The average Kentucky hospital central plant is over 30 years old. The major infrastructure and equipment have exceeded its recommended useful lives, are inefficient and can place hospitals at risk of compromising the delivery of services – either due to failure or code compliance. Moreover, these systems directly relate to infection control and patient comfort.
While Kentucky traditionally has lower utility costs relative to peer states, increasing pressures on electricity generation (the elimination of coal-fired plants) are changing the dynamic, and the rising costs will be passed to consumers. Hospital leadership must constantly find creative ways to competitively deliver high-quality care, in an optimal environment, using less resources.
When facility infrastructure assets are at or beyond their expected useful life, this introduces the notion of unnecessary risk, compromised service and compliance. This undermines the ability to deliver quality care and ratchets up the cost of doing business – at a time when there is huge competition for capital. Now, there is a mechanism to address these key issues, as well as combat rising utility costs without dipping into capital. EPAD is that mechanism.
What is EPAD?
The Energy Project Assessment District Act of 2015 (EPAD) was signed into law by Governor Beshear in April 2015 and became available for cities to adopt last summer. New to Kentucky, the Act provides an innovative, yet proven way for hospitals and healthcare systems to fund plant, infrastructure, building envelope and energy efficiency upgrades, on-site renewable projects and water conservation measures.
EPAD funding can be arranged for 100 percent of a project’s cost, and is repaid by adding a voluntary assessment to the property tax bill over a term of up to 20 years. Customarily, financing large energy projects has been plagued by short repayment periods, high or variable interest rates, stringent credit requirements and lack of equity. This self-liquidating program provides the unique opportunity to address rising utility costs and aging infrastructure, paid for through energy savings. This cost avoidance not only enables this type of program, but its benefits compound over time, combatting the impending annual utility cost escalation (projected to be as much as 20 percent in the next five years).
EPAD assessments offer low fixed interest rates, longer repayment terms and the ability to effectively improve overall property value. Furthermore, EPAD enables the financing to be treated as off-credit, prohibiting it from penalizing a hospital’s bond rating. These two reasons alone create an excellent opportunity for our Kentucky hospitals to address their needs, patient comfort, infection control and risk.
How EPAD Value Works
Kentucky communities can create EPAD districts that enable the creation of a voluntary assessment to a property owner’s tax bill in order to facilitate energy efficiency and renewable energy upgrades. The voluntary assessment is used as security for the issuance of financing to fund the improvements and services within the district, such as that of a hospital, or other commercial property. The security for the financing and the only source of repayment, unless guaranteed by a third party, is the property being financed and the cash flow generated by the property tax assessment. Both for-profit and not-for-profit hospitals (and systems) can take advantage of EPAD. While not-for-profits do not receive or pay a tax bill, the facility still resides on the tax roll. This enables the municipality where the hospital is located, in effect to simply be a point of assessment collection to repay the project cost.
EPAD can also be considered a real estate finance tool and an economic development driver. The assets financed are tangible and lend value to the property(ies). Investors in EPAD bonds look solely to the value of the property as their source of repayment.
Modernize, Reduce Risk, Save
Energy efficiency has become a vital part of every organization’s strategic objectives. By thinking about energy savings as a funding mechanism you can identify and alleviate the most painful asset problems across your hospital or system. As the complexion of healthcare mandates and reimbursements constantly change, you face issues related to labor costs, shrinking margins, and thus fewer opportunities exist to improve profitability. EPAD can provide an untapped revenue stream to improve both profitability as well as the staff/clinician and patient care environment. But the real value is in the crucial modernization of your infrastructure.
-Janet Lively is with Harshaw Trane in Louisville, Kentucky.