HJ Sims successfully completes $77.75 million Revenue and Revenue Refunding Bonds generating interest rate savings and pre-development capital
“Without the extraordinary talent, judgement, leadership and perseverance of Aaron Rulnick and the HJ Sims team, this critically important refinancing would never have happened. With the December 31 deadline for tax exempt financings of this type looming like a guillotine, the Sims team accomplished what was needed in a fraction of the typical time needed. They also went to bat for us in a saturated bond market to get us an outstanding interest rate that will save us over $2.5 million net present value of debt service. We couldn’t have done it without the HJ Sims team!”
– Stan Brading, President, Samaritan Housing Foundation, Inc.
Samaritan Housing Foundation, Inc., d/b/a SearStone Retirement Community, is a life plan community located in Cary, NC. The Community presently consists of 131 independent living apartments, 38 independent living estate homes, 8 assisted living units, and 16 skilled nursing beds. The assisted living and skilled nursing services are offered at the Brittany Place Healthcare Center (“Brittany Place”). SearStone also has gardens, walking trails and an approximately 16 acre lake. In June 2012, Sims financed the first phase of SearStone with a $117.5 non-rated fixed rate bond issue. Sims had previously provided $6.8 million in pre-development capital as well. In December 2016, Sims financed $8.0 million of tax-exempt fixed rate bonds, issued on parity with the outstanding Series 2012 bonds, to expand the Brittany Place by 15 beds, improve landscaping across the entire campus, and acquire and control land for a future Phase II expansion.
Since the original financing in 2012, and opening in 2013, SearStone has reached stabilization, and plans to expand. The Series 2012 bonds, as is customary with start-up financings, were priced at higher interest rates than a comparable established, revenue generating community would have borrowed at the time of financing. Despite the costs of financing an escrow to a June 1, 2022 call date, market conditions in late 2017 suggested SearStone could refinance its outstanding Series 2012 bonds for savings, and increase borrowing capacity for its proposed Phase II expansion.
Given the growing demand for independent living units at SearStone, preliminary planning has commenced for a Phase II expansion project. In December 2016, proceeds of the Series 2016 bonds were used to purchase the Phase II expansion site. Proceeds of the Series 2017B bonds and prior funds released from the refinancing of the Series 2012 bonds will be combined to provide predevelopment capital for the Phase II expansion. Predevelopment costs will include a new stormwater management system, and design, architectural, and developer fees.
SearStone and Sims originally planned to refund the Series 2012 bonds in the first quarter of 2018. However, in early 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, and the proposed elimination of advance refundings for all tax-exempt bonds. While the Senate soon followed with a bill that preserved the tax-exemption for private activity bonds, The Senate’s bill also eliminated advance refundings. 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 SearStone from refinancing its debt on a tax-exempt basis, likely eliminating the economic benefits of refinancing, as well as financing future capital needs on a tax-exempt basis. Instead, future borrowings would require financings at higher taxable rates. Moreover, the proposed elimination of advance refundings in both bills would eliminate SearStone’s ability to refund the Series 2012 bonds on a tax-exempt basis until 2022. Accordingly, SearStone and Sims expedited the financing several months as advance refunding faced elimination. The final tax reform bill signed in to law preserved the tax-exemption for private activity bonds, but eliminated advance refundings. Had SearStone and Sims not acted quickly, SearStone would have been forbidden from refunding the Series 2012 bonds with tax-exempt proceeds prior to its 2022 call date and compromised its capacity to support the predevelopment capital it needed to move the Phase II expansion forward.
The financing was successfully completed on December 27, 2017, amidst a historic year-end volume of tax-exempt borrowing resulting from the proposed federal tax reform. As desired, the refinancing component, the $71.73 million Series 2017A bonds, Advance refunded the Series 2012 bonds, and extended the final amortization by five years. Additionally, the new money component provided by the $6 million Series 2017B bonds, provided $5.5 million of tax-exempt project fund proceeds that will be combined with $1.5 million of restricted funds released from the Series 2012 financing to fund $7 million of predevelopment costs associated with the future Phase II expansion project. The Series 2017A bonds were structured to wrap around the debt service of the Series 2017B bonds, and existing Series 2012 bonds, to create level annual debt service across the entire debt profile. Despite borrowing $5.5 million for new projects and incurring over 4 years of negative arbitrage with an advance refunding escrow, SearStone reduced their annual debt service by more than $220k per year, and realized net present value savings of approximately a half million dollars, while extending the debt amortization 5 years.
With Sims’ leadership and the collaborative work of SearStone Management, and the full financing working group, SearStone successfully completed the financing and realized its goals. These included: 1) generation of interest rate savings by taking advantage of lower interest rates, 2) Providing covenant relief and maintaining sufficient operating, financial and strategic flexibility to implement the future Phase II expansion, 3) extending the amortization of outstanding debt, and 4) generating funding for the initial predevelopment costs associated with the Phase II expansion project
For more information on how SearStone was Financed Right® by HJ Sims, please contact: