banking experts in the long term care (LTC) space say skilled nursing
facilities (SNFs), assisted living, and other seniors housing markets
are robust and active as the industry’s consolidation trend continues.
At the same time, the desire to refinance and improve existing
facilities is fueling demand for financing, especially bridge loans
leading to HUD (Department of Housing and Urban Development)-insured
Skilled Nursing Market
While the pace of activity in the LTC financing trade is busy; the
nuances of why this is the case; how owners and operators of these
facilities should view their options; and how bridge loans, mezzanine
financing, and the HUD program work are even higher priority issues, the
bankers say. For instance, Erik Howard, managing director, real estate
finance, Capital Funding in Baltimore, likes to differentiate the
segments in which he provides financing to better explain the current
“The skilled nursing market in particular remains active,” he
says. “We still see a lot of consolidation, and we think that is going
to continue for the foreseeable future with the advance in accountable
care organizations [ACOs], and as providers look to team up with
hospital systems and other specialists,” he says.
“We think that is going to be the backdrop for the industry to
consolidate. And some of the smaller owner-operators that just don’t
have the bandwidth or the breadth of services to be able to offer to a
collective group are feeling that pressure to evaluate their long-term
viability. We are also seeing some county-owned facilities continuing to
Assisted Living Prospects
On the assisted living side, the focus is on what may or may not be
too much construction, notably in states like Texas, Howard says. “It’s
obviously been a big debate in some markets in terms of overbuilding.
Are we getting to that point of oversaturation? We do see a fair bit of
new construction on the seniors housing side. And so everyone is trying
to keep on that to make sure it is not having a negative impact on
overall occupancy or profitability,” he says.
There doesn’t seem to be a national overbuild scenario in play,
he says, as the possible problem areas appear to be very specific. “We
just don’t want cycles that we saw in the early 2000s,” Howard says.
As to what creates demand for Capital Funding’s services, he
returns to the idea that the evolving nature of health care delivery
systems is shifting the profession, albeit on a deal-specific basis.
“At the end of the day with skilled nursing it’s a somewhat
local business even though you’ve got chains that operate on a state
basis, a regional basis, and a national basis,” he says. The
sophistication level has changed in terms of the type of residents
overall being treated in SNFs now, Howard says. There is just more
acuity. “So, while smaller companies are obviously able to provide good
care, some of the billing issues and challenges with respect to state
reimbursement via Medicaid and federal level Medicare, and some of those
regulations are just becoming in some cases a little too challenging.”
The bread and butter service for Capital Funding is bridge-to-HUD
loans. These involve providing relatively short-term acquisition
financing for a borrower, and eventually taking that out to permanent
financing via the HUD Section 232 and related programs. The HUD program
permits refinancing of existing residential care facility indebtedness
with a Federal Housing Administration-insured loan.
“We’ve had that product for 20 years, and it has really been key to our growth over that time frame,” Howard says.
And then there are mezzanine loans, a type of financing that has
become a bit more popular of late. This involves writing a loan to the
owner with terms that subordinate the loan both to different levels of
senior debt as well as to secured junior debt. In other words, the
mezzanine lender is very close to being last to get paid if something
goes wrong with the loan.
“It has been utilized a little bit more over the past 12 to 24 months just because of some structural issues in the finance world. It is another product in our suite of services, and we will use it as needed,” Howard says.
Bridge Loans Take Center Stage
Another banking resource in the LTC financing arena is Oxford
Finance, a senior secured lender based in Alexandria, Va. Tracy Maziek,
managing director at Oxford, says his group is primarily involved in
financing deals for SNFs, with smaller blocks of business for
Alzheimer’s care and a little bit of assisted living.
He agrees the market is robust, with capital accessible to most
owners-operators, depending on the borrower’s business and risk profile
A good chunk of Oxford’s business in the LTC area revolves
around bridge loans, and any discussion on these loans needs to focus on
their true purpose and the key role they play in the SNF and assisted
living business worlds.
