Case Study

Developing a Financing Program for New Hospital Construction


BACKGROUND

In 2009, a hospital in a California health system began the process of seeking funding for construction of a new six-story, 325,000-square-foot hospital that would meet state seismic requirements.

Hospital officials had explored having the financing insured through the Federal Housing Authority (FHA) Mortgage Insurance Program (HUD-242 Program), an agency that would insure debt payments associated with the construction and long-term financing. The FHA was ruled out as an option because it has a limit on the amount of debt it will insure on design-build construction projects. In order to be considered, the hospital would have had to change its plans.

HFS PROVIDES HEALTHCARE FINANCIAL EXPERTISE

In 2010, bank executives contacted HFS Consultants to conduct a financial feasibility study to determine if the hospital had sufficient debt capacity to afford the project. The study projected future utilization and financial performance of the hospital as well as examining the amount of debt that hospital operations could afford. The study was submitted to Cal-Mortgage, which offers loan insurance for hospitals pursuing upgrades. The program declined handling the financing, concerned that the loan was too large for its portfolio. The hospital's investment bankers, HFS Consultants and hospital executives then decided to explore alternative options and settled on considering uninsured, non-investment grade tax-exempt financing in the market.

FINANCING SECURED

HFS Consultants, the hospital’s investment bankers and hospital executive team met with fund managers from Los Angeles to Boston to New York and presented the financial feasibility study and projections prepared by HFS, along with details regarding the history of the hospital and the project.

The group’s efforts proved successful when the financing was secured for the health system through tax-exempt revenue bonds.

Groundbreaking on the hospital project occurred in 2011.

 


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