Washington, DC Updated June 18, 2015 Initial Results: Options for Omaha, NE Medical Center Department of Veterans Affairs This document is confidential

Washington, DCUpdated June 18, 2015

Initial Results: Options for Omaha, NE Medical Center

Department of Veterans Affairs

This document is confidential and is intended solely for the use and information of the client to whom it is addressed.

2

Table of Contents Introduction

Current Capital Efforts at Omaha

Option Identification and Basis for Consideration

Initial Options for Omaha VA Medical Center

Preliminary Assessment of Options

Description of Down Selected Options

Next Steps

Appendices

3

Introduction

VA’s Omaha VA Medical Center (VAMC) in Nebraska has submitted a Major Construction project to replace the current medical center due to much needed infrastructure system corrections, space requirements, and adjacency deficiencies

– Project ranked #10 in the FY 2016 Strategic Capital Investment Planning (SCIP) cycle for new initiatives; funding a replacement center is not likely until the late 2020s

– Current backlog of approved, grandfathered Major Construction projects totaling $9 billion

– This project, like many of VA’s infrastructure needs, has not successfully competed for funding since 2008 due to VA’s limited capital budget – VA has a total infrastructure need totaling between $49 to $60 billion

VA is considering alternative options, or ways of securing adequate short-, mid-, and/or long-term space, to achieve its goal of providing timely, high-quality health care for Veterans

– Three space/infrastructure deficiency studies conducted 2009-2015 with various purposes

– Purpose of this study: review and compare prior studies, identify additional options, prioritize alternatives, conduct an analysis to recommend optimal solution to address Omaha VAMC space and infrastructure deficiencies

Initiated late March 2015, performed site visit at Omaha VAMC, held interviews with local VISN & VAMC personnel, toured nearby hospital (CUMC), conducted market analysis

The following slides present initial results from analysis of over 20 options/variations considered and a rigorous analysis of down-selected alternatives

4

Current Capital Efforts at Omaha

Minor Construction– Construct Parking Structure on approved 2016 SCIP list

– Approved Target Cost = $9.35M

Choice Act Funded– Correct Fire Line Life Safety and Med Gas Deficiencies = $1M

– Replace Roofs = $1.6M

– Replace Main Electrical Equipment = $1M

In-Progress Non-Recurring Maintenance (NRM) Construction– NRM in-progress = $9.9M– Significant Projects

•Upgrade Electrical Power and HVAC for IT = $877K

•Construct and Expand Parking = $1.5M

•Replace Boiler = $1.2M

•Elevator Repair = $3M

5

Option Identification and Basis for Consideration:

Initially 28 potential options were identified and grouped into the following categories, some which had multiple variations:– Status quo

– Partial renovation of existing hospital while it remains occupied

– Full renovation of existing hospital

– Sale-leaseback of Omaha VAMC for new replacement hospital

– Full replacement hospital on current Omaha VAMC Campus

– Relocation to renovated third-party hospital

– Others

These were analyzed based on: – Legal, technical and physical feasibility

– Level and sourcing of upfront funding requirements (likelihood of obtaining funding)

– Ongoing funding requirements

– Private sector market conditions and transaction complexity

– Ability to achieve VA requirements (space requirements & ability to correct functional deficiencies)

6

Initial Options for Omaha VA Medical CenterOf the 28 options and variations, six were down selected, based on feasibility and ability to meet goals and objectives, for a more detailed analysis

Option Description

A Status Quo

B Phased Partial Renovation of Existing VAMC

Variation 1: Prioritized small scale renovations / major repairs as funds allow

Variation 2: System-by-system phased renovation

Variation 3: Floor-by-floor renovation

Variation 4: Multi-phased renovation (combines elements of variations 1-3)

C Full renovation of existing hospital while unoccupied (temporary relocation of operations)

Variation 1: Temporary relocation to dispersed facilities

Variation 2: Temporary relocation to CUMC

D Leaseback of Omaha VAMC for third party developer to construct new replacement hospital


Variation 2: Temporary relocation to CUMC, Boys Town, or Midlands

Variation 3: Remain in existing VAMC; developer constructs new facilities on VAMC campus

Note: green shaded options indicate those down selected for further analysis.

