Presentation for Northeast Hospital Corp.

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Capital Project Financing, Loan Guarantees,
Stimulus Funding, and Grant Opportunity Success
Stories
LRGHealthcare Laconia Campus
John Weaver/Seth Gabarro DiGiorgio Associates
Inc. Phil Chaput LRGHealthcare Jeffrey Sacks
Nixon Peabody LLP Larry Brown DAI Mike Kessler
- DAI
March 19, 2010
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• Results of Economic Downturn
• First recession in decades that has negatively
  affected healthcare financing
• Banks are in crisis-much more conservative with
  funding capital projects
• Healthcare must remain competitive
• Lack of access to capital has challenged
  financing for facility, equipment and
  technology needs as well as meet obligations on
  existing debt
• Healthcare facilities are looking for alternative
  funding sources
• Moodys has a negative outlook for the US
  not-for-profit hospital sector
• The weakened economy remains and recovery of
  not-for-profit hospitals will likely be delayed
  until after the broad economy heals
• Many hospitals have to update their
  infrastructure and making rooms sensitive to
  patient needs and advancing technology remains a
  priority
• More than 49 of hospitals are financing smaller
  construction projects from existing cash reserves

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• Capital Project Funding Sources - Overview
• Conventional Sources of Capital
• Alternative Funding Sources
• - HUD 242
• - USDA
• New Market and Historic Tax Credits
• Stimulus Grants
• Grants and Fundraising
• - Robert Wood Johnson Foundation
• - Baldrige Award
• Kresge Foundation
• Specialty Funding Sources
• - Energy/Wood Fuels Grants

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• HUD Backed Financing
• HUD-Housing Urban Development
• Established in 1965
• FHA (Federal Housing Administration) a division
  of HUD
• Not a funding agency is the largest government
  insurer of mortgages in the world
• HUD insures loans resulting in lower interest
  rates
• HUD insures up to 90 of the loan
• Lenders bear minimal risk because HUD is insuring
  debt

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• Eligibility for HUD 242 Backed Financing
• Facility must be an acute care hospital with no
  more than 50 of patient days attributable to the
  following services
• chronic convalescence and rest, drug and
  alcoholic, epileptic, nervous and mental, mental
  deficiency and tuberculosis
• for Critical Access Hospitals this restriction
  does not apply
• If state has a CON process, CON must be issued or
  pending
• Must grant FHA-insured lender a first mortgage on
  the entire hospital including property, plant,
  equipment, and receivables
• Must be willing to make monthly payments into a
  Mortgage Reserve Fund that will build to a
  balance equal to two years of debt service after
  ten years
• Average operating margin for last 3 fiscal years
  to be greater than or equal to 0
• Average debt service coverage ratio greater than
  or equal to 1.25
• Design/Build projects must have mortgage amounts
  under 30 million

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• HUD 242 Loan Fees/Requirements
• Loan to value may not exceed 90
• Maximum loan term 25 years
• One-time fee of .8 of loan amount
• Annual premium of .5 of remaining balance
• Hospital must be able to provide first mortgage
  lien on the hospitals real estate
• When justified by circumstances, financial
  margins may be varied

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• Applying for HUD Backed Funding
• Choose a lender-FHA maintains a list of lenders
  who are active in the hospital mortgage insurance
  program
• Preliminary Review-FHA will perform a free
  preliminary review of the hospital and project to
  make sure that basic eligibility criteria are met
• Pre-Application Meeting-If the hospital passes
  the preliminary review, the lender and
  representatives of the hospital are invited for a
  pre-application meeting
• Submit Application-Please refer to the
  Applicant's Guide or the Applicant's Guide for
  Critical Access Hospitals
• Underwriting-conducted by staff members of FHA
• Commitment-If the hospital and project meet FHA's
  requirements and the FHA Commissioner approves
  the application, a commitment for mortgage
  insurance is issued
• Closing-FHA counsel assists the mortgage lender,
  hospital, and their legal representatives to
  close the loan

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• HUD Pre-Construction and Construction
• Owner and CM should meet with HUD before the GMP
  process to have an understanding of the
  requirements.  Some specifics of the HUD process
  outlined below
• - A preferred list of trade bidders is allowable,
  but they must meet the pre-established
  prequalification requirements
• - All subcontractors who meet the
  prequalification requirements must be allowed to
  bid
• - Trade bids must be solicited and opened
  publicly
• - Award must go to the lowest bidder
• - Prevailing Rate Requirements (David Bacon Act)
  apply
• - HUD must approve, but is not a party to, the
  contract
• Surety performance and payment bond required from
  CM
• During construction, HUD staff members monitor
  and approve loan draws and perform monthly site
  visits
• Final Endorsement-Once construction is completed
  and the final draw has been made, the final
  mortgage amount is established and amortization
  begins

