Even in Today's Economy, Creative Solutions Get Hospital Projects Built

J. Todd Robinson, AIA, and Alan P. Richman, for HealthLeaders Media, April 30, 2010

It's possible, even in today's economic climate, for new hospital construction projects to get off the ground. Collaboration and commitment are enabling hospitals of all sizes to be built in a down economy. Old playbooks don't have to be entirely discarded, but they must be revised and adjusted to accommodate a reconfigured playing field.

Notwithstanding hospital sizes, healthcare facilities usually share commonalities. As is the case with most, community hospitals have limited cash to spend and often, marginal operating revenue. Patient census may be challenged as local residents bypass the existing facility to seek care in neighboring communities with newer facilities.

To competitively position these community providers, cost-effective solutions must be created for the construction and operation of new facilities that offer them long-term viability with no sacrifice to their building and clinical programs. Flexible operational efficiencies that eliminate duplications and allow them to better care for patients with tightened staffs should be integral in the design.

Planning and team selection
Once a community hospital makes the decision to improve its physical plant, the key for bringing this vision to reality is having an experienced team. Selection of these parties should be based upon track records with similar projects, experience with FHA-insured financing projects and previous demonstration of open communication within the team framework. Experienced team members can offer cost-effective solutions and creative ideas, as well as keep the process moving through the ever-complicated maze of accessing financing and executing project development.

No matter the project, team selection is more critical than ever before. To lead the process, two tracks must be navigated: project development and financial planning, and loan funding. Master planning and debt capacity analytics are essential to managing the hospital's finite time and dollars. The early selection of an FHA mortgage banker/financial advisor and architect who understand the financial limitations of small hospitals can best assure that a hospital's project expectations match the realities of its financial wherewithal. During the planning process, as the project scope and budget take shape, additional team members are required, such as the owner's representative, construction manager, feasibility consultant and legal counsel.

Working together as team, the planning process most certainly will culminate in the commencement of the project design and financing stage. As the project's affordability becomes more apparent, goodwill delivered by enhanced community buy-in further bolsters fundraising and the dynamics of local politics.

While availability of funding sources is not what it once was, there is still hope for community hospitals needing to build a new facility. A funding vehicle that can be utilized is the FHA Section 242 insured mortgage loan from the U.S. Department of Housing and Urban Development. The reduced FHA 242 borrowing rates increase hospital debt capacity and can turn unaffordable projects into financially viable ones.

If they meet HUD eligibility requirements, community hospitals can apply for FHA 242 mortgage insurance, which dramatically lowers borrowing rates by bolstering the creditworthiness of hospital loans with a federal government guarantee. While challenging to obtain, FHA 242 mortgage insurance is often the only cost-effective financing option for a community hospital seeking funds to replace its old facility. The FHA 242 application and loan approval maze is daunting and with no upfront assurances of success, many hospitals put hundreds of thousands, if not millions, on the line prior to receiving a HUD commitment required for loan closing.

This level of at-risk hospital spending can be allayed somewhat, if the mortgage banker can benchmark hospital spending to the achievement of certain milestone in the HUD process. The coordination of project work within the HUD process is achieved through the collaboration of the architect and the project manager, within the financing budget and Sources and Uses Statement generated by the mortgage banker. In HUD terms, this budget is called the 2013.

Efficiencies in the FHA loan process, such as, expediting the start of feasibility work, dual-tracking project planning and design, dealing with possible legal and political matters and assessing the viability of various funding options can shave two or more months from the standard HUD underwriting schedule of eight to 10 months.

The technicalities of the FHA loan process and the peculiarities of each hospital applicant make integration between the project and financing team essential. To streamline the process and avoid delaying the project, the team must assign individual responsibilities that work lockstep in conjunction with the other team members. This assures a better distribution of heavy lifting and eliminates task duplication. Hospital management involvement and board representation throughout can advance decision making and keep the process moving.

Our case studies below explore two very different FHA 242 financed hospital projects. The Memorial Hospital, a landlocked, 1950s critical access facility in the mountains of northwest Colorado, after six years of stalled efforts, achieved its goal of a new facility in 2009. Meadows Regional Medical Center, a small but well-utilized community-based, acute-care hospital in rural Georgia, raced to complete, within one year, the planning and FHA 242 financing of its new hospital this past summer.

Critical Access Hospital
This project illustrated the importance of patience. The Memorial Hospital originally went public with its plans for a new critical access hospital to the citizens of Craig, CO, in 2002. TMH, at the time, however, lacked the operating revenue to afford the project they were contemplating, and they didn't have the debt capacity. They pressed on and selected a team, but, unfortunately, they were unsuccessful in their efforts. Undaunted, TMH made two critical mid-course adjustments that would set in motion successful FHA 242 financing and the November 2009 opening of the new hospital on the campus of a nearby community college. The steps TMH took included, with the assistance of its management company, the replacement of its prior project team with FHA-experienced firms to serve as the owner's representative, architect and construction manager.

The proposed project site was in an undeveloped greenfield, 7,000 feet above sea level in an environment that experienced prolonged winter seasons. These factors presented their own distinct challenges for the project design, which also had to comply with HUD regulations.

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