7

Initial Options for Omaha VA Medical Center (cont’d)Of the 28 options and variations, six were down selected, based on feasibility and ability to meet goals and objectives, for a more detailed analysis

Option Description

E New replacement hospital on current Omaha VAMC campus


Variation 2: Temporary relocation to CUMC, Boys Town, or Midlands

Variation 3: Remain in existing VAMC; while constructing new facilities on VAMC campus

F Permanent Relocation to renovated third-party hospital

Variation 1: CUMC – 3rd party acquires CUMC from current owner, renovates. leases to VA

Variation 2: VA secures Triple Net (NNN) lease from CUMC; VA renovates facility

Variation 3: VA acquires CUMC Town via purchase or gift; VA renovates facility

Variation 4: CUMC and Boys Town (adjacent and attached to CUMC); 3rd party acquires facility from current owners, renovates and leases to VA

Variation 5: VA leases CUMC and Boys Town from current owners; owners renovate facilities

Variation 6: VA secures Triple Net (NNN) leases from CUMC and Boys Town; VA renovates both facilities


8

Initial Options for Omaha VA Medical Center (cont’d)Of the 28 options and variations, six were down selected, based on feasibility and ability to meet goals and objectives, for a more detailed analysis

Option Description

F Permanent relocation to renovated third-party hospital (continued)

Variation 7: VA acquires CUMC and Boys Town via purchase or gift; VA renovates facilities

Variation 8: VA secures Triple Net (NNN) leases from Midlands; VA renovates facility

Variation 9: Public Private partnership utilizing CUMC and Boys Town

G Construct new replacement hospital on a to-be-determined site through build-to-suit lease

H Relocate main operations to CUMC; use existing VAMC campus for outpatient facilities; dispose excess portion of campus

I Enhanced Use Leasing (public-private venture)

J Lease or Exchange of History Property or Historic Transfer/Agreement

K VA exchange under 38 USC 81181

L VA exchange under 38 USC 81032

1 – Authority for transfer of real property2 – Authority to construct and alter, and to acquire sites for, medical facilities


9

Preliminary Assessment of Options:

Those options and variations that better met stated goals/objectives, physical facility requirements/conditions, feasibility, and addressed risks identified were down selected for a more detailed financial analysis

Options and variations were ranked using the following as decision criteria

– Legal, technical and physical feasibility

– Level and sourcing of upfront funding requirements (likelihood of obtaining funding)

– Ongoing funding requirements

– Private sector execution complexity

– Ability to achieve space requirements

– Ability to correct functional deficiencies

Those considered unfeasible due to lack of legal authority, technical constraints (e.g. OMB scoring), and physical barriers (e.g. developable land available) were not down selected– Sensitivity analyses will be performed to assess the potential viability of options legally or

technically challenging; legislative or regulatory relief would be required

Six (6) options were down selected ranging in scope and complexity: status quo; multiple levels of renovation; new construction; permanent relocation– Five of the six options anticipate using typical VA authorities and traditional methods such as

budgeted renovations/construction, leasing and acquisition

10

Preliminary Assessment of Options: (cont’d)

Non-Traditional Sourcing: Public Private Partnerships (PPP)

Often require special legislation to execute

Government and private sector firms collaborate to develop an asset or service

Public sector and private sector both contribute to the venture

Typical structure: private sector capital combined with government owned land

Hypothetical

– You buy a vacant residential lot

– Your brother obtains a loan and builds house on your lot

– You and your brother enter into a partnership

– Your partnership rents the house and shares the proceeds

PPP Examples:

– Other Gov’t Agency provides land; private firms provide capital & skill to create military housing

– Agency provides land; private firms provide capital & skill to develop homeless housing

– Other Gov’t Agency provides land for private sector development of office, hotel, mixed-use development in exchange for “in-kind consideration” (i.e. new facilities on base)

11

Preliminary Assessment of Options: (cont’d)

Public Private Partnerships can take many forms

Government can sell or lease land or buildings to 3rd party developer

Government can assign land purchase option to developer and lease turn-key project after developer completes improvements.