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• Case Study LRGHealthcare Lakes Region General
  Hospital
• LRGHealthcare Lakes Region General Hospital, is
  an acute care, 137 bed facility located in
  Laconia, New Hampshire, and a long-standing
  client of DiGiorgio Associates Inc.
• LRGH received capital loan and refinancing
  amounts equaling 142 million. This is a savings
  of 26 million during the life of the loan
• LRGH submitted a 42 million CON for the first
  phase implementation of the 95 million Facility
  Master Plan we completed with the hospital in
  2006. DAI then completed Construction Documents
  for implementation of Phase I of the Master
  Plan
• DAI and MBI assisted LRGH with HUD
  financing
  deliverables

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• Case Study LRGHealthcare Lakes Region General
  Hospital
• HUD Process from a Facilities Managers
  Perspective
• Involvement of Facilities Department in Process
• ALTA Surveys
• Phase 1 Environmental Surveys
• Benefits of the Affiliation Financially

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• Alternative Funding Sources USDA
• USDA offers direct cash funding of projects as
  well as a separate guaranteed loan backing
• Eligible to towns with population under 20,000
• To qualify, non-profits must not have sufficient
  project funds
• Low program entry cost with no application fee
  and a one-time 1
• processing fee
• Direct Community Facility loans currently at 4
  fixed interest rate for up to 40 years.
• With a desire to move quickly, the local
  processing goal is 60-90 days after
• receipt of a certified audit
• Staff engineer and field inspection are provided
  free
• USDA together with the Farm Credit Administration
  can issue a whole Rural Hospital Bond Package

www.usda.gov
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• Alternative Funding Sources USDA
• USDA Rural Development mission includes support
  for facility improvements at Hospitals, medical
  clinics, assisted living, medical and vocational
  rehabilitation centers, and community support
  services such as child or adult day care
• Their objective is to provide credit enhancement
  to help finance community facilities in rural
  areas to serve much-needed medical care
• The Community Facilities Program offers 3
  financing options Guaranteed Loan Program,
  Direct Loan Program and a Grant Program
• USDA guarantees up to 90 of any loss against
  principal or interest
• Eligible purposes of the funds include
  construction to improve or to enlarge essential
  community facilities
• Reasonable professional fees associated with the
  project such as legal, engineering, architectural
  services, and feasibility studies may be included
• USDA will consider Direct Lending in combination
  with Guaranteed Lending providing the community a
  low overall cost funding source

www.usda.gov
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• Alternative Funding Sources USDA
• For those projects receiving other assistance and
  have revenue sources (Sales tax, Property Tax,
  General Obligation and revenue Bonds) they
  receive a priority consideration for selection.
  Guaranteed Community Facilities loans are
  eligible to meet CRA (Community Reinvestment Act)
  requirements of Commercial Banks and Savings
  Loans Institutions.
• Loans may be sold on the secondary market through
  an assignment of guarantee, increasing the Lender
  of Records return on investment
• There is no maximum loan limit the amount is
  determined upon project feasibility, repayment
  ability, and reasonable project cost
• Loan approval can occur in 30-60 days
• The Community Facility program repayment period
  extends to a maximum of 40 years
• Interest rates can differ for the guaranteed
  portion of the financing from the non-guaranteed
  financing component

www.usda.gov
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• Alternative Funding Sources New Market Tax
  Credits
• The purpose of the New Market Tax Credit is to
  encourage investment in poorer communities by
  giving the investor tax credits to improve its
  return on relatively riskier investments in low
  income communities.
• The New Market Tax Credit was adopted in 2000,
  and is seen in Section 45D of the Internal
  Revenue Code.
• This program is administered through the
  Community Development Financial Institutions
  Fund, a department of the U.S. Treasury.
• Tax credits reduce a taxpayers tax liability
  dollar for dollar. Almost all investors are
  corporations. For example, if a tax payer owes 1
  million in taxes and has 500,000 in tax credits,
  the tax payer only has to pay 500,000 in cash.
  The rest is paid with these credits.

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• Alternative Funding Sources New Market Tax
  Credits
• Tax credits are not actually bought and sold.
  Instead, the investor becomes a partner of a
  partnership or member of an LLC, and gets a K-1
  that tells it how much tax credit it has been
  allocated for the year.
• When the economy is bad, tax payers dont owe
  much tax, so there is less demand for tax
  credits.
• Pricing for New Market Tax Credits has declined
  from about .72 per credit dollar to about .68
  per credit dollar in the last 18 months.
• New Market Tax Credits apply to any size
  building project.

