Financing Elusive, But Not Unattainable
Narrow credit markets create competitive climate.
Patrick Connole
9/1/2010
It should come as no shock to long term care (LTC) providers that credit markets remain tight, limiting the normal flow of financing from private lenders as the economic slowdown continues for a third year, despite some faint signs of recovery.
Skilled nursing facilities (SNFs) and assisted living facilities (ALFs) face some different marketplace dynamics, according to seniors housing experts, but the bottom line for all LTC owners and operators is that refinancing, bridge, construction, and other loan options still are not what they were before the recession began in late 2007.
Though these experts see some light at the end of the tunnel, the expectation for the near term is for government programs like the Department of Housing and Urban Development (HUD) 232 program, along with smaller local banks, to remain the key instruments for meeting financing needs until more sources loosen their purse strings.
The Big Picture
Robert Kramer, president of the Annapolis, Md.-based National Investment Center for the Seniors Housing & Care Industry, says, “Debt capital is still hard to come by,” even though there is a fair bit of equity sitting on the sidelines, as private banks and real estate investment trusts wait out this uncertain economic and regulatory period.
“This is a function of broader market problems; the banks are not lending,” Kramer says. He adds that a huge challenge now is the need for cash up front to get a project going. “It was 10 percent in the old days, with land used as collateral, but now everyone is looking for cash, up to the 30 percent range,” Kramer says.
HUD Programs
This lack of action from banks has made companies specializing in HUD programs especially busy, says Brian Reynolds, an originator with Capital Funding Group in Baltimore, which works on a full range of insured mortgage programs from the Federal Housing Administration (FHA).
“It’s been very busy, extremely busy. A lot of skilled nursing facilities and assisted living facilities are looking to refinance existing debt,” Reynolds says. Attractive interest rates offered by the HUD program—4.5 percent at press time—is another factor driving business to Capital Funding for navigating the government option.
The “we’re very busy” sentiment is echoed by Jeffrey Davis, president of Chicago-based Cambridge Realty Capital Companies, who says his company has seen its HUD 232 business explode, giving the firm a “spectacular” performance in 2009 and more of the same this year.
“It’s busy with lots of opportunity [in the seniors housing market], but the banks are still a big challenge … it’s like a clogged drain, if you had the right chemicals to free it up then it would,” Davis says in referring to the banking sector’s reticence to lend.Cambridge has two other main lines of business: a private-equity fund operation to manage sale leasebacks and joint ventures, among other activities, and a conventional debt financing office.
At its heart, the 232 program insures mortgage loans to facilitate the construction and substantial rehabilitation of nursing facilities, intermediate care facilities, board and care homes, and ALFs. The program allows for long-term, fixed rate financing (up to 40 years) for new and rehabilitated properties and up to 35 years for existing properties without rehabilitation that can be financed with Government National Mortgage Association mortgage-backed securities.
According to HUD, the agency in fiscal year 2009 insured mortgages for 255 projects with 30,155 beds/units, totaling $2 billion. Drawbacks to the program include the wait time to get a loan and understanding the process to apply for financing.
Be Proactive
Regardless of where the financing help comes from, there are keys for providers to realize when dealing with a market stuck in neutral. Brian Beckwith, senior managing director for GE Capital Healthcare Financial Services real estate group, offers these suggestions.
First, he says, it is important for SNFs and ALFs looking for financing to be proactive and start talking to lenders around a year before their debt matures if they want to refinance. “Begin to talk to lenders about an extension, that is often the best route … if you wait until three or six months before the debt matures, you’ve missed the boat,” he says.
Second, make sure the quality of your information is high. By this Beckwith means it is important to come to the table with a good level of data on past performance on meeting debt obligations, operating the business, and how your company will be able to manage debt moving forward.
Beckwith says a third key is to provide background on the quality of the operations by noting results of surveys and any regulatory issues. “Show that policies and procedures are in place, and focus on the health care,” he adds. The trend now is for all levels of the SNF and ALF sector to be focused even more on quality of care.
“This focus on quality is partly due to the fact that more data than ever are available to consumers and lenders, and there is high enforcement in the states,” he says.
Come Prepared
Other financial experts note additional basics for providers to consider when seeking financing. One is to fully understand the type of loan the facility is seeking, be it for refinancing, for new construction, or for expansion plans. Another is to grasp that the loan process moves relatively slowly, up to four months even in best-case scenarios.
Also, come prepared to explain your facility and its operations completely, research your best alternatives for meeting your needs, and be able to meet demands from lenders for more information in a timely manner.
Beckwith says SNFs have done a good job at managing costs through the economic downturn, aided by the tight labor market. For ALFs, he says he is cautiously optimistic that recent occupancy rate improvements will continue and that as the housing economy improves, the rates will return to a normal level.
To find out more about HUD, Google “HUD 232 program” or go to
www.hud.gov.