Picture a hospital executive saying to its investment banker, “We have a 56-year-old facility, less than $3 million in cash, and we need $25 million to replace our hospital. Did I mention that we cannot pledge a mortgage?”
Yet despite its limited resources, Yuma District Hospital’s community support, clever construction methods and good financing are transforming the aging facility into one prepared to evolve with the technology and patient demands of the 21st century. The hospital’s new 12-bed facility will have the capacity to bring state-of-the-art services in-house and better serve a growing population.
Long-time Dedication
Located in northeast Colorado, just 30 miles from the Nebraska border, Yuma District Hospital serves Yuma County and surrounding areas. The 14-bed facility was built in 1949 and designated critical access in 2002. Doctors travel up to 150 miles to Yuma to provide health care specialties and surgical services normally seen only in urban hospitals.
The existing hospital was designed for inpatient services, not growing outpatient needs. Sight lines from the nurse station made it difficult to see people seeking late-night help, and the building lacked surgical patient preparation and recovery areas. The hospital had been renovated and expanded several times, but the cost of continual renovation had reached the point that it exceeded the cost of building a new facility.
Limited Options
Critical Access Hospital status carried benefits for issuing future debt. The capital cost component of Medicare reimbursement meant the federal government would help pay for the new hospital by reimbursing a portion of interest costs. Utilization and revenues were trending upward, and the addition of two new ethanol plants in Yuma improved the hospital’s long-term outlook.
Lancaster Pollard articulated the community’s strong support as a favorable chapter of the hospital’s credit profile. The city of Yuma agreed to swap land dedicated to the new hospital in exchange for the existing hospital property, and the hospital also received several donations, including funds for a rehabilitation pool.
Financially, Yuma District Hospital was moderately profitable with limited liquidity. Cash was dedicated to operations, and state statutes limited the district hospital’s ability to pledge a mortgage. The hospital receives a few hundred thousand dollars annually from tax levies for operations. Respectful of the community’s ongoing support for its operations, the hospital board did not want to burden taxpayers with a general obligation for the new facility.
Small Hospital, Big Financing
Yuma District Hospital worked with Lancaster Pollard to finance through the U.S. Department of Agriculture’s Community Facilities Program because of the long amortization period of 40 years, a revenue-only pledge that required no mortgage, and the absence of renewal risk associated with letters of credit. A low, one-time origination fee to USDA of 1 percent of the loan also was appealing.
The USDA offers three funding options under its Community Facilities program: grants, direct loans and guaranteed loans designated for nonprofits serving communities of less than 20,000. From fiscal year 2004 to 2006, the USDA financed 99 hospitals for a total of about $440 million, with typical obligations between $7 million and $10 million.
Direct loans are competitive, but the guaranteed portion of the program historically has not used its total obligation capacity; in fiscal year 2006, $166 million in loans out of a $210 million budget was guaranteed. Interest on loans guaranteed under this program is taxable. The USDA continues to investigate the possibility of guaranteeing tax-exempt loans to further reduce borrowing costs.
Five months after application, Yuma District Hospital received commitments for $24.5 million in USDA loans -- $7 million from a direct loan and $17.5 million lent by Lancaster Pollard and guaranteed by the USDA. The loans amortize over 40 and 30 years, respectively. Lancaster Pollard also provided a tax-exempt construction loan. The total obligation was the largest ever made to a critical access hospital by the USDA and offers a competitive cost of capital with the equivalent of an “AAA” rating.
Saving Money, Saving Lives
An efficient construction method saved the hospital interest costs during the construction loan period. Rather than building the new facility using frame construction, Yuma opted for pre-poured concrete -- a more expensive system, and a technique not often seen with hospitals. The efficient method, in fact, may be most familiar as the one used by “big-box” department stores. Walls and other elements are poured off-site, then attached to a foundation on the construction site and assembled like a massive, tornado-proof gingerbread house.
In terms of materials cost, concrete slab construction is more expensive than typical frame methods. But by cutting off two to three months of construction time, the hospital saves $200,000 in construction loan interest costs.
The new Critical Access Hospital, located 850 yards from the old facility, will have the capacity to eventually bring services such as bone scanning in-house. It will include a 10-bed inpatient suite with private rooms, a two-bed obstetrics unit, a surgery suite with an operating room and a minor procedure room, an emergency department with observation beds as well as radiology, laboratory, pharmacy, physical therapy and administration clinic space.
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