Sims Quickly Finances Memory Care Expansion With Most Efficient Option
“For a number years, Presbyterian SeniorCare Network and HJ Sims enjoyed collegial interactions, board education and small consultation projects. In 2017, Presbyterian SeniorCare Network engaged HJ Sims for the construction of a 36-bed Woodside Place Alzheimer’s Care Assisted Living Community and Adult Day Living Center on our Washington, PA campus. In anticipation of the Tax Cuts and Jobs Act, the completion of this financing was achieved before the end of 2017. As in any collaboration of two organizations the cultures must align. We feel that we have found that alignment with HJ Sims.”
– Joe Wenger, CPA, NHA – Senior Vice President & Chief Financial Officer
Presbyterian SeniorCare (“PSC”) is a not-for-profit, faith-based, multi-site network of living and care options, serving more than 6,500 older adults in 10 counties in Western Pennsylvania. PSC offers a comprehensive continuum of care and service options for older adults through a combination of senior living communities, affordable housing facilities and at-home programs and services. PSC’s three facilities, providing personal care and memory care services which, together with PSC’s Central Office and Woodwell investment holding entity, comprise the Presbyterian SeniorCare Obligated Group (“PSC-OG”).
Among PSC’s multiple initiatives is the expansion of memory care services to populations that are underserved. Given this priority, PSC had previously developed the Woodside Place model and constructed Woodside Place at Oakmont in the early 1990s to address a gap in the elder care continuum and the lack of facilities designed and specially programmed for the unique needs of persons with dementia.
While PSC has had a longstanding presence in the Washington County market providing personal care services at its Southminster Place facility, it has not had a dedicated memory care facility. Sensing a need for memory care in this market, it commissioned a market study in 2016 which confirmed likely demand and this service expansion opportunity. With this validation, PSC advanced project planning, consisting of a 36 bed memory care facility to be known as “Woodside Place of Washington”, located on property adjacent to its Southminster Place facility. PSC sought to begin construction in early 2018 and, in June 2017, engaged HJ Sims to assist in the review of financing alternatives and ultimate implementation of financing.
PSC anticipated financing the project ($9.93 million total cost) from a combination of sources. Reflecting the anticipated demand for the planned memory care services and PSC’s (and constituents’) commitment to this service line, foundational capital was expected to be provided through a capital campaign with a $2.5 million goal to be raised over a three year period. The balance of financing ($7.43 million) was to be provided through tax-exempt debt financing. PSC and Sims envisioned commercial bank debt to be the likely source of financing given the construction-related use of proceeds, the combination with capital campaign funding and the relatively small size of the debt capital need. This would also complement PSC-OG’s $15 million of outstanding bank financing.
While capital campaign proceeds were to be an integral component of financing, they would not be available at the time of financing closing and initial project construction; rather, they were anticipated to be received in installments through 2021. Therefore, addressing this phased timing for receipt was among the structuring options for the financing. In this regard, PSC considered two options: 1) Borrowing the full amount of the project cost and related uses of funds and subsequently applying capital campaign proceeds to repay a portion of the debt, as received or 2) Reducing the borrowing amount through PSC-OG’s advance of funds equaling the amount of anticipated capital campaign proceeds and then applying the campaign proceeds to repay PSC-OG. Sims assisted PSC in analyzing these alternatives, among others. Key considerations included assessment of projected financial results for the Woodside Place at Washington project along with the PSC-OG overall as well as the additional debt incurrence test provisions associated with its outstanding debt. Other financing structuring options were considered including debt maturity and amortization, with phasing of principal repayment, funding of interest during the construction and fill-up period and the interest rate mode (floating vs fixed rate debt). Based on the foregoing analysis, PSC opted to pursue the second option, advancing funds to reduce the loan commitment, with the expectation of being reimbursed with capital campaign proceeds by 2021.
PSC originally planned on completing the financing in the first quarter of 2018, matching the anticipated start of construction. However, in November 2017, the U.S. House of Representatives released their initial tax-reform bill, which proposed the elimination of tax-exempt private activity bond financing for not-for-profit organizations along with other potentially unfavorable provisions. While the Senate soon followed with a bill that preserved the tax-exemption for private activity bonds, the differing treatment of tax-exemption for private activity bonds in the two bills created heightened uncertainty in the tax-exempt borrowing markets and financing dilemmas for tax-exempt borrowers. Elimination of tax-exempt financing would have precluded PSC from financing the project on a tax-exempt basis, likely forcing a borrowing at higher taxable rates, and possibly eliminating the financial feasibility of the project. Given the lead time necessary to draft legal documents and complete a financing, and looming tax reform effective January 1, 2018, the financing proceeded on a fast-track. Among other decisions, this prompted PSC’s decision to pursue the financing with Citizens Bank, its existing bank partner, rather than undertaking a wider bank solicitation. Citizens provided an attractive financing proposal including competitive interest rate and fees along with limited conditions precedent to financing enabling expedited financing.
The financing was completed successfully on December 29, 2017, amidst a historic volume of tax-exempt borrowing resulting from the proposed tax reform. PSC-OG finalized $8.095 million of financing to be drawn following application of PSC-OG’s equity contribution over the anticipated 16 month construction period. PSC-OG opted to close the financing assuming an underlying floating rate on the loan, with interest accruing, as the loan is drawn and to evaluate the potential strategies for hedging interest rate risk early in 2018, following fuller consideration of potential interest rate increases as well as the impact of the reduction in the corporate tax rate on its future interest rates. With Sims leadership and collaborative work of PSC Management, Citizens Bank and the full financing working group, PSC achieved the next critical step in realizing its objective of expanding its memory care services offering to more fully serve seniors in its market area.
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