When it comes to building hospitals, resolving the unexpected is expected. Fred Wolters, principal architect and healthcare leader at North Carolina-based BJAC, will never forget the time he struck gas at one of his construction sites.
Today, the hospital is an energy-efficient facility complete with its own gas well. But at the time, there were concerns about how to build on top of something that could potentially explode.
“You just can’t pick up a project and move it elsewhere,” Wolters says. “We had to get completely different folks who were able to help, start drilling operations, and ensure we knew how to contain, cap it, and utilize it.”
Just another day at the office, some might say.
Indeed, today’s construction managers do more than just manage a schedule. Decreasing government reimbursable amounts and still-jumpy capital markets mean healthcare executives want fresh alternatives for getting facilities up and running by last week.
Today’s fast-changing healthcare landscape can quickly affect building schedules if subtle nuances are either ignored or misunderstood. “The architect, engineering, and construction industry needs to understand our client’s business, what drives it, how they make decisions and how we can better support them,” says Andrew Quirk, senior vice president of Skanska USA’s National Healthcare Center of Excellence.
Straightforward funding, straightforward building
Possibly the most efficient way to finance a project, self-funding occurs when hospitals carve out funds from one of three areas—capital expenditure accounts or cash from defined or non-defined contributions.
Small to midsize hospitals might have $10 million to $20 million dollars directly available while larger medical centers could have significantly more. The advantage to self-funding is that all decisions are internal. Potential problems with change orders, invoice backup, or subcontractor feasibility are quickly resolved with direct executive, builder, and design team communications.
Where self-funding falls short, lend lease financing steps in. Lend lease, also known as a sale-leaseback, is a popular maneuver for healthcare executives wanting a new facility but not the maintenance upkeep headaches and balance sheet hit that comes with owning one. Developers—such as Cushman Wakefield, Trammell Crow, or Duke Realty—will often finance and build the new facility before leasing it back to the hospital once construction is complete.
“The advantages to both parties are significant,” says Matthew Lindsay, vice president at Lancaster Pollard, an independent healthcare financing firm headquartered in Columbus, Ohio. “Hospitals not only get their new facility constructed faster, since they are working with a private developer, but they can also access ready capital through a multi-billion-dollar company without having to approach the capital markets.”
Likewise, the developer negotiates a profitable lease with a reliable tenant while reaping real estate value gain on its own balance sheet.
Hospital executives hesitant about the current capital markets but unwilling to relinquish valuable real estate will also consider participation loans. Participations happen when four or five banks finance a deal with one bank shouldering both the majority of the default risk and earnings gain.
The lead bank typically sets the credit terms and conditions and will either pull together the funds from a network of sister banks or approach an underwriter to help place the deal with other interested lenders.