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In their search for capital financing, finance officers in health care organizations have questions, and may not know where to start. Following is a list of Frequently Asked Questions. See also the list of useful links included here. Do not hesitate to contact us for more information.

What is the difference between tax-exempt bonds and a loan from my local bank?
In general, tax-exempt bonds have a lower interest rate and a longer term than a loan from a bank. Depending on conditions in the credit markets, tax-exempt debt can have an interest rate that is substantially lower than a taxable bank loan. Also, tax-exempt bonds usually have a longer amortization period than a taxable loan. The longer amortization period and lower interest rate substantially decrease the debt service paid on an annual basis.
Should my organization always borrow capital funds using tax-exempt bonds?
Only non-profit organizations having received an approval from the Internal Revenue Service can borrow using tax-exempt bonds. Also, tax-exempt bonds can only be used for certain purposes that must be approved by a special tax counsel.
Where do I go to borrow using tax-exempt bonds?
Tax-exempt bonds may only be issued by a government agency. In New York State there is a statewide agency, the Dormitory Authority of the State of New York, which issues tax-exempt bonds for health care providers. There is also an agency in your locality, an Industrial Development Agency, which also has the authority to issue tax-exempt bonds on behalf of non-profit health care organizations. The requirements of the Dormitory Authority and the Industrial Development Agency differ in important respects and these should be compared before deciding on an issuing agency.
What interest rate will my organization pay?
Interest rates vary considerably depending on conditions in the credit markets as a whole. In general interest rates depend on the level of risk perceived by the investor and the length of time the bonds are outstanding. The greater the level of risk and the longer the amortization period, the higher the interest rate will be. You can find the current level of interest rates for tax-exempt bond issues by visiting the web site of the Bond Market Association.
What legal documents are involved in borrowing for a capital project?

There are too many legal documents involved to list them all. In general, however, the legal documents have provisions that cover the following areas:

  • A lien on the revenue of the borrower
  • A mortgage on the land and building being financed
  • Financial tests that must be met on an ongoing basis
  • Requirements and limitations on actions such as incurring additional debt, merging or disposing of assets.

Tax-exempt bonds have additional requirements to assure that the laws and regulations governing tax-exempt bonds are met.

What are the up-front costs for borrowing?
Both tax-exempt bonds and taxable loans have a number of up-front fees in common. These include legal fees, consultant fees, title insurance, environmental reviews, and commitment fees. In addition, tax-exempt bonds have fees for the investment banker for selling or placing the bonds, the bond issuing agency and its counsel, the State and the Department of Health and in some cases, fees to insurance companies and banks that provide a guaranty for the tax-exempt bonds. A good rule of thumb is to use a cost of issuance of 4% to 6%, depending on the amount of the loan. The greater the loan, the lower the cost of issuance as a percentage of the loan amount.
My organization has a high interest rate on its tax-exempt bonds. Can I refinance and get a lower interest rate?
The answer is yes, but with some important limitations. Unlike a home mortgage which can be repaid at any time with no penalty, both taxable and tax-exempt debt have limitations on when debt can be repaid and a penalty for prepaying it early. In general, tax-exempt bonds cannot be repaid or "called" until 10 years after they are issued, and then only at a premium that decreases over time. However, there is a financing technique known as an advance refunding, which can be used to refinance the bonds before the call date.
We have long term debt on our balance sheet and need to borrow additional capital debt. Are there any limitations on our doing so?
Most long-term debt, both taxable and tax-exempt, has an additional debt covenant requiring that certain financial tests be met before additional debt can be issued. If the covenants are onerous, it may be worthwhile to refinance the existing debt to eliminate them.
We have issued tax-exempt bonds and as a result we have restricted reserves on our balance sheet. What are these and how do we access them?
In general, there are two types of reserves involved in a tax-exempt bond issue. One is for the bonds (held by a trustee). Others are required if the hospital or nursing home's mortgage is insured by FHA. The first is known as a "debt service reserve fund," and is meant to be used only if there is a default in the mortgage payment. It is difficult to access this reserve, although some documents permit the substitution of a letter of credit or a surety bond. There are various other reserves mandated by the FHA, and require that agency's permission to use them.

The Dormitory Authority, commonly known as DASNY, is the New York State Agency which issues tax-exempt bonds on behalf of non-profit hospitals and nursing homes and other non-profit health care providers. It is one of the largest issuers of tax-exempt bonds in the nation and has a variety of financing programs.

Through the Federal Housing Administration (FHA) the federal government provides mortgage insurance for hospitals, nursing homes and community health centers. When tax-exempt bonds are used to make a mortgage loan which is insured by FHA, the interest rate on the bonds is very competitive. The United States Department of Health and Human Services assists HUD in administering the insurance programs for hospitals and community health centers. Both HUD and HHS have web sites devoted to these mortgage insurance programs.

All counties in the State and many localities have Industrial Development Agencies (IDA) which may issue tax-exempt bonds for non-profit hospitals, nursing homes and other non-profit health care providers. The statewide organization of IDAs is the New York State Economic Development Council. The Council's web site lists the phone number and contact person for the IDAs in the State by region.

The Bond Market Association's web site provides a variety of information about tax-exempt bonds. This web site also provides information on current levels of interest rates for tax-exempt bonds that are being traded in the market place.

One of our standard recommendations to our clients is to develop a strategy for qualifying for an investment grade rating from at least one of the standard rating agencies: Fitch Ratings, Moody's Investors Service, or Standard & Poor's. It may take at least 5 to 7 years to accomplish this depending on the facility's financial condition. But in the long run an investment grade rating greatly enhances access to capital. The rating agencies' web sites provide information on the rating process and the financial ratios that are used in setting a rating. This information is contained in the health care area of the public finance section of the web site.



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