by Brian Rhodes, Assistant Vice President of Healthcare, First American Healthcare Finance, an IHA Endorsed Business Partner
Many hospital CFOs who are faced with a backlog of deferred maintenance projects and budget constraints use financing as a strategic tool to complete critical projects that need to be done today. Bonds often are an attractive option for hospitals to finance large improvement projects at low, fixed rates over longer terms. However, many hospitals that use bond financing for long-term building projects carve out separate financing for shorter useful life assets. This strategy can provide the following benefits:
1. REDUCE OVERALL INTEREST EXPENSE
Separating shorter useful life assets from the longer-term bond issuance provides a great opportunity for hospitals to avoid added interest expense. Assume a hospital is going out for a $10 million bond issue for a building renovation project. The 20-year bond has a fixed interest rate of 4.0 percent. The $10 million renovation costs include $9 million of traditional renovation charges and $1 million of various technology and furniture purchases.
The illustration below summarizes the total interest expense of two approaches to financing this project.
2. AVOID PAYING FOR ASSETS BEYOND THEIR USEFUL LIFE
Rolling shorter useful life assets into longer-term bond issues results in hospitals paying interest on assets that are no longer in use. The technology, medical equipment, networking infrastructure, or new furniture will be replaced years before the 20-year term expires. Why incur interest expense on medical equipment, technology, or furniture beyond its useful life?
By matching funding with the asset life, hospitals can reduce maintenance costs and improve operational efficiency with the latest equipment. The diagram below outlines the estimated useful life of assets commonly separated from longer-term bond issues.
3. FASTER AND EASIER PROCESSING THAN BOND FINANCING
It’s a common misperception that incorporating leases for shorter useful life assets adds complexity to your bond issue when it is actually very easy. The lease process has a lead time measured in days and can be completed much faster than bond financing. Equipment leases also lack the complex terms and conditions of a bond issuance and generally feature the following terms:
Equipment leasing for short-term assets is an effective solution for hospitals seeking to align funding with useful life and reduce interest costs—all through a simple financing process. Complementing long-term bond financing with short-term equipment leasing can be a helpful tool for hospitals to address key projects and provide patients and staff with the latest equipment needed to give the best care possible.
For additional information on how short-term leasing and financing can complement your long-term financing strategy, contact Brian Rhodes at firstname.lastname@example.org or 585-643-3448.