Historically, capital investments required for rural hospitals to modernize facilities have been unavailable, but the expansion of the USDA Community Facilities Program, the stabilization of finances with Critical Access Hospital (CAH) status, and other federal programs over the past decade has changed the equation.

Encouraging News from the Financial Market 

With loan programs established in the recent years, rural communities can now access additional capital, and at very affordable rates to rural & community hospitals and CAHs:

  • Loans have an average 2.6% fixed interest rate for a 38-year repayment
  • After taking into account cost-based reimbursement, the net interest cost is reduced to about 1.4%

This levels the playing field, ensuring that rural & community hospitals, as well as CAHs, and other healthcare facilities can make the long-term investments they need to serve their communities better.

USDA Community Facilities Program 

The key source of the additional capital has primarily been the USDA Community Facilities Program. The program has provided more than $3 billion in loans annually, a ten-fold increase over the past decade. The USDA is deeply committed to supporting healthcare across rural America and making long-term investments in infrastructure. It has also been working to improve the program and issued new regulations in October 2020 called OneRD.

USDA Funding for Acquiring Assets, Developing Infrastructure, and Purchasing Equipment 

The USDA program is specifically designed to acquire assets and develop infrastructure and purchase equipment for long-term use, not short-term working capital.

Eligible Uses of Funding: 

  • Acquiring existing real estate
  • Constructing, expanding, renovating, or improving facilities
  • Purchasing vehicles and major equipment
  • Associated project expenses (i.e. legal fees, interest expense)

Ineligible Uses of Funding: 

  • Finder’s fees
  • Operating expenses
  • Working capital
  • Projects that will disturb wetlands
  • Projects not modest in size, design, or cost

Refinancing Options:

  • Debt may be separately financed with a guaranteed loan or included as part of a new project to include direct loan funds if less than half of the project total
  • Debt to be refinanced must have originally been used for an eligible purpose
  • Term can be re-extended up to 30 years or matched to existing amortization

Sources of Funding and the Capital Stack

To understand how the financing comes together, we need to look at the capital stack, which is made up of three parts:

  • Equity
    Ranges from 1% to 40% of project costs
    Internal cash and/or fundraising
  • Guaranteed Loan
    10%-20% of total debt
    Rate may be fixed or variable as per lender for up to 30 years
  • USDA Direct Loan
    80%-90% of total debt
    Rate is fixed at the time of commitment or upon completed construction of project, whichever is lower

Equity encompasses a broad range. Some clients put minimal equity in, and others have substantial equity, whether through reserves that they’ve accumulated over time, a fundraising campaign, or a combination of the two.

Once we determine the equity, we look to the two USDA loan programs: the Guaranteed Loan program and the USDA Direct Loan program. The best source of capital is the USDA Direct Loan Program, which can provide 80% and 90% of the total debt, with the rate set by the USDA. As of September 2021, the current rate in effect for those loan proceeds is a 2.25% interest rate, which is available for up to 40 years of repayment. The remaining 10%-20% of the debt is through the Guaranteed Loan program, with a rate that is subject to negotiation with the guaranteed lender.

USDA Application Requirements 

When we work with a client to submit a USDA application, a typical timeline from start to finish is between six and a half to seven and a half months. The application process includes:

  • Environmental requirements
  • Preliminary architectural report
  • Feasibility study
  • Appraisal
  • Application processing and underwriting

To learn more about the specific requirements and how your organization can access USDA loans, please contact us.