Hospitals planning renovations, expansions or other capital projects have about one year left to take advantage of a recently approved law giving community banks—and their hometown hospitals—new options for low-cost credit. The problem is, few banks know about the opportunity, says Steve Kennedy, vice president of the investment bank Lancaster Pollard. "Hospital officials are going to have to work closely with their bankers. I think [banks] are going to be pleasantly surprised that they can participate in your project."

The new lending option involves the 12 Federal Home Loan Banks, which were created during the Great Depression to encourage home loans and create jobs. As a system of regional banking cooperatives, the FHLBs make direct loans not to individuals but to their member banks, like Morton (Ill.) Community Bank.

Lancaster Pollard recently served as bond underwriter for a deal between Morton and FHLB-Chicago to lend $5.5 million to Hopedale (Ill.) Medical Complex for its 25-bed critical-access hospital.

Hopedale's executives were told by their large national lender last spring that their letter of credit would not be renewed. In the past, a hospital Hopedale's size would essentially be out of options, especially in the wake of the credit crisis and large banks' result­ing skittishness. But in the Housing and Economic Recovery Act of 2008, Congress gave FHLBs the authority to provide credit enhancements to tax-exempt projects that qualify as "community investments," including hospitals. (Traditionally, FHLBs could fi­nance tax-exempt deals only if they involved housing.)

The new authority makes it possible for Morton to use the FHLB's AA- to AAA-rated bond rating to guarantee a loan to Hopedale that will refinance its existing debt and borrow an additional $1 million to design and plan a proposed $20 million expan­sion, says Mark Rossi, Hopedale's chief operating officer.

"The key to the whole success of this project is that the FHLB provides the bond rating we need to get this done," he says. "We're saving $10,000 to $15,000 a month in interest costs, and the local bank is making an investment in the community."

Indeed, community banks are eager to participate in financing projects involving their local hospitals, which often are the largest employer in their communities, says Mark Blasinsky, director of business research and development for the FHLB of Pittsburgh. But they should not delay. The authority expires on Dec. 31, 2010.

Rossi says Hopedale is moving forward with its expansion plans and intends to use the same process to finance it. He advises hospital executives to look for underwriters with relevant experience and to negotiate on professional fees.