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Alternative Funding Sources New Market Tax
Credits
An investor capitalizes a bank (the Community
Development Entity) that pays it back with both
cash and tax credits. The combination is enough
to give it the desired rate of return. To do
this, the CDE has to be approved by the CDFI
Fund, and be awarded an allocation of tax credits.
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• Alternative Funding Sources Robert Wood Johnson
  Foundation
• Grants to not-for-profits are available through
  specific calls for proposals
• Unsolicited proposals are accepted in three
  program areas Building Human Capital, Pioneer
  and Vulnerable Populations.
• Building Human Capital- invests in training of
  health professionals.
• - One goal is to reverse the childhood obesity
  epidemic by 2015
• - Develop policies and programs to expand health
  coverage
• Pioneer supports innovators to explore cutting
  edge solutions of health and healthcare.
• Vulnerable Populations programs to transcend
  the social barriers that stand in the way to
  better health.
• Public Health policy for Americans to have
  quality public health services and policies that
  protect, promote and preserve their health.
• Equality commitment to improve the quality of
  health care for all Americans

www.rwjf.org
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• Alternative Funding Sources The Baldridge Award
• Healthcare sector is part of the nations highest
  recognition for Innovation and Performance
  Excellence
• Award is announced in late November by the
  President of the United States.
• National Institute of Standards and Technology
  (NIST) award promotes excellence in
  organizational performance
• Criteria helps organizations improve their
  performance by focusing on three goals
  delivering ever-improving value to customers and
  stakeholders, improving the organizations
  overall effectiveness, and organizational and
  personal learning.
• An independent board examines seven areas
  leadership strategic planning customer focus
  measurement, analysis and knowledge management
  workforce focus process management and results.
• Eligibility Certification deadline is April 6,
  2010 877/237-9064

www.baldrige.nist.gov
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• Alternative Funding Sources The Kresge
  Foundation
• A foundation that seeks to influence the quality
  of life for future generations to promote human
  progress.
• Funding methods support facility capital, growth
  capital, operating support, and program support
  for our nations nonprofit infrastructure.
• Awards planning grants and other forms of seed
  money for new nonprofits.
• Makes available signature challenge grants for
  matching funds.
• Health Program improve access to healthcare for
  marginalized, particularly low-income and
  minority populations.
• Four values apply creating opportunity, working
  in underserved geography, promoting diversity,
  and strengthening community impact.
• Environment Program Address the challenges of
  global change focusing on reducing greenhouse-gas
  emissions, adoption of renewable energy
  technologies, and adaptive strategies for dealing
  with climate change.
• Community Development grants in geographically
  defined rural, urban, and aging suburban
  neighborhoods and its physical revitalization.

www.kresge.org
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• Locating Funding Sources Energy/Wood Fuels
  Grants
• DSIRE is a comprehensive source of information
  on state, local, utility and federal incentives
  and policies that promote renewable energy and
  energy efficiency. www.dsireusa.org
• THE CHP Partnership Funding Database tracks
  federal and state CHP and biomass financial
  incentives as well as regulations that remove
  unintended barriers to CHP or biomass project
  development such as standardized interconnection
  rules, net metering rules, or output-based
  regulations. www.epa.gov/CHP/funding/index.html
• Fuel Cell Connection (monthly email) focuses on
  federal and state-funded fuel cell research and
  development programs within the U.S. The
  Connection provides information on funding
  opportunities and contract awards, as well as
  legislation that will affect the fuel cell
  industry. www.usfcc.com
• www.grants.gov is your source to find and apply
  for federal grants.

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• Specialty Funding Sources Energy/Wood Fuels
  Grants
• Case Study Millinocket Regional Hospital
• Millinocket Regional Hospital (MRH) in
  Millinocket, Maine needs to replace boiler.
• MRH desires to utilize fuel source other than
  oil.
• State of Maine Department of Conservation, Maine
  Forest Service request applications for grants to
  convert oil fired boiler plant to wood fuels.
• Grant Highlights
• Open to all Maine public entities including
  schools, hospitals, state, county, local and
  tribal governments.
• Preference given to Androscoggin, Aroostook,
  Franklin, Oxford, Penobscot, Piscataquis,
  Somerset and Washington Counties.
• Preparation of grant
• Results of initial grant application
• Next steps

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Open Discussion and Questions
Other Resources
For further information on any of the topics
covered in this presentation, please contact
Larry Brown or Seth Gabarro [phone]