Community Health Facilities Fund "CHFF"

John Witte, Director of Operations
302-376-7578
johnwitte1@aol.com

Project Summary

"CHFF assists the non-profit behavioral care borrower in obtaining low-cost, fixed-rate loans. Borrowers can finance new construction, renovation, the acquisition of property and high cost debt. They can also finance equipment, as long as there is real estate to be financed also. Some working capital can be financed. 1 Loans financed by CHFF generally have a 25-year term. The interest rate is below the prime rate and is fixed for the term of the loan. CHFF lends up to 90% of the asset's appraised value."1 CHFF has set up a loan program that can finance borrowers one at a time and on their own schedule. So far, CHFF has provided 31 behavioral care organizations with a total of $80 million in loans.

Financial Challenge

CHFF's financial challenge was finding the appropriate mix of capital that would allow it to offer loans. This was conducted in steps. Grant money was first obtained from The Robert Wood Johnson Foundation (RWJ). This allowed

Financial Structure & Benefits

CHFF was created by two trade organizations in the behavioral care market to establish a source of low cost financing for similar trade organizations. Chris Connleey, a former employee of Lehman Brothers, was brought on board to handle the finance side of CHFF, which he manages with a three person team. RWJ was contacted to provide an initial amount of $7M in capital. Eaton Vance (EV) of Boston, MA then contributed $63M to match RWJ's initial capital of $7M. This arrangement allows CHFF to lend out funds to qualifying not-for-profit organizations (NFPOs), from which repayments provide the means to give EV investment returns. Effectively, the $7M from RWJ is like equity and the $63M from EV is like debt.

Eaton Vance was attracted to the investment because it provides interest income that is tax-free with respect to federal taxes, due to CHFF's 501c3 tax status. Additionally, EV liked the historically low default rates on the loans that CHFF made to not-for-profits, as this attribute provides a high level of assurance that EV will not lose money on its investment. Eaton Vance made its $63M contribution by buying bonds that were backed by the loans made to CHFF's borrowers. The bonds have been issued based upon the amount of money in the pool of funds contributed by CHFF and EV. The bonds contain a Debt Service Reserve Fund (DSRV), which is an "emergency fund" that is used in case the borrower misses a loan payment. Every Nonprofit Capital loan must have a DSRF equal to approximately one year's principal and interest. The DSRF is funded from the bond offering. The size of the bond offering is increased to include funds for the DSRF. At closing, a portion of the proceeds of the bond issue are placed into the DSRF held by the Trustee. The DSRF is furthermore treated as a restricted asset on the balance sheet, and is held by the Bond Trustee for the benefit of the bondholders. The interest earnings on the DSRF benefit the borrower by reducing the annual debt service payments. DSRF will be used to make the final payments of the loan. For example, if the loan has a 25-year term, cash payments are made by the borrower for 24 years and the DSRF is used to make the payments in the 25th year. Social Benefits

Social Benefits of the project include the ability of NFPOs to own facilities that they previously leased. Often times, NFPOs lease their facilities because they started small and have always leased their facilities. Additionally, many NFPOs choose to lease because federal authorities will pay lease payments but not interest on loans. Historically, leases often have had average rates of approximately 14%, which is relatively high compared to the rates offered by CHFF, which are generally below the prime rate.

Project Significance

To date, the most popular uses of CHFF financing have been the refinancing of high rate debt and the purchase of facilities that are currently being leased. Other acceptable loans include renovating a facility, purchasing a computer system, or purchasing capital equipment." ¹

This financing is significant because it provides liquidity for a unique lending system. Banks cannot normally package and re-sell loans to NFPOs. Instead, the loans must be held on their books. This results in disincentives to banks to offer such loans, leaving many NFPOs without funding. CHFF has an established history of underwriting these loans, and knows the kinds of credit criteria that are necessary to identify good borrowers. Many banks do not have the appropriate amount of knowledge concerning the necessary credit criteria, which leads the banks to engage in conservative lending practices that also leave many NFPOs without any or the bests sources of funding.

Project Transferability

CHFF's accomplishments can be utilized by others on two basic levels. First, NFPOs seeking funding can use CHFF's services to obtain financing that will save money in the long run through refinancing existing credit obligations with CHFF's lower rate loans. Second, CHFF serves as a model for financing. The organization received its financing in stages. The first stage was a grant that provided an equity cushion for EV. Bonds also had to be issued in order for EV to inject its funding.

Recommendations

If your NFPO has large financing needs, you can see if you qualify for a loan by going to http://nonprofitcapital.com/, a web site affiliated with CHFF. Covenants on the loans are violated occasionally. If you violate a covenant, you must notify the bondholders, including Nonprofit Capital, request a waiver of the covenant, and comply with any other provisions of the loan documents for covenant violations.

Author

Scott Cottrell is a first-year student at The McDonough School of Business at Georgetown University. He is a CPA and worked as a financial analyst in banking prior to business school.

Works Cited:
1. Community Health Facilities Fund Web Site, http://www.chff.org/