Ask the Experts: Financing Construction Projects
For big construction projects—around $50 million—should we consider a fixed-rate bond issue? Or is a bank loan a better option?
Answer 1: Unless there happens to be a very progressive bank, most long-term financing options are less expensive. The HUD/FHA (Department of Housing and Urban Development/Federal Housing Administration) route has been an attractive option recently.
This question was answered by: David A. Williams, FHFMA, CPA, partner, Horne LLP, and is a member of HFMA’s Mississippi Chapter.
Answer 2: This is a very common question. There are pros and cons to each so some borrowers start by considering both. Some even do two simultaneous requests for proposals (RFPs)—one for each structure. Banks cannot go as long as public bondholders can, so bank loans and, specifically, bank placements (tax-exempt loan placed with a single bank) require a shorter amortization, typically inside of 15 years versus the traditional 30 years for a public bond offering. This means debt service may be higher unless the placement has a large balloon at the end, but it also means the placement rate may be lower due to pricing on the short end of the yield curve.
Banks also use placements as loss leaders to get their foot in the door with more lucrative products such as treasury management, so if the hospital has the ability to offer additional business, banks can charge lower spreads. Disclosure is lighter for bank placements (no official statement or appendix A) and they do not require an underwriter or bond ratings, so placements are not only quicker but also less costly to implement.
One challenge with placements is identifying suitable lenders for the geography, which are usually large commercial banks plus a handful of institutional (non-bank) lenders. Another challenge is that due to lack of disclosure, it’s often difficult for a borrower to get a good sense of market terms for a bank placement. This is where financial advisors with a large rolodex of lenders can qualify them and conduct an RFP.
Also, keep in mind that depending on the hospital’s size, $50 million may be too much for one lender depending on credit concentration constraints. There are several other considerations we can discuss. With respect to other structures, HUD or U.S. Department of Agriculture (USDA) programs are often an alternative as David Williams pointed out, but these structures are relatively uncommon because of some unique constraints and a significantly longer time to market.
This question was answered by: Pierre Bogacz, director of the Healthcare Group, PFM Financial Advisors, LLC, and a member of HFMA’s Florida Chapter.
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