In our last issue, we gave you the basics on raising money for new projects and equipment purchases. But what if your plans are more ambitious? For big projects, you might need to get creative.
The Iowa Clinic is in the midst of deciding whether to expand its current facilities. Chief Executive Officer Ed Brown says it’s 80 percent certain the 110-physician multispecialty group, with locations around the state, will grow by 80,000 to 90,000 square feet at its 15-acre West Des Moines site, filling the space with many additional services. And where will it get the money to do this? More than likely, he says, by “soliciting large providers of capital such as insurance companies who offer long-term financing.”
Specifically, Brown will be looking into negotiating a private placement with an institutional investor, such as an insurance company, to raise the capital his clinic’s expansion will need.
A “private placement” with an insurance company may sound puzzling, or even scary, but it’s really just one of many possible avenues for securing large-scale funds for ambitious expansion projects. In the November-December issue of Physicians Practice, we discussed the basic methods of securing financing for small to midsized projects and purchases for your office. But if, like the Iowa Clinic, you have bigger plans - especially those that require construction or substantial renovation of office space - you’ll maximize your success if you understand this more advanced level. There’s plenty to choose from when you’re faced with securing significant funds, including private placements, tapping into the public debt (bond) market, and more.
But why the need for such complexity? Partly because of the medical field itself. Unlike most other types of construction financing, medical real estate financing is “a very specialized area,” says David Young, GE Healthcare Financing’s senior vice president of loan originations. “It cannot be treated in the same way as regular real estate. They are typically highly specialized, single-use assets.” One reason is that building codes are much more stringent for medical offices than for other types of commercial buildings. Another is that healthy people don’t typically want to walk through “sick” areas to pick up their dry cleaning or a gallon of milk. Let’s review the options for major-project funding.
Simply put, a private placement is a loan made by an institutional investor other than a commercial bank. Initially set up by the Securities Act of 1933, the loan calls for terms to be negotiated between the investor and you, the borrower. Life and casualty insurance companies, real estate investment trusts, and pension funds are all common examples of institutional investors, although large-scale healthcare-oriented lenders, such as GE Healthcare Financing, include private placements in their lending repertoire. “We can arrange large amounts for financing without going to the public bond market,” says Young. “It’s more efficient and predictable as far as rates go.”
Why should you consider a private placement? Relatively quick completion time, for one thing. Greater flexibility in loan terms, for another. Lower fees, decreased paperwork, and fewer involved parties also help. But most important, private placements carry a much higher lending limit. Commercial bank loans generally top out at $5 million. With a private placement, you can secure much larger amounts at a fixed interest rate with the loan amortized as you need it - typically from 10 to 30 years.
There are some stipulations to entering into this sort of agreement: You - or someone involved in your practice - must be capable of making informed decisions about the purchasing of securities, agree to provide customary due diligence regarding your practice, and promise the lending institution you have no intention to resell the investment. Note that although most private placement agreements are with a single investor, it’s possible to add in a few more, in a very limited capacity.
The details of private placements also vary, but generally, you can count on the following:
Obviously, private placements are not appropriate for building out an extra supply closet in a solo practice. But if your needs do fit the scale, they can get you the capital you need at terms equitable to both sides. One note of caution: Private placements often prohibit prepayment until the average life of the loan is reached. This varies depending on your specific loan terms, but count on the average length of a 20-year loan to be about 12 years. You can still pay off the loan early, but you’ll very likely be slapped with a hefty penalty.
The bond market
Dick Haines, architect for Atlanta-based design/build firm Medical Design International, bemoans the current habits of the medical world. “Most practices talk to their banks,” he says. “Sometimes that’s not the best way to get money.”
An alternative? “Go to Wall Street,” says Haines. He points out that many corporations “have money they have to invest. They’ll issue bonds and then sell the bonds to their investors.”
Issuing a bond to raise a significant amount of funds can also work for your practice. The exact type depends largely on your practice’s legal setup. If you operate as a nonprofit, you can take advantage of tax-exempt bonds. But even for-profit practices can benefit, although the bond would have to be a taxed security. Still, the taxable bond market can prove useful in terms of variable-rate debt. Depending on which animal the market is mimicking at the time of your funding investigations, variable-rate debt could actually end up costing less than commercial bank or private placement offerings.
