Management Questions to Evaluate Lease Use
• What is management’s philosophy and history
related to use of capital and operating leases?
• What assets are being leased?
• Why lease versus buy? Are other funding sources
being considered, such as long-term bonds or
capital leases, instead of operating leases?
• Did the organization enter into the lease as a way
to manage and protect against obsolescence? What
is the history of managing this issue?
• If the lease were to be fully on balance sheet and
incorporated with the rating debt metrics, would
the organization reconsider its use?
Lease management and documentation
• What is the approval process for leases? Are lease
decisions consistently made within the capital
• Who is responsible for leases?
• How are leases documented? Is a single overall
summary document maintained and reported on by
type of lease (capital or operating), use (equipment
or real estate), and level of commitments over
• Are all leases fully tracked, including those with
joint ventures and affiliated entities?
Lease structure and terms
• How are the leases being structured? Are there
criteria related to the asset’s useful life that govern
the use of leases? Who bears the residual value?
• Are the leases cancelable or noncancelable? Are
they typically renewed at maturity? What happens
at the end of the lease term regarding the leased
• What secures the lease and what is the recourse to
the leaseholder? Are the leases parity to the
Master Trust Indenture debt with cross-default
• Are real estate operating leases, in turn, subleased
to others (within or external to the health care
• Are equipment operating leases done through a
master leasing agreement? Are the terms
standardized? Does the organization use its leverage
to gain better overall terms?
Concluding Comments about Leases. As mentioned earlier,
leased assets must be considered within the context of the
organization’s capital formation options and capital
allocation process and be subject to organizational capital
constraints. Clearly, leases can offer an attractive way for a
hospital or health system to finance an asset and preserve
cash under the right circumstances.
For organizations with access to a range of financing
alternatives, lease use should be carefully scrutinized and
controlled (see Sidebar for relevant evaluation questions).
The off-balance-sheet treatment of leases is no longer an
available benefit, but there may be other benefits that
should be considered. For example, an organization entering
a new but uncertain market with an outpatient presence
might wish to lease a facility rather than own it. This
provides an easier exit strategy if the organization decides
that it no longer wishes to have a presence in that market.
Most importantly, going forward the use of leasing for
qualified projects should be carefully weighed against other
funding alternatives in the tax-exempt, public and private
USDA Rural Development Community Facilities
The USDA Rural Development Community Facilities
Program makes and guarantees loans to develop “essential
community facilities,” which include clinics, ambulatory care
centers, hospitals, rehabilitation centers, and nursing homes,
in rural areas and towns with populations of up to 20,000.
These loans may be used to construct, enlarge, or improve
health care facilities, including the cost to acquire land, pay
professional fees, and purchase equipment required for
Refinancing existing debt may be considered an eligible
direct or guaranteed loan purpose if the debt being
refinanced is a secondary part of the loan, is associated with
the project facility, and if the applicant’s creditors are
unwilling to extend or modify terms in order for the new
loan to be feasible.
The Community Facilities Program is similar to the FHA
Section 242 financing program in that it can provide credit
enhancement to specifically defined borrowers. It can
guarantee loans made and serviced by lenders such as
banks, savings and loans, mortgage companies that are part
of bank holding companies, banks of the Farm Credit
A Guide to Financing Strategies for Hospitals