Financial Lessons of a First-timer

Facility Construction and Design

By: Louis Levitt

Published: 10/10/2007

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Four rules I learned in securing the working capital to get an ASC off the ground.


Our physicians group had everything in place to start an ambulatory surgery center project: 14 doctors who were committed, cooperative and had the capital to invest, a great building in a perfect location and a healthcare lawyer who secured state approval on the waiving of our CON (in Maryland, you don't need a CON for a one-OR ASC, but the state must OK this). All we needed was the working capital to get our planned multi-specialty, one-OR, two-procedure-room freestanding ASC off the ground. It was my first attempt at such a project, and what an adventure it was. Here's what I learned.

Estimate? What estimate?
We had hired a consultant from an accounting firm and made most of our projections based on her expertise from other centers and national figures - including the projection for how much financing we would need. It turns out that this estimate was not very accurate, and realistically estimating our costs became an obstacle.

To start, we looked at our space and said, we've got 7,000 square feet - most of it office space. Even expensive office space in Washington, D.C., costs maybe $50 a square foot to build out. Our consultant figured surgical would be about $90, and we initially budgeted for that. The healthcare architect, however, then told us $125 a square foot.

But the electrical and mechanical requirements for an OR really drove the price up, in addition to the fact we had picked a building that wasn't suited for OR space. A newer building would have had some of the features we needed, such as a bigger generator and air conditioning unit. So the final estimation came to $150 a square foot, and we suddenly realized this was going to cost a lot more than we expected - and we needed to look again at how much financing we would be requesting from a lender.

Lesson No. 1 is an informal rule: When you arrive at a cost estimate, double it. And No. 1A, if you can manage it: Bid out your project; don't just take the first person recommended to you. After we got the $150-per-square-foot estimate, we took a step back and decided that price was too high. We put the project up for bid and were able to get the figure down to about $135.

7 Tips From the Pros
Here are seven tips for getting what you want from your financing.

1. Create a community. "If you can co-develop a medical office building with an ASC, your financing will be easier to procure," says Todd Tidmore of MedCapital in Addison, Texas. That's because the lender looks at your project with a "what if it fails?" attitude. If the surgery center fails, he says, the lender is left with a less-specialized (and therefore more marketable) building, which makes winning approval more likely.

2. Secure equity. "Have enough equity from your physician group and the developer," says Terry Gill of CIT Healthcare Financial Services in Marietta, Ga. "Somewhere north of 20 percent - if your project will cost $2 million, that means having $400,000 or more in cash to back it."

3. Allow breathing room. Jeffrey N. Fox of CitiCapital in Marietta, Ga., advises that you start exploring your finance options about 90 days after you find a development company. A minimum of six months before you actually need the money is when you should start applying with lenders. "Just securing copies of income tax returns, personal financial statements and signed credit report-authorization forms can take about six weeks," says Mr. Fox. "Physicians are busy, so you need to give them enough time."

4. Know up front. When you first start exploring your financing options, go to your lenders of choice and try to secure pre-approval - that way you won't be caught off-guard by a denial. "Lenders are going to look at what type of physician you are, how long you've been out of school, whether there are any derogatories on their credit reports, how deep they are in debt," says Raymond Doherty of Boston-based HPSC, Inc. "You'll have a better idea of your likelihood of approval."

5. Ask questions. "Contact a lender early and get up front what they want to see in your business plan," says Ken Seip of Chicago-based MarCap. Banks not familiar with ASC financing might want to see a comprehensive review of the industry to bring them up to speed, for example, while healthcare lenders might be more interested in just a half-dozen or so targeted pages that cover your facility and investors. "That way you'll lessen the chance of their having questions and your having to change the plan or give them more information," he says.

6. Use CON to your advantage (for once). Give the lender a copy of your CON or, if you are not in a CON state, another state's CON application to use as a guide, especially if you've chosen a bank that's not financed any or many ASC projects. "The CON helps the lender understand the demand/supply analysis, expected reimbursement and the project's expenses," says Paul Hutt of MedSource Capital Finance in Olympia, Wash. The idea is that the more informed the lender is, the more likely your project will be approved.