You will need to assemble a team of experts to issue a bond:
Because of the increased risks involved in this lucrative but complicated issue, a bond issue is not for the financially fainthearted. But before just shying away, seek advice and get all the facts - it may turn out to be the best solution for building something big to enhance your practice.
Narrowing your options
To help decide on a particular type of financing, keep a lender’s funding and liability perspectives in mind. Commercial banks use short-term variable-rate deposits to fund their loans, and they match assets and liabilities with short-term lending opportunities. This makes construction financing attractive to commercial banks, as long as your funding needs are not astronomical. But institutions such as life insurance companies, which mine the more money-spinning strains of raising capital, conduct business very differently. They have, by definition, long-term liabilities through the life insurance policies they sell, and so they want their investments to be equally long-term because then they’ll have the cash when they need it.
Consider also how long you expect to hold on to your expansion. Less than 10 years? Then a local commercial bank (or banks) might be best. Medical equipment, which becomes obsolete relatively quickly, aligns well with this. But if your plans are more complex (read, costly), then a more long-term arrangement from an institutional investor or a bond issue makes more sense, as it helps to spread out your debt load.
Finally, accept that the key to success with any high-stakes financial endeavor is to supply a full spectrum of information - detailed expansion plans, projected timeline, financial documents, real estate appraisals, surveys, environmental reports, photos, videos, construction budgets, aerial photographs, letters of credit, and the like. Don’t be surprised if the lending institution asks to do both an operations audit and a financial audit, as well as extensive interviews with appropriate members of your staff. David Young says that the more open you are with the inner workings of your practice, the more confidence a lender will have in forging a mutually beneficial partnership with you: “We have to understand completely because it’s basically the collateral for the lending.”
These kicked-up-a-notch financing solutions do take more time to complete than a simple lend or lease agreement for a new piece of ancillary equipment. However, you have some control over this by educating yourself thoroughly on the options, planning your expansion carefully, organizing your financial affairs, and being forthcoming with all requested information.
Otherwise, a typically two- to three-month affair could drag on for up to six months, “but usually that’s because the customer does not have things ready,” says Young.
Consultant, where art thou?
Naturally, no matter what type of financing you choose, you’ll want to seek professional help along the way to ensure you obtain exactly the right solution for your practice. Consider hiring a design/build firm, which offers comprehensive services for major ventures. Some of these firms, such as Marshall Erdman & Associates, specialize in medical construction. The Atlanta-based company’s executive vice president and chief operating officer, William Peel, says that his firm “connects the financial community with the medical community.”
Think of design/build firms as the Super Wal-Marts of construction consultants: They build big, and they use every conceivable tool, product, or idea known to the Western world to see the venture through to completion. Consider allying with this sort of consultant to help keep your expansion from morphing into an unwieldy beast - but only if truly warranted. “Scale becomes a factor for us. For a one- or two-physician practice, we probably can’t be competitive. Multispecialty projects are more appropriate,” says Peel.
Another up side? The design/build firm works for you, meaning you’ll retain ultimate control of the project’s direction; indeed, a good design/build firm will encourage this. “A significant portion of the projects we work on, the physicians have a great deal of involvement. For details, administrators provide project management data so we can do the analysis. This emerging structure allows doctors to focus on the quality of their practice,” says Peel. “With few exceptions, there’s a chief medical officer or practitioner who is the driving force. The pendulum is swinging to physicians being directly involved with executive leadership,” he adds. Peel thinks this arrangement allows for maximum mutual benefit, saying, “They do what they do well, and we do what we do well.”
To find the funds to support your expansion plans, you can look beyond the financial world. Here are three alternatives to consider:
senior writer for
, holds an MA in nonfiction writing from The Johns Hopkins University. Her articles have appeared in numerous publications, including
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This article originally appeared in the January 2007 issue of Physicians Practice.