Possible applications of Public Private Partnerships to the Omaha VAMC options listed below:

Variation of Alternative 4 – New Replacement on VAMC campus:

– VA leases Omaha VAMC site to 3rd party developer, 3rd party develops new hospital (asset) to VA requirements, VA leases improved asset from 3rd party developer via long-term lease

– 3rd party developer provides skills and capital; VA provides land lease

Variation of Alternative 5 – Permanent Relocation to CUMC/Boys Town:

– 3rd Party developer acquires CUMC/Boys Town site & renovates hospital/asset, VA leases renovated asset from 3rd party developer via long- term lease, VA contributes VAMC campus to developer for disposition to reduce lease costs

– One hypothetical PPP option for Alternative 5 was down selected for analysis (Alternative 6)

VA could potentially use authorities in 38 USC, sections 8103 and 8118, if modified, to execute the variations to Alternative 4 and 5 or receive separate authority similar to the exchange and/or lease-back authorities in 8103 and 8118

12

Preliminary Assessment of Options: (cont’d)Public Private Partnerships Challenges OMB Scoring Rules (Circular A-11)

– OMB determines if a lease is considered a Capital or Operating Lease, per scoring rules– Capital Leases are paid “upfront” and Operating Leases are paid annually “over lease term”

Advantage of Public Private Partnership is cost of facility is paid over time in rent– High likelihood PPP for Alternative 4 & 5 would be scored as a capital lease– Annual lease payments to cover 3rd party developers costs, to include financing and an equity

return, are likely to be cost prohibitive for the Omaha VAMC– If OMB determines transaction is a Capital Lease – this advantage is removed

Legislative relief is required to enter into a lease back PPP– Waiver on OMB scoring rules for Operating vs. Capital Lease, specifically

• Extend lease term limits to greater than 75% of economic life of asset• Allow lease payments over lease term to exceed 90% of fair market value (FMV)Many agencies are challenging OMB scoring rules to address funding shortfalls, without success

AND – New special authority specific for Omaha VAMC similar to existing authorities, or modification

of existing authorities, is needed to ensure VA has authority to execute• 38 USC 8118 (exchange) - Extend expiration; allow for compensation less than FMV • 38 USC 8103 (acquire by exchange; lease-lease back) Expand authority to include major

medical facilities; extend lease term limit of 35 years to 50 or more • 38 USC 8169 (enhanced-use lease (expired)) – Reinstate authority for Omaha VAMC

13

Description of Down Selected Options:

1. Status Quo: Although not a long term option, included for baseline and comparison

2. Partial Phased Renovation: Combines elements of both a system-by-system and floor-by-floor renovation approach, while continuing to operate the facility. To resolve additional space deficiencies requires leasing in conjunction with the phased renovation.

3. Full Renovation: Vacate and perform a single-phase renovation with temporary relocation to CUMC. To resolve additional space deficiencies requires leasing in conjunction with the renovation. Option allows a full renovation of the Omaha VAMC, without patient care disruption during the renovation process.

4. Construct Replacement Hospital on Omaha VAMC Campus: Vacate and construct a new facility, with temporary relocation to CUMC/Boys Town/or other to allow construction of new replacement hospital on the VAMC, without patient care disruption throughout demolition/construction.

5. Permanent Relocation to Renovated 3rd-Party Hospital Facility: Renovate CUMC and Boys Town facilities for permanent VA occupancy under existing leasing authority. Includes a single-phase renovation of the CUMC facilities and adjacent Boys Town facilities, without patient care disruption during renovation process.

