Preliminary Review Process

1. Preliminary Review Process Joseph B. Nathan Financial Analyst, Office of Insured Health Care Facilities, HUD Paul Giaudrone Financial Analyst, Office of Insured Health Care Facilities, HUD Steven Hunt Account Executive, Office of Insured Health Care Facilities, HUD

2. Process Steps • Self assessment • Initial contact with HUD • HUD conducts Preliminary Review • Pre-application meeting

3. Self assessment • Uses of FHA loan • Construction financing, modernization, equipment, refinancing, remodeling, expansion • Coverage, Cost, and Conditions • FHA insures 99% of the loan amount • 25-year term • One-time fees total 0.8 percent of the loan amount • Fixed annual premium is 0.5 percent of the remaining mortgage balance • loan-to-value up to 90 %

4. Self assessment • The HUD-insured lender must have a first lien position. • Note: For refinancing, at least 20% of mortgage amount must be used for construction and equipment

5. Self assessment • Adjusted patient days at least 50% acute care • (Critical Access Hospitals Are Exempt) • Past 3 years average operating margin >0 • Past 3 years average debt service coverage ratio >1.25 • (For hospitals recently designated as Critical Access, calculate financial information as though it had been a CAH for all three years)

6. Case Study • Community Hospital Replacement Project

7. Loan-to-Value • Maximum LTV is 90% • LTV= Proposed Mortgage Amount Cost of New Project + Value of Collateral • Value of Collateral determined by Net PPE or Appraisal • Maximum Insured Mortgage Amount= Total Estimated Replacement Cost of Project x 90%

8. Appraisal Policy • Can use an appraisal to determine value of collateral only if: • the property was not sold within the last three years via an arm’s length transaction. • Ex: Can get appraisal of donated land • Applicant lender engages appraiser • Must be a general certified appraiser with 2 yrs experience appraising hospitals

9. Scenario A: No Cash Required • Everything is the same except the hospital project is a rehabilitation project with $100 million in net PP&E to transfer over into the new project. • 90% loan to value calculation: Value of Property Plant & Equipment $100,000,000 LESS Capital Leases 0 PLUS Improvements to be undertaken $151,102,566 Net Value $251,102,566 X 90% Maximum Insurable Mortgage $225,992,309 • The proposed mortgage of $173,102,000 is well under the maximum insurable mortgage limit and no cash down payment is required.

10. Scenario B: Insufficient Cash & Equity • Example is same as the main case study, except the balance sheet reflects only $2 million in cash and investments. Resulting Impact: • With only $2,000,000 in cash and investments, it appears unlikely that the hospital will be able to come up with the $24,465,000 cash required for the proposed loan.

11. Scenario D: Appraisal • Example is the same as Scenario A, except that the net PP&E is $30 million and has an appreciated replacement cost value of $50 million • The proposed mortgage of $173,102,000 is acceptable if the $50,000,000 value is substantiated by an appraisal

12. Scenario C: Financial Turnaround • Example is same as the main case study, except that the hospital has the following financial ratios: Resulting Impact: • Average operating margin for the last 3 years is less than 0.00 and does not meet HUD threshold. HUD would recommend that the hospital wait before applying to allow time for turnaround financial indicators to improve and demonstrate stability.

13. Need for the Hospital Based on Objective Criteria • Mortgagee letter 04-08 Provides Guidance • Need is assessed for hospitals in both CON or non-CON states • Because each hospital presents a unique situation, there is no formula or cutoff level that applies to all applications • Section 242 shall “encourage programs that…..provide comprehensive health care, including outpatient and preventive care, as well as hospitalization, to a defined population”

14. Need Factors Outlined in Mortgagee Letter • Services offered by hospitals in the service area • Migration of patients out of the service area • Planned construction projects at other facilities in the region • Historical market share by major service category • Disproportionate share hospital designation • Distance to other hospitals • Service area definition • Existing or proposed hospital • Designation as sole community provider, critical access hospital • Community-wide use rates • State-wide use rates • Population projections • Staffed vs. licensed beds • Applicant hospital’s occupancy rate • Competitors’ occupancy rates • Outpatient volume • Availability of ER services • Teaching hospital status

15. Applicant Date Request • Questions in the “need tool” help HUD assess factors outlined in Mortgagee letter • 1. Project Description • 2. Service Area Definition • 3. Quantify Licensed, Staffed, and Available Beds • 4. Identify Competitor Hospital • 5. Outpatient and ER Services • 6. Hospital Classification • 7. Teaching Hospital Status

16. Key Factors Indicating Need • Critical access hospital and sole community provider designations • Community-wide bed deficit • Increasing population • High applicant and competitor occupancy rates • Long distance to other hospitals

17. Case Studies • Community Hospital – key factors present • Examples of hospitals rejected based on need • Scenario 1 – Urban Hospital in overbedded area • Surrounded by competitors, low occupancy • Scenario 2 – Doctor-owned start-up hospital • Hospital would have severely impacted a local provider of charity care • Scenario 3 – Suburban replacement hospital • Hospital was to be built near a larger hospital with excess capacity • Scenario 4 – Critical Access Hospital • Proposed replacement facility to be located less than 5 miles from another facility