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New major project? Increase your bond rating by decreasing non-cash expense

Record amounts of hospital construction projects have occurred during the past decade and will continue.  Properly accounting for the depreciable life of a not-for-profit hospital’s major assets and real estate could have a notable financial impact on the system’s bottom line. Some not-for-profit hospitals have benefitted greatly from reassessing their non-cash expense to properly reflect depreciation. As a result of this decreased depreciation expense, bond ratings may improve, resulting in a better credit rating which, in turn, can enable hospitals to borrow money at more favorable interest rates.

A new hospital or major renovation project is typically depreciated by following a published IRS depreciation schedule. For nonresidential real property, this provides a typical recovery period of approximately 40 years. VMG Health has found that newer construction standards and market evidence indicate that the published IRS depreciation schedule can differ from a market-based projection of the true economic useful life of a modern hospital or outpatient facility. Within VMG’s research in the sector, we have observed buildings with economic useful lives exceeding 45 or even 50 years. In addition, following major capital projects, a facility originally put into service more than 50 years ago can often have a substantial remaining useful life. What does this mean for your health system?

It means that newer facilities and completely renovated facilities may warrant a higher book value than is currently accounted for on a hospital’s balance sheet and/or a lower depreciation expense. Balance sheet strength is a prime determinant in bond rating, and directly affects a not-for-profit hospital’s ability to obtain more capital for operations and growth. If your health system has built new buildings over the past several years or is currently initiating major renovation projects, it is recommended to engage a healthcare valuation expert to perform an economic useful life and remaining useful life analysis for your real and personal property.

Bottom Line
If you are building a new hospital, or are planning a large capital expenditures project, the way you account for depreciation could significantly impact your bond-rating. In conjunction with embarking on this project, it is an ideal time to review your current portfolio of properties and fixed asset listing. There is likely an opportunity to assist your not-for-profit hospital’s bottom line by properly reflecting non-cash expense.

 

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