SMF assisted one of its long-time healthcare clients successfully close in June a complex restructuring of its FHA-insured mortgage loan through HUD’s Partial Payment of Claim (PPC) program.
Hebrew Home and Hospital, Incorporated (“HHH”) is a not-for-profit organization that owns and operates a 322-bed healthcare Project in West Hartford, CT containing 277 nursing beds and 45 beds providing hospital-level services as a locked behavioral health unit (22 beds) and a complex medical unit (23 beds). HHH financed construction of the Project in 1987 with an FHA-insured loan funded with tax exempt bonds. In 1999, HJ Sims refinanced the 1987 bonds with a new issue of bonds collateralized with the existing FHA-insured note, which had been modified to reflect the terms of the new financing. SMF served as financial consultant to HHH in connection with the note modification. In June 2009, SMF originated a new FHA-insured loan that prepaid the 1999 tax-exempt bonds and conventional bank debt HHH incurred to finance capital and operating costs associated with the establishment of the behavioral/hospital unit. The 1999 and 2009 refinancings generated over $360,000 in annual debt service savings; moreover, the 2009 refinancing resulted in the release of a guarantee of the bank debt by a related party to HHH, freeing up significant assets.
In the wake of the Great Recession, like many healthcare providers, HHH experienced significant reductions in third party reimbursement while operating costs continued to escalate. In addition, HHH encountered occupancy challenges in the behavioral/hospital unit as larger healthcare systems became more active in that space. These conditions contributed to several years of consistent operating losses. Despite related-party support, fundraising, budget cutbacks, and reductions in staffing, HHH could not generate enough cash flow to cover operations and full payment of debt service on its 2009 FHA-insured loan. In order for HHH to remain a viable healthcare provider, it concluded that it had to restructure its loan payments to a level that would be consistent with what had become the “new normal” of its operating and third-party reimbursement parameters.
HHH entered into negotiations with HUD and the lender/servicer of the GNMA securities for the 2009 loan to determine what would be an appropriate amount of debt that could be successfully supported over the long term. In that regard, SMF was retained to assist HHH in completing a financial model of the Project’s operations that was developed by HUD’s senior asset management officials, and in obtaining HUD and the GNMA servicer’s approval of the restructuring. The financial modeling took into account the anticipated future performance of the Project, the projected impact of an affiliation agreement that HHH recently completed with a local hospital, and capital expenditures to be financed from the reserve fund for replacements. SMF also assisted the transaction by effectively serving as “umpire” among HHH, HUD and the GNMA servicer as the process unfolded.
HHH now has a capital structure that is commensurate with its new operating and financial profile. In addition, HUD paid out a reduced insurance claim then they would have had the restructuring not been completed. HHH’s new capital stack consists of a new, right-sized first mortgage insured by FHA and a secondary, subordinate obligation to FHA that covers the amount of indebtedness that was restructured. This secondary financing is only payable from a percentage of surplus cash generated by future operations.
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