Continued from NEOHFMA Visions Newsletter 2008-2009 Issue Three

What is a sale-leaseback? Quite simply, a sale-leaseback is an agreement in which an organization – in this case a hospital – sells fixed assets, currently owned, for cash to a lessor and leases the assets back.

The sale-leaseback is a tremendous tool when cash is tight such as in today’s economic environment.   Not only will it free up capital, but when done effectively a hospital can realize immediate financial advantages without compromising the long term economic objectives. From an operational perspective, this approach can better position a hospital to keep pace with the ever changing healthcare landscape and more specifically the dynamic expectations of patients and physicians.

The proceeds from the sale-leaseback can be used for working capital, debt restructuring, additional equipment acquisitions, and paying off other miscellaneous debt.

The value of the equipment you acquire– whether it is IT infrastructure, imaging assets, or related diagnostic equipment – comes from using it, not owning it. A general rule of thumb is that it makes good business sense to own equipment that appreciates in value and lease equipment that depreciates in value.

With technology lifecycles moving at a rapid rate, as well as the added pressures of maintaining competitive advantage by offering the latest innovations, hospitals cannot afford to be left with aging assets that are now obsolete and hold little value.

Financial executives and IT professionals working in unison can use the sale-leaseback to establish a regular equipment refresh cycle. With an operating lease in place on the previously purchased assets, the sale-leaseback allows for back-end flexibility, providing organizations with several end-of-term options:

• Renew the lease at fair market value (FMV)
• Return the equipment
• Purchase the assets at fair market value (FMV)

Each leasing company has stipulations on what types of assets are eligible for sale-leaseback and how long ago they were purchased, but in general any “tier 1” medical equipment (CT, MRI, Digital Mammography) or IT infrastructure (PCs, servers, routers) acquired within 12 to 18 months is a viable candidate. An independent lessor is likely to offer the most flexibility, as it will perform the transaction on any equipment, regardless of vendor. Captive lessors will rarely execute a sale-leaseback outside of its own equipment.

Let’s take a look at a hypothetical sample sale-leaseback transaction.

A 150-bed short-term acute-care hospital acquired a 64-slice CT scanner in February 2008 after realizing they were losing patient volume to a larger, more technologically-advanced hospital in the same region. They purchased the asset outright at the time, as they weren’t experienced with leasing and estimated that they were going to hold onto the asset for five or more years.

When the economy faltered later in the year and patient volume remained flat, the hospital realized the need to tighten its belt. It began to evaluate options to free up capital and learned that a sale-leaseback of the CT, which was purchased for $1.5 million, could be a means to that goal.

The CFO began working with an independent lessor who proposed a 60-month FMV sale-leaseback in which the lessor would purchase the asset from the hospital for original equipment cost ($1,500,000). Following a credit review and providing proof of payment, the lessor figured an 8-percent debt rate and put 15 percent of equity ($225,000) into the deal.

After calculation, the hospital (lessee) would assume a monthly payment of $25,685. In this operating lease format, the lessee does not assume the risk of ownership and the lease payment is treated as an operating expense in financial statement and does not affect the balance sheet. As a result, the hospital has freed up a significant amount of working capital.

In conclusion, the sale-leaseback may be an option worth exploring if significant capital-intensive assets have been purchased in the past 12-18 months. Cash is king in this market, and freeing some additional resources to help improve the hospital’s bottom line may only be a pain-free transaction away.