Column | Capital Finance

2 USDA loan programs offer advantages for rural healthcare organizations

Column | Capital Finance

2 USDA loan programs offer advantages for rural healthcare organizations


Historically low interest rates and reasonable terms have created favorable conditions for borrowers to access capital for healthcare facility projects. As a result, borrowers of all sizes and credit profiles, including rural healthcare organizations, can take advantage of the opportunities presented by these conditions.

While all organizations are exploring options in the tax-exempt bond market and among bank loans and private placements, rural healthcare organizations have the added option of accessing loans through the U. S. Department of Agriculture (USDA). Like any governmental program, the USDA’s loan programs present challenges and limitations, including additional paperwork, a longer processing time and uncertainty of approval. But the end results are unmatched for affordability and reasonableness of terms. The USDA’s Office of Rural Development offers unique opportunities for not-for-profit and municipal entities primarily in rural areas through its Community Facilities Program, which includes the Direct Loan & Grant Program and the Guaranteed Loan Program. The larger program’s intent is to improve the economy and quality of life in rural America and the provision of healthcare by funding facilities.

A growing funding source

Before 2009, the annual budget for the program was about $100 million. Today, the lending budget is more than $3 billion. Over the past 10 years, the USDA has filled a void in the credit market and improved project affordability for rural organizations that could not otherwise access needed capital. Loans ranged from a few million dollars to $150 million with fixed rates and terms of up to 40 years. The types of healthcare projects funded have included nursing homes, critical access hospitals (CAHs) and acute care hospitals, electronic health records, equipment and medical office buildings.

Eligibility issues

Program eligibility is limited. Qualifying organizations are not-for-profit or municipally owned and located in towns with fewer than 20,000 residents and serving rural populations. Notably, the programs require local ownership and control of qualifying organizations, which disqualifies CAHs owned in majority or wholly by a larger system.

In the past, organizations that owned the land and buildings but were operated by non-local or for-profit entities faced challenges in establishing eligibility. Many rural healthcare entities, however, have qualified easily for the program and secured favorable terms. Loans through the Community Facilities Program allow organizations with financial ratios not tolerated by the traditional bond markets to access rates generally reserved for highly rated entities (i.e., A or better) and to finance up to 100% of project costs. A foundational element of the program is to give qualified organizations access to rates and terms not available otherwise. For example, a $50 million loan through the program could have a 3.25% all-in rate — at current rates.

1. Direct Loan & Grant Program

Elements of the Community Facilities Direct Loan & Grant Program include:

  • A direct loan from USDA to the borrower
  • No fees or covenants
  • A fixed rate lasting up to 40 years

Once an application is approved, the loan amount is obligated, and the interest rate is locked in. The final rate will not increase but could decrease if interest rates are lower when the loan is closed. Advantages for borrowers include:

  • No tax-exempt opinion, no covenants, no penalty for early pre-payment
  • No debt service reserve fund
  • No application fee
  • Requires an examined financial forecast
  • Provides up to 5 years to access the loan funds for each project
  • Allows switching to similar projects, although additional approval needed

2. Guaranteed Loan Program

Under the Guaranteed Loan Program, a borrower typically receives a bank loan with a guarantee from the USDA applied to 90% of the total, ensuring the principal will be repaid in the event of default. The loan can be a taxable bank loan, tax-exempt bank loan or bond issue. Rates and terms vary by lender but are higher than under the direct loan. The guaranteed lender sets the covenants and enters into a parity or intercreditor agreement with USDA, and the lender’s covenants are applied to the overall debt as a whole.

The public-private mandate

Many CFOs might prefer to apply for the direct loan, given the more favorable rates and terms. But this option rarely is available in the current Community Facility Program because of the public-private partnership mandate, which requires the borrower to have a combination of the two components: a direct (public) and guaranteed (private) loan. There also are no clear guidelines dictating the split between the two programs. Rather, the split depends on the size of the overall borrowing and the borrower's credit profile. There is a balance between the impact on debt service coverage and days cash on hand of the higher-rate, often shorter-term guaranteed loan.

The construction financing mandate

In recent years, a mandate for construction financing also has added to the complexity of the financing. Previously, the direct loan was drawn down during the construction period and then amortized post project completion, which was simple and free from fees, and required no additional loan. Today, USDA monitors the construction, but requires that borrowers obtain interim financing.

Given the volume of USDA Community Facilities loans, the market has many lenders and investors that provide such financing. The interim financing can come in the form of a drawdown loan from a bank, although those typically are provided for smaller projects. For larger projects, upwards of $50 million, which require more security and often exceed the lending limits for unsecured debt by banks, bond anticipation notes (BANs) are used. BANs are similar to a traditional tax-exempt bond issue but are short term (i.e.,  less than three years. The short term and USDA’s official certainty of takeout allows for BAN ratings with interest rates often less than 2%. The downside is that the entire project’s costs and capitalized interest are borrowed up front and accrue interest during the construction period.

Program outlook

The USDA Community Facilities Program is unmatched for qualified rural entities, but the requirements around the amount and availability of both the direct and guaranteed loans could change. Many different types of firms can assist in the application and interim-financing process, including traditional underwriters, placements agent and packagers. Fees and expertise also vary, making it critical to properly vet the qualifications and organizational aptitude of any partner chosen to help secure such financing.

The good news is the program is expected to continue for some time, as the preferred option for qualified rural entities. 

About the Author

Kelly Arduino

is a partner at Wipfli, LLP, and a member of the Great Lakes Chapter of HFMA (karduino@wipfli.com).

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