“It is truly a bridge to another financing event or a sale
outright,” Maziek says. These loans typically serve three purposes: One
of them is to finance a new acquisition, the second to refinance an
underperforming or underleveraged property, and the third to acquire
financing for a property that is not stabilized properly.
On The Way To HUD
One of the reasons to use bridge loans is that a borrower cannot
obtain a conventional bank loan because the property in question is
either underperforming or not stabilized, yet is looking to get an
interim-loan facility in place where they can still take advantage of
leverage on a building, Maziek says.
“These loans are typically not considered permanent financing. Bridge loan tenors are usually 18 months to five years,” he says.
Bridge loans range in size from around $3 million to $4 million
for a single property deal in the Midwest to as high as $80 to $100
million for multifacility portfolios.
Once the loan runs its term—then the borrower can look to
permanent financing through conventional financing such as a bank, HUD,
or other agency—Fannie Mae (Federal National Mortgage Association) or
Freddie Mac (Federal Home Loan Mortgage Corp.) programs, he says.
As for customary interest rates for these loans, they vary
depending on borrower risk like any other financing, but usually rates
are from the mid-single to the high-single digits.
“It is all dependent on the borrower and property profile, flexibility of terms, and leverage,” Maziek says.
When asked what the risks are in taking on a bridge loan,
Maziek says LTC owners and operators need to know that if they are in a
situation where they have an underperforming property or unstable
financing facility and the property fails to stabilize or continues to
falter operations-wise, then the resulting debt burden can become too
much and they can become overleveraged. “I would say that is the biggest
downside,” he says.
Business Has Been Good
Business for bridge loans has been brisk in recent years, and it is
a regular feature of financing in the LTC area. “One reason this is
popular in long term care is if it is not a large-type acquisition,
maybe you have identified something in the market that the prior
operator has not been able to successfully navigate, or perhaps you just
have a better mousetrap. Ultimately, it is the same business as the
former operator was executing but perhaps they just were not executing
well,” Maziek says.
also think there are more bridge loans these days because HUD and the
agencies have become such a desirable form of long-term capital that we
see lots of people wanting to put leverage on a business or on a
facility. And this gets them in a better position to take a loan out
later through agency financing. I would say 10 years ago the long-term
bank market was more robust so you did not see as many bridge-type
deals, but it has definitely grown over the years.”
Financing demand also follows the level of mergers and
acquisitions going on, which has been strong and correspondingly has
bolstered the need for bridge financing.
What Borrowers Should Know
In suggesting what LTC owners and operators should know going into
any financing situation, Capital’s Howard says the most important first
step is to be as open as possible with a lending source.
“First and foremost we always talk to our borrowers about
transparency, which affords the lender the opportunity to be creative
and work through both the good and bad,” he says. “So if we understand
the full gamut of the operational landscape in particular with the
facility, this gives us more data to be able to craft a financing model
that works for them.”
Howard says with the historically low rates prevalent in the
market now, Capital Funding counsels its clients to take advantage of
the HUD program. “Given the uncertainty that occurs every year at both
the state level and the federal level for reimbursement, we think that
fixing your debt payment provides a tremendous amount of visibility and
certainty for long term care owners and operators.
“And it’s such a large portion of the expense structure that we think it’s a good opportunity and smart thing to do to
take advantage of that HUD program,” he says.
Other tips for owners and operators include knowing the lender has the ability to execute the loan and knows the LTC
It is a fairly niche business in terms of health care finance,
Howard says, “so you need to make sure your lender understands the
dynamics of the industry. Obviously, providers understand the
operational risks that they deal with day to day, but I think it is
important to ensure that your lender fully recognizes those and gets a
sense as to how they address and react to some of those challenges that
operators face,” he
“If you get a lender that is not terribly active in the space
and may not understand survey cycles and what those surveys mean, you
could be in a challenging position. You want to partner with someone
from a finance perspective that understands your business and has been
doing it for awhile and has seen some of those cycles come and go.”
For More Information:Erik Howard
, Capital Funding GroupLevi Coleman
, Levitz GroupTracy Maziek
, Oxford Finance LLC
Patrick Connole is a Washington, D.C.-area freelance journalist covering the health care sector and other economic issues.