Robert Shapiro recalls how tightening capital markets almost tripped up a $325 million construction project for North Shore-Long Island Jewish (LIJ) Health System, the nation’s second largest nonprofit healthcare organization.
“Construction began right when interest rates started spiking in 2008. The market was nervous, no one was buying bonds, the whole future looked uncertain,” the CFO says. To finance interim construction costs, the healthcare facility turned to its $200 million bank line of credit. “You just can’t turn off the cash spigot when you have these kinds of outstanding commitments. Having a line of credit at hand was like having our own internal bridge financing option.”
Quick thinking and the luxury of an established credit line allowed Shapiro to keep construction on schedule. Unlike other facilities that had their lines of credit pulled, banks were comfortable with North Shore LIJ’s strong credit risk rating, although the hospital didn’t escape completely unscathed.
“They still hiked the annual fees and interest rate costs,” Shapiro comments wryly.
What a difference a few years make. Before 2008, capital markets were awash with financing options for healthcare facility renovations. Not anymore. Between Wall Street’s meltdown, spiking tax-exempt variable rates, disappearing bond insurance players, expiring Build America Bonds, and reduction of the bank qualification limits program, 2011’s capital markets are a far cry from the bullish healthcare finance markets of 2005 and 2006.
These days, financial due diligence is stricter and underwriting requirements are tougher. Even funding timelines have increased, ranging between 90 to 120 days and even longer if credit-enhanced financing is involved. “Five years ago, capital financing options were more flexible. Lenders are much more hands-on now to ensure construction draws stay on target and that the hospital has sufficient funds to complete the project,” says Michael Roynan, partner at Stradley, Ronan, Stevens & Young, LLP. “Want a new, 100-bed facility? Then expect greater compliance requirements than in the past.”
Yet while lenders are treading cautiously, Matthew Lindsay, vice president at Lancaster Pollard, an independent healthcare financing firm headquartered in Columbus, Ohio, advises that there are still plenty of financing options available for clients who understand the fundamentals and are willing to exercise a little patience and flexibility.
In the beginning
Successful projects begin with understanding the plans and the costs before approaching the bank. Is it a brick-and-mortar wing addition, an electronic records system installation, general renovations, or environmental upgrades like solar panels and seismic retrofitting? Answering these questions clarifies initial project scope while alerting executives to potential costly project overruns.
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