Both in terms of time and complexity, one of the most difficult aspects of a surgery center to finance is the real estate component. Let's start with understanding a basic aspect of lending: Lenders must always plan as though the project will fail, that they will one day own the building. This doesn't mean that they think your project will fail, but they must plan as though it will. That's hurdle one. Hurdles two and three are that freestanding centers are unique and expensive commercial real estate projects. A surgery center is a unique property that is used for a very special purpose. Since a lender must plan for failure, it must consider what it'll do with this piece of real estate if it gets it back. Because surgery centers are what lenders call a single-purpose use facility, they can't easily be converted into an office complex or retail location. This single-purpose aspect is a difficult hurdle to overcome.

The typical ASC is a more expensive real estate project per square foot than most other types of real estate. Since lenders must plan to get the project back, and since they're not in the business of owning real estate, they must consider if they can sell the project for enough to cover their loan balance. The more expensive the project, the more heartburn they have in considering recovering their loan balance at a subsequent sale of a failed project.

Your financing solutions
Now that we know some of the hurdles in financing a project, let's look at the sources for financing.

• Local banks. The primary advantage of dealing with your local bank is that they know you and already have a relationship with you. Assuming that you've been a profitable relationship, they'll want to do their best to keep you as a customer. They'll take the time to understand your project and see the economic benefit to you and your practice. Banks are particularly good as the source for construction financing.

Another advantage of dealing with local banks is they can be more flexible than other lenders. For example, they may let you prepay all or part of the loan with little or no prepayment penalty. On the downside, local banks don't normally fix the interest rate as long as other lenders. Most banks are limited to fixing the interest rate for a period of no longer than five years. Typically they'll amortize the loan over 20 years, but will fix the interest rate for only five.

• Life insurance companies. Most long-term loans, also called permanent loans, for commercial real estate projects are financed through life insurance companies. Life companies are significant holders of cash, and seek to invest their cash for fixed rates to support their annuity and actuarial projections. For example, a life insurance company will often provide a loan that will amortize over a 20-year period and have a rate fixed for 10 years. This is particularly attractive during times of lower interest rates, such as that as we have experienced the last two years.

As of press time, the rates life companies were quoting for ASC projects ranged from 6.25 to 6.50 percent for 10 years with the loan amortized over 20 years. Some life companies are also making loans that will fix the rate for 15 years and even 20 years for high-quality projects. For the physician and/or physician group that has a long-term focus for the ASC, the rates life companies offer in this current market can be particularly attractive. To finance a loan through a life insurance company, usually you'll need a commercial real estate loan broker. You'd pay a broker's fee at closing, similar to the financing of your residence.

How much?
Now that we know some of the hurdles to financing and some of the sources, your next question may be: How much can I borrow? The standard answer is 80 to 85 percent of cost for a facility to be built and 75 percent of the value for an existing facility. Since the value of a facility that is built and under lease is often greater than its cost, most projects can finance 85 percent of cost and still be at 75 percent of fair-market value. There are many exceptions to this, and you may hear of projects that receive up to 100 percent of cost, but these are not the typical project. Generally, the more expensive the project, the greater the need for equity in the project.

Since the determination of appraisal is an important part of the financing process, it's critical to have the project appraised by a licensed appraiser who understands the appraisal of an ASC. Put another way: You don't want to be an appraiser's first ASC project. Keep in mind that since the lender must actually retain the appraiser, you'll need to coordinate this aspect with the lender.

Borrower vs. lender
Just as you as the borrower are certain of your surgery center's success, the lender must anticipate failure and plan that it will eventually own the building. It is this anticipation of failure that causes many lenders to limit the amount of loan per square foot to less than what a surgery center project requires.

This calls to mind the surgeon who applied for a bank loan - and got considerably less than he needed. The bank retained the services of its local appraiser to prepare a pre-construction appraisal. Neither the bank nor the appraiser had ever been involved with an ASC project. The appraiser finished his report, and determined the value of the project once completed would be $1.2 million. Based on this value, the bank said they would happily lend the physician $1 million for his project, which was to cost him $1.75 million. The physician was stunned. Although he was very successful in his market, he wasn't able to provide $750,000 in cash equity for the real estate component of his project.