6. Relocation to Renovated 3rd-Party Hospital Facility via PPP: Renovate CUMC and Boys Town facilities for permanent VA occupancy using PPP structure. Includes a single-phase renovation of the CUMC facilities and adjacent Boys Town facilities, without patient care disruption during renovation process.

14

Next Steps:

Refine cost estimates for the selected options:– Status Quo– Multi-Phase Partial Renovation– Single-Phase Full Renovation of Existing Hospital– Construct New Replacement Hospital on Omaha VAMC Campus– Relocation to Renovated CUMC and Boys Town– PPP for Renovated CUMC and Boys Town

Determine recommended option Provide a summary report of results

15

Alternative Advantages Disadvantages

1 Status Quo • Baseline for comparison• Likely lowest cost alternative• Operations remain on current location (staff

preference)

• Not a long-term solution• Does not resolve physical deficiencies• High risk of system failures• Continued aging of facility (~95 years at end of analysis

period)

2 Phased Partial Renovation of Existing VAMC

• More likely to receive funding than a total renovation project. Hospital remains operational during partial renovations

• Not dependent on 3rd party solutions• Operations remain on current location (staff

preference)• Short to mid-term partial solution for some

critical system and functional deficiencies• Retains current location for majority of space

requirements• Flexibility to adjust projects and timing & allow for

future expansion

• Not a viable long-term solution; decisions on significant investments for mid-term solutions may be delayed in favor of seeking funding for long-term solution (concern with regards to demolishing or mothballing recently renovated facilities)

• Requires permanent relocation of some operations and indefinite leasing to meet space requirements

• Requires multiple relocations for swing space• Requires multiple funding requests from multiple

funding programs in specific sequencing to achieve renovation as planned

• Facility would continue to age (~95 years at end of analysis period)

Appendix 1 - Advantages/Disadvantages Summary:

16

Appendix 1 - Advantages/Disadvantages Summary:Alternative Advantages Disadvantages

3 Single-Phase Full Renovation of Existing VAMC

• Reduces patient disruption and safety concerns during construction

• Resolves the most immediate physical deficiencies and many of the functional issues

• Renovation of a vacated hospital is less complicated• Retains current location for a majority of space

requirement; balance of space deficiencies resolved through leasing

• Flexibility for future projects and expansion• Extends useful life of facility

• Requires permanent relocation of some operations and indefinite leasing to meet space requirements

• Funding approval required to obtain CUMC lease when vacated in 2017 for temporary relocation and initiate renovation

• Requires two relocations

4 Construction of New Replacement Hospital at VAMC

• Reduces patient disruption and safety concerns during demolition and construction

• Resolves all physical deficiencies and functional issues

• Eliminates interim projects to address aging facility and infrastructure

• Funding approval may not be obtainable until mid to late 2020s; CUMC location may not be available for lease

• Similar funding request in 2016 was not approved• Requires two relocations

5 Permanent Relocation to Renovated CUMC & Boys Town

• Adds ~400k SF of space; resolves remaining space deficiencies through leasing

• Resolves the most immediate physical deficiencies and many of the functional issues

• Renovation of a vacated hospital is less complicated

• Densely developed site w/ little room for growth• Complexity in negotiating with two landlords• Existing campus demo & disposal required• Does not fully resolve all functional deficiencies • Patient and staff safety concerns due to higher

crime rates in neighborhood; Location of one parking lot (108 spaces) requires users to cross N. 30th street to access hospital

• Significant investment in property not owned/controlled by VA

• ~38 year old facility with aging infrastructure

17

Appendix 1 - Advantages/Disadvantages Summary:Alternative Advantages Disadvantages

6 PPP for Relocation to Renovated CUMC & Boys Town

• Potential longer lease term could result in lower annual rental payments or reduce/eliminate upfront contribution by VA

• Potential to utilize current VAMC to offset a portion of the costs

• Other advantages as per Alternative 5

• Lack of authority by VA to perform PPPs• Undefined structure• Other disadvantages as per Alternative 5• Potential scoring issues

