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
||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
||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
||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
||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
Tax-exempt bonds have additional requirements to assure
that the laws and regulations governing tax-exempt bonds
||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
||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.
DORMITORY AUTHORITY OF THE
STATE OF NEW YORK
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
STATE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
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.
INDUSTRIAL DEVELOPMENT AGENCIES
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.
BOND MARKET ASSOCIATION
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