Experts in the financing field agree that facilities looking for money to fund projects are hard put to find any. “The market has shifted back to a more conservative stance in valuation and underwriting,” says Daryl McCombs, a director of Red Mortgage Capital, headquartered in Columbus, Ohio.

In fact, “underwriting standards are probably more conservative than they’ve ever been in the past,” says Michael Burchell, a director of Capital Funding Group, based in Baltimore.

So, when will financing loosen up? That’s “very much tied to the overall market,” says Robert Kramer, president of the National Investment Center for the Seniors Housing and Care Industry (NIC), Annapolis, Md. Lenders are waiting to see what deals get done and what cap rates to use in underwriting, he says. “Outside of agency financing, a deal may get done but it’s likely a distressed property, so there’s a question as to whether that’s [a representative] capitalization rate.”

Positive Signs Ahead

However, Kramer sees signs in the economy that “things are heading into more positive territory: The [stock market] drops aren’t as severe, and there’s some leveling off” of the residential real estate market.

In addition, Michael Hargrave, a vice president of NIC, has confidence that the actions taken by the Federal Reserve to get the financial companies lending again will eventually help, “but it has to work its way through the system,” he says.
“There are several positive things we see,” says Kramer. “The REITs have been keeping their powder dry, raising capital successfully both by financing properties through the agencies and [having] public equity offerings. We [also] see a lot of private equity folks who believe there is going to be a real opportunity” in seniors housing and care, but they’re waiting for enough transactions to take place so they can get a good understanding of today’s valuations, and until debt becomes more available.
“There are some companies poised to begin lending that [are] commercial financing companies, such as MidCap Financial,” says Kramer. “They’ve not done a lot of deals yet, but clearly are looking for the right timing, the right leverage. So in some ways it’s like a log jam waiting to break.”
REITs and private-equity organizations will probably lead the way, says Kramer, once the capital markets open up again. Currently, those entities are restrained by the capital markets. “They want to know they can refill their coffers by going to the bond or equity markets, and that’s been very difficult for the REITs and private equity,” says Hargrave. “But REITs and private equity firms find this industry very attractive because it has good demographics and provides a good return on investment.” Hargrave sees REITs starting to make strategic buys in the next year or so.
On the other hand, if the lack of consumer confidence continues for another year, or there’s another major jolt to the financial system, access to financing will continue to be very limited, Kramer says. “So far we’ve not seen many foreclosures, and we’ve not seen a dramatic increase of capitalization rates—they’ve gone up, but not by hundreds of basis points.” If the lack of confidence continues, “there would be a lot more distressed debt,” he says.

Agency Financing Robust

Skilled nursing facilities are able to get HUD Federal Housing Administration financing, while assisted living facilities can go to Fannie Mae or Freddie Mac. The government agencies “are the only sources of permanent, take-out financing,” Kramer says. Most of the major banks are only doing deals through the agencies.
“Were it not for agency financing, [very few deals] would be getting done,” says Kramer.
But agency funding doesn’t meet all needs. “Fannie Mae and Freddie Mac financing is only available for stabilized properties” and not for new construction, so those loans are for recapitalizations or acquisitions, says Kramer.
But many properties can find what they need at the agencies. Burchell’s business, whose company is an FHA lender, has been “pretty robust.” More companies are looking at it, despite the longer process, because it’s pretty much the only option, he says. The underwriting criteria haven’t become constricted; they’re the same as they’ve always been, says Burchell. With HUD, “it’s 35-year fixed-rate financing, so it’s very attractive,” he says. The process of getting the loan can take between four and six months. A new HUD program, called LEAN, has been working to speed the process up.
McCombs is also finding that many borrowers are coming to his company to get agency financing. In fact, he reports that not just Red Capital Group but other agency lenders as well are seeing significant increases in activity this year.  

Private-Pay Rent On The Rise

Unlike in commercial real estate, “rents are continuing to rise for private-pay seniors housing; even though occupancy has fallen, [net operating income] is still rising,” says Hargrave. This means that the inherent value of the property may continue to rise. It’s “one of the reasons we’re not seeing loan performance indicators go off the charts like they are in some other asset classes,” he says.
Down the road, declining senior care units could also mean a favorable supply and demand adjustment, Hargrave says. “If we have several years of [little] new construction, that could really swell these properties in terms of waiting lists and the ability to raise [rental] rates.”