MCM provides long term financing for Community-based service providers that are either governmental units or not-for-profit 501(c)(3) corporations including Mental Health Agencies and Intellectual and/or Developmental Disability Service Providers.
MCM’s Simplified Bond Program is the easiest way for a governmental, or a not-for-profit, social service provider to borrow tax-exempt money for major capital improvements. The Simplified Bond Program was designed specifically for the needs of community based social service providers or agencies.
The Simplified Bond Program provides low-cost, long-term financing using tax-exempt municipal bonds. Generally, the use of municipal bonds will provide a borrower with savings of 20 to 30% on the interest portion of the loan, when compared to a comparable term bank loan. Click for more info. The savings generated can be put back into services. MCM offers both fixed-rate and variable-rate financing, but in most cases, we suggest fixed-rate financing for non-profit organizations. Banks typically offer variable-rate loans or loans with an interest rate “reset” at some point which exposes the non-profit to substantial economic risk.
Issuance costs are low due to standardized loan documents and when possible, pooling of loans for economies of scale.
To qualify all borrowers must:
- Have prepared audited financial statements
- Be qualified as a 501(c)(3) tax-exempt organization or unit of government under state law
- Meet certain credit-worthiness requirements which are based on the size of the organization and the funding source
- Be financing a project for the mission of the agency that does not benefit any individual or any for-profit business
Who may participate?
Any non-profit 501(c)(3) service provider that has received their designation as described in the IRS Code or that is a unit of government under state law.
What financing needs are eligible for the Tax-exempt Loan (Bond) Financing Program?
The Program is designed to provide low cost, tax-exempt financing to purchase or renovate facilities, acquire major equipment, or to refinance existing real estate loans and mortgages that may be outstanding at a higher interest rate.
Can improvements to capital leases and working capital loans be covered in the Program?
In most states improvements to capital leases and working capital can both be covered in the loan program. However, working capital may be borrowed only in conjunction with the purchase of real property.
What will be the estimated rate of interest?
The actual interest rate will be dependent on market conditions at the time the bonds are sold, and the credit strength of the borrower, so it is virtually impossible to predict interest rates until these variables are known, except to say that tax-exempt rates are typically 20 to 30% less than comparable bank financing. It is also important to note that we typically suggest a fixed-rate for the life of the loan, not a floating or variable-rate.
At what point is the interest rate confirmed?
Our professionals can provide you with updated market estimates, but final interest rates are determined at the time the bonds are sold. The rate is established through an auction-like process. The winner/buyer of the bonds is the one willing to accept the lowest rate of interest on their investment.
What percent of project costs can be financed through the Program?
Generally, 100% of project costs can be financed. It is desirable for a borrower to have some equity in the project, but it is not necessary.
Is there a minimum size loan that is necessary for participation in this Program?
Yes, the minimum loan is $1,000,000 which can include one or several projects, unless several borrowers can be put into the same bond financing in a “pool”, then we can finance as little as $300,000. Anything less will cause the savings realized through using tax-exempt bonds to be sacrificed.
Is there a maximum loan that a provider may receive?
There is no limit to the size of the loan that a provider may obtain, other than the practical limit of the entity’s ability to repay the debt.
For how long can money be borrowed?
Loans can be any length from three years to 25 years. Most borrowers prefer to borrow for about twenty years.
Will there be any up-front costs associated with this Program?
MCM does not require any fees up front, however some state issuers require a nominal good-faith deposit in advance. At closing of the bond transaction, non-profit borrowers may be required to pay the amount of the issuance costs that exceeds two percent (federal law limits the amount that can be borrowed through tax-exempt debt to two percent) to the Bond Trustee for payment of fees at closing. In most states it is possible to borrow this amount through the issuance of taxable bonds.
What are the anticipated costs of issuance through this Program?
Costs of issuance are a function of the total size of the bond issue, but typically the total costs are between 4.0% and 5.0% of the loan amount. When these costs are rolled into the financing, they translate into an additional interest rate of between .20%-.25% for a 25 year loan. In other words, a bond interest rate of 3% would have an effective rate between 3.25% and 3.30% for 25 years.
Are there any on-going fees related to the Program?
Yes. The Trustee will charge an on-going fee for serving in that capacity, and in some states, the issuing entity will charge a small on-going fee.
When will money be available to the borrower?
A bond program will take between three to four months to assemble and market. Money is available to the borrowers immediately after the closing on the bonds.
Interim financing facilitated by MCM may also be available if needed in the meantime.
How and where does a borrower make payments on its loan through the Program?
Each borrower will make monthly payments to the Trustee bank just as if it were making a mortgage payment. Each month the Trustee will notify the borrower of the amount due, which will be the gross amount less any offsetting interest earnings.
What security is required by the bondholders?
