I applaud your efforts to encourage hospital chief financial officers to think "corporate finance" in the task of managing real estate assets ("A capital offense," Oct. 7, p. 71). Yet the strategies proposed are in reality more expensive "project finance" tactics.
Hospitals that have access to tax-exempt debt should maximize that subsidy in acquiring capital assets and thereby retain their own liquidity for programs and projects that don't qualify for tax-exempt financing. Off-balance-sheet financing, such as through a sale and leaseback, is much more expensive than tax-exempt financing: In addition to higher interest rates, there are the additional costs of property and sales taxes as the project becomes taxable. If the hospital ultimately holds the risk for the success of the project and ultimately requires control of its campus, why would it give away equity for the sake of appearances?
In the current environment, hospitals should focus on minimizing costs and not on the ratio of return on an understated asset base. Project finance techniques increase the corporate cost of capital.
W. SETH CRONE
Vice president, healthcare investment banking
Chase Securities of Texas, Houston