Financing Your Center Isn’t Brain Surgery!

Ambulatory surgery centers and specialty hospitals are proliferating at a dramatic rate. Many physicians prefer to send their surgical patients to these facilities instead of an acute care hospital for a number of reasons. Because of this built-in referral base — and because they can be run more efficiently than most hospitals — dedicated surgery centers tend to flourish financially. Consequently, teams of surgeons are more likely these days to develop their own surgery center.

They seldom have any problem finding demand for their services. Rather, the most common obstacle is financing. Here are some principles to keep in mind, to get the best possible financing.

This is not a job for a do-it-yourselfer

Some surgeons believe they can develop a surgery center without the help of a professional development company. That choice won’t endear them to a lender. Lenders favor an experienced team handling the development: dedicated real estate, financial, and management experts.

A development company will often coordinate the preparation of the necessary legal documentation; including LLC agreements, management agreements, subscription agreements and an offering memorandum. These tend to be detailed and highly technical documents with which development companies work with often and understand the terminology and procedures. Lenders usually feel more confident when professional developers have been involved in the process.

A development company will also prepare a pro forma, estimating your expenses and indicating how much equity you’ll need to open the center. If the pro forma is prepared by a person without experience, certain expense items and contingencies may be overlooked or misestimated. A development company is able to draw on its experience with pro formas, which should make the process go more smoothly. Moreover, an experienced development company will be able to steer you to the most suitable lenders: those that have experience with surgical centers, offer reasonable rates and guarantee structures.

Give honest estimates

A lender will want to see firm evidence that the number of procedures your surgical center will handle, particularly in the first few months of operation, will generate sufficient cash flow. Many surgeons make the mistake of telling lenders how many procedures they can handle, assuming that that’s how many they will handle. Lenders would rather receive a conservative estimate of how many cases you’re likely to take on, and the rate at which that number might rise. If your estimated caseload looks too high, ask for more information to substantiate your claims.

Rely on your development company to assist with due diligence. Development companies are in the business of researching such issues as the competition in your area, and how local hospitals will react to your surgery center.

Invest sufficient equity

A lender will likely feel more confident about your project if you yourself show confidence in it. That means putting a significant amount of your own money into the transaction — particularly if you’re asking for non-recourse financing (that is, financing for which you are not personally liable).

If, for example, four surgeons have raised $100,000 among them for the financing of their surgery center, they’ll have a hard time getting non-recourse financing at a bank rate. If the center fails, they’ll be out only $25,000 each, leaving the lender with nothing to show for its money but a failed medical facility. If each physician puts in $100,000, the lender is likely to offer better terms.

What kind of terms can you expect in today’s market? That depends on the lender, but you should generally expect to pay between 7 percent and 9 percent interest based on market conditions.

The lender might expect a guarantee structure of from 12 to 36 months, which would burn off as certain conditions or benchmarks are reached. Many lenders will allow a “step-up” structure of low (perhaps interest-only) payments over the first six months, followed by combined principal and interest payments.

I don’t mean to give the impression that all you need to get your surgery center financed are a development company, equity, and an honest presentation, but those three tools are your foundation. I’ll be going over several other “must-haves” in more detail during my presentation at today’s surgicenter conference in Las Vegas, Sept. 27-29, and I hope to see you all there.