Baptist Hospitals of Southeast Texas
Baptist Hospitals of South East Texas (“BHSET”) has hospital facilities in Beaumont and Orange, Texas. It was originally sponsored and run by Memorial Hermann Health System (“MHHS”), a well-respected multi-hospital system in Houston. BHSET attempted to enter the tax-exempt bond market on their own credit in 2000, but due to weakness in their credit and adverse market conditions the bond issuance failed.
MHHS asked our firm to assist. We realized that part of the problem was that BHSET owed MHHS more than $23 million that was being carried as short-term debt. We subordinated nearly $13 million of that debt into Class B stock which could be repaid to MHHS if BHSET met certain financial benchmarks. We then obtained HUD insurance on their $100 million construction loan and successfully funded it with a new tax-exempt bond issue. MHHS was repaid $13 million at the loan closing and the Hospital received a 5.05% interest rate.
In 2005 the Hospital suffered extensive damage from Hurricane Rita. The hospital needed to repair the damage and enhance the Hospital buildings so that they would not be as impacted by future storms. The project had a variety of funding sources: hospital cash, hazard insurance proceeds, FEMA funding, a Community Development Block Grant (“CDBG”) and a $51 million loan insured by HUD. The project totaled nearly $70 million. Our firm coordinated the funding of the project from the four sources of funds so that the various requirements of all of the funding sources were satisfied.
In 2000, BHSET was too weak to enter the credit markets on its own and was even weaker after the devastation of Hurricane Rita. Both times, HUD saw a hospital that provided necessary services in an area that lacked adequate healthcare. HUD’s mortgage insurance allowed the Hospital to access capital when they needed it most.
Kaleida Health Children’s Hospital
Beginning in 2009, Kaleida started the process of relocating its downtown acute and post-acute facilities to the Buffalo Niagara Medical Campus (“BNMC”). The BNMC included Kaleida’s Buffalo General Medical Center (“BGMC”), Gates Vascular Institute (“GVI”) and HighPointe on Michigan Nursing Home, as well as the Roswell Park Cancer Center, the Buffalo Medical Group and the University at Buffalo School of Medicine.
The final Kaleida facility to be relocated was the 200-bed Women and Children’s Hospital of Buffalo. The new 11-story, 400,000+ square foot facility is linked to BGMC by skybridge, connecting the children’s hospital’s labor and delivery rooms to BGMC’s ORs should a mother in labor require surgical intervention, or access to the GVI for mothers needing neuro services.
Despite the strong State and community support for the new facility, Kaleida faced two challenges when approaching HUD for the financing:
- Kaleida just opened a new hospital and nursing home and closed a hospital and nursing home in the previous two years and the transition period and staffing changes caused their financial performance to deteriorate and not meet HUD’s eligibility requirements.
Our firm worked with the Hospital and HUD to demonstrate the importance of the new Children’s facility for Kaleida’s future success to obtain a waiver for the operating margin requirement, which saved the Hospital from waiting a year to demonstrate operations had stabilized.
- The proposed funding of the new facility included a HUD-insured mortgage loan, two State grants, a $45MM fundraising campaign, $50MM of equipment financing and operating cash that Kaleida had set aside.
Because each of the funding sources had different requirements for use of proceeds and timing issues for when they could be accessed, we coordinated each source to ensure that costs were appropriately allocated and funds were available timely to pay the contractors and other project related costs without impacting the project’s schedule.
Finally, after construction was underway, management decided to add a number of project betterments at a cost of over $8MM. Our firm successfully obtained a mortgage increase from HUD to pay for those costs and ensure that the timing of the project remained on its original schedule, so as to not impact final endorsement.
Kaleida Health Global Vascular Institute
Kaleida Health needed to construct space on the Buffalo Niagara Medical Campus to relocate essential services from its Millard Fillmore Gates Circle Hospital, which was slated to close. A plan was crafted to develop a Global Vascular Institute (“GVI”) on the downtown campus. The project was so appealing that the University of Buffalo (“UB”) wanted to be part of it and establish a research center there, asking to take four floors in the building. This presented an interesting dilemma: UB needed to own, rather than lease, the space. Kaleida was using HUD-insured financing which required that Kaleida – and only Kaleida – own the building that was being mortgaged.
