Developing and Financing Ancillary Facilities

Developing and Financing Ancillary Facilities

Agenda Mixed Use Trends Development Process Own vs Lease Financing Structures Case Studies 2

Ullom s Rules of Lawyer Competency There exists in nature an inverse relationship between the number of syllables used by a lawyer and his/her actual competence. The use of citations and references to IRS regulations serves as further evidence of one s lack of understanding. Clients should actually understand their transactions. A Lawyer s goal ought not be to make his/her clients depend upon him/her.

4 Mixed Use Development Trends Healthcare Shift from Inpatient to Outpatient Fewer Towers Ambulatory and Outpatient Facilities New Neighborhoods and Markets Re-purposing Retail Space May Include Assisted Living or Skilled Nursing

Mixed Use Development Trends Higher Education Student Housing Apartments, Suites and Townhomes not Dorms Integrated Restaurant and Food Options Integrated Retail Additional Amenities 5

Mixed-Use Development Trends 6 Medical Village Freestanding ER Urgent Care Clinics Ambulatory Facilities Imaging Wellness / Therapy Medical Office Apartments / Senior Housing / Assisted Living Skilled Nursing Restaurant Retail Hotel University Developments Student Housing University Services Healthcare Wellness / Fitness Restaurant Retail Hotel Other Developments Cultural Institutions Museums Housing Retail

Mixed Use Implications Development and Construction Process Ownership Taxes Finance Operations 7

Hypothetical Project Non-profit hospital is considering an ambulatory care center that will include a free-standing emergency department or urgent care center, imaging center, lab and medical office space Hospital has identified a site for the project that is located offcampus Hospital doesn t have the expertise to oversee the planning, design and construction of the project 8

Practical Considerations Site selection Developer selection Own vs Lease Ownership options Ownership advantages Leasing advantages 9

Site Selection Is the site ideal for the proposed use? Accessibility Data analytics Land cost Infrastructure The one remaining site Explore all options On-market vs off-market Greenfield vs redevelopment 10

Developer Selection Identifying the right development partners Access to capital Size of project Provider alignment Experience and efficiencies Fee for service vs developer ownership Request for Proposals Asking for incentives 11

Own vs Lease Now more than ever organizations are struggling with ownership decisions Historical policy of owning core assets may no longer hold Accounting rule changes Nature of core assets Costs of Capital Property Tax Implications Reverse monetizations make headlines 12

Ownership Options Traditional ownership options Ownership of land and the building Non-traditional ownership options Condominium form of ownership Ground leasing arrangements Joint venture with other providers Excess land held for future development Hybrid model 13

Ownership Advantages Lowest Cost of Capital Refresher: One may utilize tax-exempt financing to finance capital projects owned and used by a 501(c)(3) organization in furtherance of its charitable purpose Control Clear Balance Sheet Treatment Property Tax Exemption 14

Leasing Advantages Flexibility Some Level of Off-Balance Sheet Preservation of Capital and Capital Capacity (maybe) Some level of control through ownership restrictions, use restrictions and purchase options 15

Tax-Exempt Financing Basics Tax-exempt financing Owned by a 501(c)(3) organization or governmental unit Ownership for tax purposes Capital leases Joint ventures Used in furtherance of charitable purpose Private use Leases Service/management contracts Unrelated trade or business use Allocation rules Various other tax restrictions Useful Life vs. WAM Post-issuance compliance 16

17 Own and Borrow Pros Cons Lowest cost of capital, if qualified for T/E financing Property tax exemption Project delivery options Control All on balance sheet More complicated Transaction costs Market disclosure Split development/financing Very traditional structure. 501 (c)(3) Organization issues debt (likely tax-exempt bonds) through governmental issuer and engages a fee only developer to build the building. Investors / Lenders T/E or Hybrid Financing 501(c)(3) Entity Fee Developer

Build, Monetize, Leaseback Pros Cons Partial off-balance sheet treatment* Turn-key development/financing Greater project delivery control Simplified execution Property tax Higher cost of capital/lease rate Typical Developer/REIT Structure. 501(c)(3) Organization executes turn-key arrangement with Developer who sources capital, builds building and sells to REIT. Developer/REIT may be on in the same or separate entities. Alternatively, 501(c)(3) Organization may fund construction of building and monetize (sell) building to REIT when completed. 501(c)(3) Entity Long Term Ground Lease = 50-75 years REIT Investors Developer REIT 18 *Accounting treatment subject to accounting rules applicable to each 501(c)(3) organization. Consult your accounting advisors for an assessment of accounting treatment. Improvements = Operating Lease Back

