For many health systems, expanding and modernizing facilities is critical to meeting patient needs, enhancing operational efficiency, and staying competitive in an evolving healthcare landscape. However, how these projects are financed can have long-term implications on an organization’s financial health. Traditionally, real estate deals are structured using fixed assets—such as hospitals, clinics, or medical office buildings—as collateral to secure financing. While this method has been widely used, many healthcare executives are now looking for alternative approaches that allow for greater financial flexibility and risk management.
Here are the top 10 reasons why health systems should reconsider using property or fixed assets as collateral for real estate financing:
1. Preserve Financial Flexibility for Core Operations
Tying up fixed assets as collateral can limit a health system’s ability to access capital for other critical investments. Healthcare organizations must prioritize funding for essential services such as technology upgrades, workforce expansion, and new clinical programs. Retaining liquidity allows health systems to respond to emerging opportunities and challenges without financial strain.
2. Avoid Overleveraging the Balance Sheet
Pledging fixed assets can increase a health system’s debt burden and impact its creditworthiness. High leverage ratios may lead to unfavorable borrowing terms in the future and limit the organization’s ability to take on additional projects when needed. Avoiding asset-backed debt ensures greater financial stability.
3. Reduce Exposure to Market Volatility
Real estate values fluctuate based on economic conditions, interest rates, and local market dynamics. Using fixed assets as collateral exposes health systems to the risk of declining property values, which could impact their borrowing capacity and financial standing in the long run.
4. Maintain Control Over Strategic Assets
When a health system pledges real estate assets for financing, it often comes with lender-imposed restrictions and covenants that may limit future decision-making. By avoiding this approach, executives retain full control over their properties, allowing for greater operational flexibility and long-term planning.
5. Avoid Covenant Restrictions That Limit Growth
Traditional real estate financing agreements often include restrictive covenants that can hinder a health system’s ability to pursue future expansion or strategic initiatives. Avoiding these restrictions ensures that organizations have the freedom to adapt to changing healthcare demands.
6. Protect Against Default Risks
If a health system encounters financial difficulties and defaults on a loan backed by fixed assets, it risks losing critical real estate holdings. Signature loans or alternative financing structures that do not require collateral provide a safeguard against potential property loss.
7. Strengthen Credit Capacity for Future Investments
By avoiding asset-backed loans, health systems can maintain a stronger credit profile, which enables them to secure better financing terms for future projects. Preserving borrowing capacity ensures that capital remains available for mission-critical investments.
8. Align Real Estate Strategy with Capital Planning
Many health systems integrate capital planning with real estate strategy to ensure financial alignment. Avoiding asset-backed financing allows organizations to explore funding options that align with long-term goals rather than being locked into traditional debt structures.
9. Leverage Alternative Funding Sources
Rather than relying on fixed assets as collateral, health systems can explore alternative financing models such as joint ventures, third-party ownership, or developer-funded projects. These options allow organizations to expand without overextending their balance sheets.
10. Preserve Autonomy in Decision-Making
Health systems that avoid traditional collateralized financing retain greater independence in their decision-making processes. Without lender-imposed constraints, executives can make strategic choices based on operational needs rather than financial obligations.
A Smarter Approach to Healthcare Real Estate Financing
Healthcare executives must carefully evaluate their financing strategies to ensure long-term financial health and operational success. By steering away from traditional real estate deals that rely on collateralizing fixed assets, organizations can maintain financial flexibility, reduce risk exposure, and optimize capital allocation.
At Boldt, we help health systems navigate alternative financing solutions that support their strategic goals without unnecessary financial burden. Our expertise in structuring flexible, capital-efficient real estate deals ensures that healthcare organizations can grow sustainably while preserving their financial strength.