construction, rehabilitation or acquisition of the physical property and equipment of a hospital, including those financing costs approved by the U.S. Department of Housing and Urban Development." Hard costs are defined as "the costs of the construction and equipment, including construction-related fees such as architect and construction manager fees." Approved financing costs include customary legal, organizational and consulting costs as well as interest capitalized during construction, prepayment penalties associated with retiring the hospital's existing debt and termination costs for interest rate protection facilities that are integrated into the original financing.
The changes provided by this new rule will provide a source of needed financing for hospitals that will aid to reduce interest costs, eliminate restrictive debt covenants and stabilize a hospital's financial position so the hospital can continue to provide healthcare to the community it serves.
Which hospitals are eligible for this program?
To qualify for this program, hospitals must:
1. Obtain an aggregate operating margin of at least zero percent, using the three most recent annual audited financial statements.
2. Maintain an average debt service coverage ratio of at least 1.4 times, using the three most recent annual audited financial statements.
If the two requirements above are not met, HUD will recast the operating margin and debt service coverage ratio for the three years by estimating the interest savings when the mortgage is expected to close in lieu of the historical interest costs.
In addition, if financial performance in one of the three years was affected by an exceptional one-time event that substantially altered performance, HUD may calculate the three year performance based on the four most recent years, with the unusual year omitted.
3. Document that it provides an essential healthcare service to the community in which it operates, and its financial performance would be materially improved by refinancing existing capital debt.
The hospital may show that it provides an essential healthcare service to the community by submitting an analysis quantifying how the community would suffer from inadequate access if the hospital were no longer in operation.
The hospital may show that its financial performance would be materially improved by providing documentation of the following:
a. There are limited affordable refinancing vehicles available to the hospital, and
b. The hospital must meet three of the following seven criteria:
- The proposed refinancing would reduce the hospital's operating expenses by at least .25 percent;
- The interest rate of the proposed refinancing would be at least .5 percentage points lower than the rate on the debt to be refinanced;
- The interest rate on the debt to be refinanced has increased by at least one percentage point at any time since Jan. 1, 2008, or is very likely to increase by at least one percentage point within one year of the date of the HUD application;
- The hospital's annual total debt service is in excess of 3.4 percent of total operating revenues, using the hospital's most recent audited financial statements;
- The hospital has experienced a withdrawal or expiration of its credit enhancement facility, or the lender providing the credit enhancement facility has been downgraded or the hospital can demonstrate that one of these two events is imminent;
- The hospital is party to bond covenants that are substantially more restrictive than the FHA Section 242 mortgage covenants; and
- There are other circumstances that demonstrate that the hospital's financial performance would be materially improved by refinancing its existing capital debt.
What happens next?
Once HUD is satisfied that the above criteria are met the next step in the process is to have a pre-application meeting at HUD's discretion. The pre-application meeting may be held at HUD headquarters in Washington, D.C., or at another site agreeable to HUD and the hospital. This meeting allows the hospital to tell their story, including a summary of the proposed refinancing. It also allows HUD to summarize the application process. If HUD is satisfied that the hospital meets the FHA Section 223(f) requirements, the hospital may be invited to submit a HUD application. The new published rule also revises the existing application process to minimize the administrative burden and the possibility that worthy applicants will be eliminated before their application is given full consideration.
Richard Rollins is partner-in-charge of the Dixon Hughes Goodman Hospital Capital Strategies Group and has more than 30 years of experience in the healthcare industry. During his accounting career, he has provided a broad range of healthcare consulting services including third-party reimbursement, total quality management, business process reengineering and operations improvement. He is a member of HUD's Committee on Healthcare Financing and he communicates regularly with HUD personnel. He has performed a number of feasibility studies for FHA Section 242 financings, USDA loans and bond issuances.
Karen Lloyd is senior manager of the Dixon Hughes Goodman Hospital Capital Strategies Group and has more than 10 years of experience in the healthcare industry. She currently provides debt capacity studies and feasibility models for hospitals and is well-versed in the requirements of the FHA Section 242 mortgage insurance program.
Randy Medlin is a manager in the Dixon Huges Goodman Hospital Capital Strategies Group and has more than 30 years of healthcare financial experience, with 23 of those as a hospital CFO. His experience includes overseeing the financial management of a hospital with $170 million in total assets, coordinating three tax-exempt revenue bond issues, providing financial feasibility for the construction of a new hospital and the completion of a four-phase master facility plan. He is also responsible for the selection and implementation of two hospital information systems, strategic capital planning and he served as chief security officer. He has extensive experience in revenue cycle management, process improvements and strategic planning.
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