18

Appendix 2 - Key Characteristics of Options

Alternative 1 2 3 4 5 6

Status Quo

Multi-Phase Partial

Renovation of Existing

VAMC

Single-Phase Full Renovation of Existing

VAMC

Construct New

Replacement Hospital at

Existing VAMC

Relocation to Renovated

CUMC & Boys Town

PPP for Renovated

CUMC & Boys Town

Final Location of Main Facilities

Current Campus

Current Campus

Current Campus

Current Campus

CUMC / Boys Town

CUMC / Boys Town

Temporary Relocation During Construction

N/A – no construction

included

No – swing space

accommodated

through leases

Yes – temporary

relocation to CUMC

Yes – temporary

relocation to CUMC

No – remain in VAMC until

CUMC renovation complete

No – remain in VAMC until

CUMC renovation complete

VA Own or Lease Main Facilities Own Own Own Own Lease Lease via PPP

19

Appendix 3 - Further discussion on OMB Scoring Impacts for Sale-Leaseback

Sale-Leaseback OMB Scoring Risks: Should any of the following be scored red, a lease (or leaseback) would be considered a capital lease with all asset costs (including the net present value of all lease payments over the life of the lease) scored upfront vs. annual appropriation for lease payments under an operating lease.

OMB Circular A-11 Criteria for Operating Lease

CommentsScoring

RiskOwnership of the asset remains with the lessor during the term of the lease and is not transferred to the Government at or shortly after the end of the lease period.

Under the sale-leaseback scenarios, transfer of the asset to the Government is not currently anticipated to be part of the structure.

The lease does not contain a bargain-price purchase option.

Under the sale-leaseback scenarios, a bargain purchase-price option is not currently anticipated to be part of the structure.

The lease term does not exceed 75 percent of the estimated economic lifetime of the asset.

Per industry standards, hospitals have a service life of ranging from 31-60 years. A 30-year lease would be under the OMB economic life threshold with a service life of 40 or more years

Risk criterion would trigger capital lease: = Low Risk = Medium Risk = High Risk

Criteria continued on next slide

20


CommentsScoring

RiskThe present value of the minimum lease payments over the life of the lease does not exceed 90 percent of the fair market value of the asset at the inception of the lease.

Based upon estimated fair market value and a simplistic analysis of rents required to support a sale-leaseback scenario, a 10-year lease may meet this requirement; however, 15, 20 and 30-year leases would not. Given the importance of the Omaha VA, the complexity of the transaction, and the assumption that the VA would contribute significantly to the construction costs, it is unlikely that a 10-year lease would be acceptable to the VA or OMB.

The asset is a general purpose asset rather than being for a special purpose of the Government and is not built to unique specification for the Government as lessee.

Construction standards are anticipated to be similar to typical private sector hospitals and are not considered special purpose. VA contributes a lump-sum payment for medically-related alterations, if needed.

Risk criterion would trigger capital lease: = Low Risk = Medium Risk = High RiskCriteria continued on next slide

A single criteria that scores red defines the lease as a capital lease


21


CommentsScoring

RiskThere is a private-sector market for the asset.

It is anticipated that a private developer would provide a hospital for which there would be a private-sector market.

There should be no provision of Government financing and no explicit Government guarantee of third party financing

Under the sale-leaseback scenarios, the explicit guarantee of third party financing is not currently anticipated.

Risks of ownership of the asset should remain with the lessor unless the Government was at fault for such losses.

Under the sale-leaseback scenarios, the risk of ownership is anticipated to remain with the lessor.

The project should not be constructed on Government land.

Under the sale-leaseback scenarios, construction on Government land is not anticipated.

Risk criterion would trigger capital lease: = Low Risk = Medium Risk = High Risk


Documents

Washington, DC Updated June 18, 2015 Initial Results: Options for Omaha, NE Medical Center Department of Veterans Affairs This document is confidential