Retirement Community Case Study by Bricker & Eckler partners David Rogers (left), Chair of the Bricker & Eckler Investment & Structured Finance Group and Ed Moore (right)

National Church Residences' Master Trust
Indenture -- Effective Financing for Health Care Projects

Since 1994, Bricker & Eckler has served as exclusive bond counsel in Ohio for National Church Residences (NCR) and its affiliates. During this time, Bricker & Eckler has worked with Lancaster Pollard & Co., NCR's underwriter and financial advisor, on NCR's tax-exempt bond issues. This case study describes how Bricker & Eckler helped structure a financing to meet NCR's current and future capital needs, while taking into account the $11 million of health care facilities revenue bonds NCR was issued in 1999.

Background

Founded in 1961 through the efforts of four Ohio Presbyterian churches, NCR is an Ohio nonprofit corporation with the mission of maintaining the dignity and independence of older adults through the provision of safe, comfortable housing and appropriate services at a moderate cost.

NCR owns Bristol Village Retirement Community, located in Waverly, Ohio. Having undergone various expansion and rehabilitation projects since 1961, Bristol Village now includes 391 independent living units, 82 congregate living units, 26 assisted living units, 50 Medicaid/Medicare certified nursing beds, and common area amenities. Bristol Village's operations provided about 30 percent of NCR's gross revenues for the 1999 fiscal year.

Over the past 35 years, NCR has significantly expanded its operations through the development and acquisition of additional housing and health care properties. With the exception of Bristol Village, each of the senior housing and health care projects are owned and operated by affiliated nonprofit corporations, of which NCR is either the sole or majority member. Each of the multifamily housing projects is owned by affiliated limited partnerships, of which NCR is the managing general partner. NCR provides management services, under management agreements with fees based upon a percentage of revenues and fixed expenses, to each of its affiliates, along with two dozen other non-affiliated properties.

Nearly all of NCR's affiliated senior housing properties were developed using proceeds from federal grants provided under the HUD 202 program, which encumbers all assets of each such federally assisted senior housing properties. All of NCR's affiliated multifamily housing properties were developed using proceeds from combinations of various federal and state grants, low income housing tax credit syndications and other non-recourse debt. All of NCR's affiliated health care properties were developed using proceeds from tax-exempt health care revenue bonds. NCR did not have any liability for debt incurred by its affiliates with respect to these properties, except for certain limited lease-up guarantees made for the benefit of the purchasers of the low income housing tax credits in connection with certain multifamily housing properties, and limited guarantees with respect to two health care revenue bond issues.

NCR's Capital Needs

NCR decided to finance, on a tax-exempt basis, approximately $6 million of additional capital improvements for Bristol Village and its corporate headquarters building. Portions of Bristol Village were financed with proceeds from three outstanding tax-exempt bond issues, only two of which (approximately $4 million outstanding) could be refunded on a tax-exempt basis. All of the revenues and physical assets of Bristol Village were pledged as security for these three bond issues. NCR's corporate headquarters building was financed with proceeds from an outstanding tax-exempt bond issue (approximately $1.5 million outstanding), which could be refunded on a tax-exempt basis. The corporate headquarters building was mortgaged as security for that bond issue.

Bricker & Eckler's Solution

Bricker & Eckler and Lancaster Pollard & Co. were retained by NCR to structure a financing to meet its current and future capital needs. Based upon a thorough review of all the financing alternatives available, the NCR board of trustees decided to change both the philosophy and methodology used by NCR and its affiliates to finance future capital acquisitions. The NCR board recognized that it would not allow an affiliate to default on its outstanding debt while NCR had assets available to pay such debt, and that NCR's affiliates could achieve substantial debt service savings if NCR would directly guarantee, and provide additional security for, the repayment of such debt. However, any affiliate guarantees provided by NCR should not preclude NCR from incurring debt and providing adequate security for its own capital projects.

Based on these parameters, Bricker & Eckler and Lancaster Pollard recommended that NCR use the modern master trust indenture (master indenture) structure commonly used by hospitals and health care systems, particularly to finance future health care projects. A master indenture provides NCR with the flexibility to incur additional debt, including affiliate guarantees, secured on a parity basis with any outstanding debt previously issued and secured by the master indenture. A master indenture will also allow NCR (initially, the only member of the obligated group) to add its affiliated entities as members of the obligated group.

Bricker & Eckler's principal challenge in structuring an effective master indenture was providing NCR with the flexibility to offer the level of security appropriate to the needs of the various classes of lenders. For example, banks that provide letters of credit to secure tax exempt bond issues generally prefer to underwrite their loans on a traditional project financing basis, secured by mortgages and security interests in the real and tangible personal property to be financed. On the other hand, bondholders may not require mortgages and security interests in the real and tangible personal property to be financed. Bricker & Eckler solved this problem by:

1. Limiting the security granted on a parity basis to all lenders pursuant to the master indenture to the gross revenues of the obligated group; and

2. Permitting the obligated group to continue to grant mortgages and security interests in real and tangible personal property on an individual project-by-project basis.

Another challenge for Bricker & Eckler was complying with NCR's existing document provisions which prevented it from granting a security interest in all or a portion of its gross revenues. Bricker & Eckler solved this problem by:

1. Successfully negotiating with the bondholder and trustee on behalf of the bondholders to accept an obligation issued and secured pursuant to the master indenture in exchange for waiving the document restrictions; and

2. Restricting the scope of the security interest in gross revenues granted pursuant to the master indenture while one issue of tax-exempt bonds (which could not then be legally refunded on a tax-exempt basis) remains outstanding.

By using a master indenture, Bricker & Eckler and Lancaster Pollard helped NCR successfully structure a financing that met all of its capital needs. As a result, we made a complex transaction understandable, trouble-free, and rewarding for NCR.

For more information, please contact David A. Rogers at (614) 227-2367 or drogers@bricker.com or Ed Moore at (614) 227-2380 or rmoore@bricker.com.