The bondholders will require several covenants within the security provisions, but the primary security will be a first mortgage on the facility being financed with bond proceeds, and a first (though not exclusive) lien on revenues of the borrower. Since many providers have already given a first lien on their receivables to other lenders (such as the local bank for a line of credit), an Inter-creditor Agreement must be worked out with the other lender to allow a “parity” first lien on the revenues. (Please note: for IAC and NYSACRA borrowers in New York State there will be no lien on revenues.) Borrowing money in this Program will not prevent you from borrowing additional funds as long as the borrower can meet a reasonable Debt Service Coverage Test. The Inter-creditor Agreement, and instructions on how to handle it, will be provided by Bond Counsel once the process is underway.
How does the “debt service reserve” fund work?
The debt service reserve (D/S/R) account will be funded with bond proceeds by each participating agency in the program. The purpose of the fund is to assure the investors that their bond payments will be made timely. The D/S/R will be available to a borrower in a serious cash flow situation that would put the borrower in default. In this case, the D/S/R would be used to pay the bondholders while the borrower attempts to catch up on their monthly payments. The money in the D/S/R belongs to the borrower when the debt has been paid off, and most borrowers will use the cash to help pay the last bond payment. Additionally, the semiannual interest payments earned by the investment of the D/S/R may be used to lower the monthly payments.
Who handles the construction bids and selection of builders for participants in the Program?
The borrower is responsible for selection of contractors, engineers and architects, just as if one was paying cash for the project.
Will we have to have our property appraised, and if so, when?
If you are acquiring an existing facility or land, it will have to be appraised prior to purchase. You will not be required to have the appraisal at the time you make application for participation in the Program; but, having the appraisal ahead of time will help in determining how much money you will need to borrow. Appraisals can be no more than one year old at the time they are submitted to the Trustee.
What if a project is delayed for six months or a year?
As soon as the bond issue is closed, the borrower becomes liable for their portion of the debt. In a situation where a construction project or an acquisition is delayed, communication should be made with the Trustee Bank and the Investment Banker as soon as possible so that interest earnings on the construction money may be credited to the monthly payment. This will lower the monthly payment as much as possible until the borrower is able to proceed with its project. (Please note: for IAC and NYSACRA borrowers in New York State, projects must be completed prior to participation.)
What if a project falls through completely?
A borrower must be fairly certain that its project will go through, or that it will be able to substitute another project of equal value. If everything falls through, the borrower will be able to call the outstanding bonds and pay them off early; however, it should be noted that there will be a cost to the borrower based on the cost of issuance of the bonds related to its project.
What is the advantage to this Program?
The bonds that are sold to raise money for the loan are tax-exempt. This means that the interest rate will be about 20% to 30% lower than conventional bank financing. Additionally, when participating in a pool with other borrowers, the costs related to issuance are shared on a pro-rata basis among all borrowers.
Who buys these bonds, and why would they buy them at these low interest rates?
Individual investors, as well as institutional investors, will be interested in buying these bonds because of the tax-exempt status of the bonds. With this feature, the investors will not have to pay income tax on the interest earnings.
Your agency is staffed with experts in the program side of the industry and our firm is staffed with experts in the financial side of this industry. Every well-run non-profit agency that serves people with mental health and/or intellectual or developmental disabilities works to operate as efficiently as possible to ensure that as much of the budget as possible can go to serving individuals. To be certain that your agency is financially healthy it is important that both Management and Board members have a full understanding of your agency’s financial condition in relationship to other providers and industry standards.
MCM prepares Financial Assessment reports for agencies. Our report compares your financial ratios with industry standards and generates an assessment rating. Let our expertise save you time and money and let us provide you with a meaningful tool for use by management and board members.
Do you want or need to know
- How much cash reserve your agency should always have on hand?
- Whether or not your agency is spending too much on facilities?
- The 5-year trends for your key financial ratios?
- How your financial strength compares with other providers in your state?
- Suggestions for improving weak areas?
MCM has specialized in financing non-profit service providers in the mental health and developmental disabilities field since 1989. In 1993 we developed a credit assessment process that allows us to accurately determine which non-profit service providers qualify for long-term financing. This credit assessment system has been used to finance over 2,400 MH/DD facilities from coast to coast with a very low default rate. We have analyzed our collected data and designed the Financial Assessment report. This report does not simply re-iterate what is in the financial audit or Form 990 but relies on our years of experience in this field for assessing credit strength.
The Financial Assessment report and the ratios incorporated are based on the analysis of thousands of financial statements from service providers of all sizes from all over the country, however each provider’s report is generated to meet the needs of your individual agency. The assessment reports will assist you in the examination of the liquidity, capital structure and profitability of your provider organization.
Click here to see sample pages from a report
From our webinar:
For a fee quote, please contact Kendal Hauck via email or call 972.663.6553.