Case Study

T-I-F + H-V-C-R-E Spells a Great Financing Deal

Case Study Details

Financing Type:
New Project Investment
T-I-F  + H-V-C-R-E  Spells a Great Financing Deal

Indiana Orthopedic Specialty Hospital Shows the Way

Creative solutions allowed a group of orthopedic surgeons to prevail and secure favorable financing to build a new orthopedic specialty hospital to be leased to St. Vincent’s Health (part of the Ascension system). CMAC was hired to arrange this financing and negotiated a structure with the bank that substantially mitigated the initial equity contribution to the physicians with no meaningful tradeoffs on other loan terms. 

The borrower had approval from the county to receive $5.5 MM of Tax Increment Financing (“TIF”) funds due to the significant economic impact the project would impart on the community.  Understanding how to best monetize the TIF funds up-front to assist in funding the project was the goal.  

The vast majority of lenders were unwilling to consider TIF funds as contributed equity when assessing the borrower’s cash injection. The majority considered it as a reduction in the cost of the project. However, CMAC was able to convince one bank to use TIF funds as part of the contributed equity thus allowing the owners to substantially reduce their individual capital contribution. This may seem like a subtle distinction, but it actually reduced the cash required by nearly $200,000 per owner. Not a subtle result!

CMAC had to resolve how to use the TIF funds in conjunction with the High Volatility Commercial Real Estate (“HVCRE”) regulations.  We needed to understand the HVCRE and its application to the project: 

  1. The loan-to-value (LTV) ratio could not exceed 80% for commercial construction loans; 2. The borrower has contributed capital to the project in the form of cash or unencumbered readily marketable assets (or has paid development costs out-of-pocket) of at least 15% of the real estate's appraised "as completed" value; and 3. The borrower's 15% capital is contributed to the project before the bank advances any loan proceeds, and such capital is contractually required to remain in the project until the loan is converted to permanent financing, sold, or paid off.
  2. Grants from municipalities, state agencies, or federal agencies cannot be considered as cash provided from the grant as a capital contribution because the cash did not come from the borrower.  

With the structure negotiated with the bank, it was clear that the loan would have to be considered HVCRE since the bank was not requiring that the borrower put in 15% of the value in borrower cash (since they were allowing the TIF funds as equity in their internal requirement and they were sizing the loan on a Loan To Cost parameter after a very high appraisal). When a construction loan is considered HVCRE, the bank must assign a 150% reserve requirement, which makes the loan much less profitable for the bank. Most banks will therefore refuse to lend under this classification. However, after arduous negotiations, the bank was able to justify allowing the loan to be an HVCRE loan during construction and thus the substantially mitigated equity requirement remained intact. The loan terms were structured with a 24-month, interest-only period followed by an 8-year term with 25-year amortization. $50MM of the $51.2MM loan had the rate fixed at 4.00% through an interest rate swap. The remaining $1.2MM was allowed to float. The interest rate over the construction period was Libor + 2.25% switching automatically to a rate of L + 1.60% after construction. The borrower, the bank, and the community all benefited from the creative financing and use of TIF funds to complete this project. 

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