April 1, 2018 | Allen Van Driel, CEO
Throughout the planning process of our building project, we carefully explored and implemented financing mechanisms to minimize the of need for property tax support.
Before we even completed the design phase of the project, we undertook a capital campaign, entitled “Honoring Our Past, Ensuring Our Future.” Through generous donations to this capital campaign by individuals and organizations, we raised right at $2 million towards the project.
As we planned for the project, we carefully analyzed with the assistance of Great Plains Health Alliance and BKD, LLP (our accounting firm) the impact of the project on our reimbursement from the Medicare program. As a Critical Access Hospital, we are paid by Medicare based on the cost of the care we provide. Since depreciation and interest expense associated with the building project are part of what Medicare considers allowable expenses, in effect Medicare will pay for more than half of the cost of the project through increased reimbursement.
When we requested proposals for the construction of the building, the proposals were required to be structured as “Construction Management at Risk.” This means that the construction management company was required to construct their proposal and bid for the project based on a Guaranteed Maximum Price. This safeguard prevents additional costs of the project once underway by assuring that any cost overruns are the responsibility of the construction management firm, not the Board of Trustees. Hutton Construction, the construction management firm that was hired to manage the project, has done an excellent job of adhering to the budget they proposed before construction began.
Prior to beginning construction, we applied to the U.S. Department of Agriculture Rural Development agency for a low interest, long term loan to finance the building. We were successful in securing a 35 year loan for the cost of the project an interest rate of 2.875%, well below market rates at the time. USDA issued a Letter of Conditions in 2016. This letter outlines the requirements and restrictions under which USDA will issue the loan. One of the major conditions associated with the USDA loan is they will not actually dispense funds until the project is complete. This required us to find a source of construction funding for the project.
In 2008, Smith County established a Public Building Commission (PBC) when funding was needed for capital improvements at the existing hospital. The PBC, characterized legally as a “quasi-governmental agency”, has the authority to issue revenue anticipation bonds. These bonds provide a funding source for acquisition or improvement of buildings or capital improvements. In order to issue the bonds, a revenue stream capable of making debt service payments on them must be demonstrated. With the assistance of GPHA, BKD, and Piper Jaffray, an investment management company that has worked with Smith County on previous bond issues, the documentation was completed and revenue anticipation bonds to pay for the construction of the replacement hospital were issued in mid-2016.
All of these initiatives collectively were expected to provide affordable financing for the total project. Later in 2016, we were contacted by officials from USDA Rural Development, who recommended that we explore yet another potential source of funding for the project. This source is called Federal New Markets Tax Credits. It is a federal program, established in 2000, that provides tax credits to large, government-qualified investors who provide assistance to infrastructure projects in low-income communities. Smith County was identified as one of only a very few counties in Kansas eligible to participate in the program. We began working with a firm called Crescent Growth Capital in 2016 to help us understand the program and navigate the application process. Overall, the program, which is operated by the U.S. Department of the Treasury, allows Community Development Entities (CDEs) to invest in qualifying projects and, in return, receive credits against their federal tax liability. Most of the CDEs participating in the program are large banks. Part of the responsibility of Crescent Growth Capital was to market our project to potential investors and assist with bringing parties together to complete the transaction. After initial discussions with the SCMH Board of Trustees, the Smith County Commissioners, and the Smith County Public Building Commission in 2016, we worked throughout 2017 to secure interest in our project, gain commitment from CDEs, complete the legal documents necessary for the transactions, create a separate entity called the SCMH Qualified Active Low Income Community Business (SCMH QALICB), and satisfy requirements of the two CDEs that ultimately invested in the project. The result, after months of work and hundreds of hours of discussions, was the investment by two CDEs of $17.5 million in investment in our project, resulting in tax credits to themselves, and providing an additional $2.5 million in revenue to our project. This $2.5 million is not a loan, but an investment. It does not have to be paid back. It simply is an infusion of additional capital in to our project. The New Markets Tax Credits transaction was completed in mid-February of this year, and we are beginning to see the flow of funds from the transaction.
This is just one more way that your SCMH Board of Trustees are using every resource available to complete the new hospital building project in the most cost-effective way possible, with the greatest benefit to the community. The taxpayers of Smith County should be very grateful for the time and effort put into the project by these volunteer stewards of local resources.