Our firm suggested a condominium structure that would allow Kaleida to own the entire building during construction, and then deed a portion of it to UB upon completion. We worked with Kaleida, UB, HUD, and the New York State Department of Health to structure a deal that satisfied all of the parties and the regulatory agencies.
Kaleida was given a chance to build a state-of-the-art facility and HUD recognized that the GVI was an extraordinary opportunity for Kaleida to build a project with $65MM of grant funds from the State. By sharing the core and shell costs with UB, Kaleida reduced their cost of the building and delivered an even more cost effective project.
HUD saw a borrower with a chance to change the face of its campus, and provided them the flexibility to do so.
NewYork-Presbyterian Ambulatory Care Center
NewYork–Presbyterian (“NYP”) has been using the HUD Hospital insurance program to fund capital projects since the early 1980s. But in 2013 when they wanted to take advantage of the low interest rate environment to fund a portion of their $895 million Ambulatory Care Center, they were met with two challenges:
- HUD typically doesn’t issue a commitment for mortgage insurance until a project is fully-designed and the construction price is guaranteed, and NYP had only just started design of this project; and
- The proposed construction was scheduled to take nearly five years, and the Ginnie Mae securities used to fund the loan price significantly higher when funds are drawn over an extended construction period.
NYP’s CFO did not want to miss the attractive interest rate environment and challenged us to find a solution. Working with NYP’s finance team, construction team and HUD, we structured the loan so that it was initially and finally endorsed on the same day – a first for the HUD Hospital program. Using this unique structure, all of the loan funds were disbursed to the Hospital at the closing, and held in escrow to pay project costs as design and construction of the facility progressed. This structure required the development of a complex Building Loan Agreement, the procurement of a number of waivers of HUD’s policies and regulations, and extraordinary collaboration. But it was successful, and allowed NYP to get to market more than a year earlier than they would have in a “typical” HUD-insured transaction, and because the loan funds were disbursed at closing instead of over a prolonged construction period, the Hospital saved more than 100 basis points in interest rate.
After the loan closed and the project was underway, the Hospital decided to expand the scope of the project as a result of Hurricane Sandy and to add a Women’s Hospital above the Ambulatory Care Center. The additional project costs of over $500 million would be funded from the Hospital’s own equity, but the addition of six new floors and 250,000 square feet to the project would add years to the construction timeline. Since the loan was structured as a permanent loan and not a construction loan, there was no impact to the financing or the ability to finally endorse the loan.
United Hebrew Geriatric Center
United Hebrew Geriatric Center (“UHGC”) owns and operates two skilled nursing facilities on a campus in New Rochelle, New York. The campus also includes a 126 bed assisted living facility and a 135 unit apartment building for seniors, both financed through HUD. The two nursing facilities were aged: one was constructed in the 1950s and the other in the 1970s. UHGC needed to renovate one facility, replace the other, and find a suitable re-use for the abandoned 1950s structure.
The project received Certificate of Need approval from the State of New York’s Department of Health (“DOH”). At the time of approval, however, the “caps”, or the per-bed construction price a nursing home could not exceed, were very low but were expected to increase. The condition of the existing facilities prohibited UHGC from waiting for that increase to come through and they undertook a project to replace 150 beds from the 1950s facility in a new, all-private room, all-private bath facility, and renovate the connected 1970s facility. We worked with the DOH to grant two cost increases to the Certificate of Need, so that the facility (the only all-private facility in Westchester County) could have cost-saving features like resident lifts and could add back some of the amenities that were engineered out prior to the cap increase.
HUD quickly approved the mortgage and a subsequent mortgage increase which covered the cost of the additional amenities. That project was completed on-time, and UHGC has since worked with HUD to approve financing for the renovation of the 1950s building into a special needs assisted living residence. One of the hallmarks of HUD financing is that there are no arbitrary borrowing limits. HUD can finance this project and your next.