Hybrid Solution Pros Cons Lower blended cost of capital Partially off-balance sheet* Partial property tax exemption Partially on-balance sheet Partial property taxes More complicated Transaction costs Market disclosure Hybrid to take advantage of tax-exempt portion. 501(c)(3) Organization signs turnkey agreements with Developer. Taxable portion is traditional Developer/REIT lease. Taxexempt portion is separated (condo) from remainder and owned by 501(c)(3) Organization or leased under a capital lease by 501(c)(3) Organization. Capital for tax-exempt portion sourced at tax-exempt rates. 501(c)(3) Entity Capital Lease Portion Marketed as Tax-Exempt Obligation T/E Bond Market Long Term Ground Lease = 50-75 years REIT Investors Developer 19 *Accounting treatment subject to accounting rules applicable to each 501 (c)(3) entity. Consult your accounting advisors for an assessment of accounting treatment. Non-Qualifying Improvements = Operating Lease Back Qualifying Improvements = Capital Lease Tri-Party Lease to Include Issuer

The Best of Both Worlds Hybrid Solutions for Mixed Use Projects Own the Portion Used by Nonprofit/Gov t Fee Ownership; Condominium; Capital Lease; Installment Purchase Lease or Allow Third Party Ownership for Private Portion Operating Lease Third Party Ownership 20

Hybrid Benefits Pros Cons Lower blended cost of capital Partially off-balance sheet* Partial property tax exemption Partially on-balance sheet Partial property taxes May be more complicated Transaction costs Market disclosure *Accounting treatment subject to applicable accounting rules. Consult your accounting advisors for an assessment of accounting treatment. 21

22 Tax-Exempt Credit Tenant Lease / Conduit Ownership Pros Cons Lower cost of capital Lower than REIT, not as low as Own and Borrow Off-balance sheet* Property tax exempt Dependent on state law Unknown market/ investor reception/funding vehicle More complicated structure Market disclosures Relatively new structure applied in Higher Education, new structure to the broader market. 501(c)(3) Organization enters into an operating lease with another 501(c)(3) or Governmental Unit that will serve as the owner of the building. 501(c)(3) Organization manages development and construction in same way as if 501(c)(3) Organization owned facility. Because both ownership and use are by 501(c)(3) and/or Governmental Unit, building may be financed tax-exempt. Building is on owner s balance sheet, not user s. 501(c)(3) Entity Fee Developer Long Term Ground Lease Terminates Upon Repayment Improvements = Operating Lease Back Lease Includes Tax Use Covenants Investor Conduit Owner T/E Obligation Secured by Lease Payments & Leasehold Mortgage Recourse to Project Non-Recourse to Issuer *Accounting treatment subject to accounting rules applicable to each 501(c)(3) entity. Consult your accounting advisors for an assessment of accounting treatment.

23 Case Study #1 Sun Devil Hospital Campus Development Two Components ASC and Imaging Center (Hospital Portion) Medical Office Building (Private Portion) Hospital Owns All Land Land Leases Private Portion to Developer One Developer; Integrated and Efficient Construction Process Hospital to Issue Bonds and Own Hospital Portion Developer to Own Private Portion, Lease Space to Hospital and Third Parties

Sun Devil Site Hospital Portion Developer Portion 24

Sun Devil Financing Multiple Lenders Bond Purchaser = Bank #1 Developer Lender = Bank #2 Bank Rights Conflicts Arise on Eve of Closing Delayed Closing and Nearly Missed Construction Season 25 Financing and Use Rights Were Not Coordinated Development and Construction was Integrated, but not Financing

Case Study #2 Rocky Mountain High CLIENT DISCUSSION: We would like a shiny new Wellness Center on campus A Wellness Center meets our strategic plans and would be a great success We will need some space in the Center for appropriate service lines By the way, we can t spend any money Oh yea, and we don t want to actually own the Wellness Center because we don t want it on our balance sheet Oh, one more thing -- we can t take on any debt or any obligation that looks like debt or really any obligations at all We d like it built and operating ASAP 26 THANKS SO MUCH FOR YOUR HELP, YOU RE THE BEST!

It s Alive! Creativity to Meet Goals Investment Bankers Investors Tax Exempt Bonds 1.Senior Series 2.Mezzanine Series 3.Zero Coupon ( Equity ) Condit Issuer Loan Agreement Promissory Note Health System Health System Long Term Ground Lease Nonprofit Newco Local Government 27 Developer / Manager Management Agreement Development Agreement PROJECT Community College Newco Governance Not Controlled nor Consolidated

Closing Comments Mixed-Use Trends Are Real Current Conditions May Favor Ownership Hybrid and Novel Financing Structures = Lowest Blended Cost Just Like Development and Construction, Financing Must be a Coordinated Effort Creativity is Needed 28 28

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