7. Get your terms. Robert Goodman of the Mansfield Group in Westampton, N.J., advises making sure the financing is not joint and several, but done on a pro rata basis. That is, it's based on a percent of ownership interest. "If the deal goes bad, you don't want to be obligated for the full hundred percent," he says, "just your share." It might affect your rate up front, but it provides long-term security.

- Stephanie Wasek

Off to the lenders
Then we started looking at lenders. We knew we wanted a lender that wouldn't require all the physicians in our group to be individually responsible for the whole loan; instead, each of us would be responsible for one-fourteenth of the loan. We also knew that we wanted to localize as many aspects of our project as possible, which is why we decided to look at banks; we went to three.

First, the biggest bank in town: We had to make two or three calls before someone called us back - not a good way to win a customer. Next up was a hot, fast-growing bank. Within half a day, both the president and manager of the bank were in my office telling me they wanted our business. They were small, but they had partner banks that would loan us the balance of what they couldn't provide, they assured us. I was, to say the least, impressed. So much so that I began planning to move the financing on my private practice over to the bank. The third bank we approached was sort of a back-up - and boy, was it a good thing we did.

The day we were supposed to sign the loan package, we also needed a letter of credit to sign the lease on our space. I called the bank to find out when I could pick up the letter, but we had a hitch. Now, of all times, when I was about to secure the building. I had to call a meeting with the bank and my lawyer to figure out what was going on - I didn't want to lose the space, but at that point I felt I might have to.

As it turns out, the bank was just too small for us; they simply never told us they wouldn't be able to make a loan of more than $1 million. It was my naivet' - we really should have been more thorough in our due dilligence.

By hyping up our interest in the back-up bank, we were able to secure a loan for the construction and a letter of credit for the lease, including the limited liability we were looking for. We hadn't wanted to apply to the back-up bank at first, but our consultant, in perhaps her biggest contribution to the project, had made us. The landlord was very patient, and we were able to have the space we originally wanted.

So, lesson No. 2: Customer service is important, but don't get swept up in smiles and handshakes. Make sure the lender has the capacity to support you, especially if you decide to go the bank route, which may have more limited funds than a national healthcare financing firm.

Spreading the wealth
Financing is available out there for both space and equipment. While we used one bank for our space, we used a combination for the equipment, which cost hundreds of thousands.

The bigger equipment, like autoclaves and OR tables, we found on secondary market. The more delicate, technological equipment, such as endoscopy equipment and television screens for endoscopies, were bought new. We tried to use a single vendor for as much equipment as possible in order to cut a deal, and we dumped 95 percent of our equipment costs into leases.

The bank and a financing company are each backing half the leases. By spreading the loans over two companies, we have more leverage over the financing.

Lesson No. 3: Differentiate between who's lending you money for your building, and who's lending you the money to equip that building.

Standing our ground
There were certain terms we wanted in our financing contracts - both for the space and the equipment - and we decided on them in advance. We wanted financing that would let us

  • each be responsible for one-fourteenth;
  • redistribute and prorate the financial responsibility if we add more doctors in the future;
  • kick out of the deal after five years (of a 10-year deal) by paying three or four months' rent if we decide it's not working; and
  • remove the letter of credit on the build-out after six years, if we're on time with our payments (that way, the landlord's costs to return the building to office space if we leave are covered, but we earn a better credit rating sooner and don't have to protect the lease as long).

We set it up this way because our physicians want to see something in the way of returns sooner rather than later. We had to do a bit of negotiating to make sure we got our terms - especially with the last-minute issues in our financing - but we did it. Lesson No. 4, then, is that you're more likely to get what you want if you know exactly what it is you want going into negotiations.

"By the seat of my pants"
I never dreamed opening the Massachusetts Avenue Surgery Center would be such a tremendous task. Another physician forewarned me, "You'll find out how difficult it is," he said.

Did I ever. It cost me so much time away from my personal practice - more than 20 hours a week. I did a lot of this by the seat of my pants over the last nine months, but it was fun. I learned a lot (about financing and just about everything else you can imagine), and now the hard work has paid off: We received our state inspection in December and are now performing our first cases.

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