Senior Living Business: USDA Programs Benefit Rural Borrowers--
A Viable Source Even When ARRA Funding Expires September 30
Financing programs provided by the U.S. Department of Agriculture (USDA) have filled a void in the credit market over the past year or so, as the tax-exempt bond market pretty much evaporated for nonrated organizations. USDA Rural Development offers two programs that can be utilized for the development and construction of seniors housing facilities: Community Facilities Loan Assistance, which offers direct loans and loan guarantees, and the Business & Industry Guaranteed Loan Program.
Community Facilities Loan Assistance (CF) is available to public borrowers (municipalities or counties) and not-for-profit community organizations in rural areas and towns with populations of up to 20,000.
Funds provided through CF programs may be used for any capital expenditure, including land acquisition, professional fees, and equipment purchases required for operating the facility. No more than 50% of the debt may be used to refinance existing indebtedness.
• The CF Guaranteed Loan Program guarantees up to 90% of the loan value for market-rate loans made and serviced by local banks and other eligible private lenders. The local lender drives the underwriting criteria and determines any covenants related to the guaranteed loans.
• The CF Direct Loan Program makes funds available to applicants who are unable to obtain commercial credit. Fixed-rate interest rates are currently set as low as 4.5% for the poverty rate, which is determined by the median household income of the area being served and the type of project. An intermediate rate is set halfway between the market and poverty rates. The term for the direct loans is a maximum of 40 years.
The American Recovery and Reinvestment Act (ARRA) of 2009 provided $1.2 billion of funding in addition to the $280 million already allocated to the CF direct loan program. Over the last 18 months, borrowers had been getting up to 90% of their entire projects financed with that direct loan money, which enabled a lot of projects to go forward. However, the ARRA funding is set to expire on September 30, 2010, and the typical amount that borrowers will be able to get through the CF direct loan program will revert to $1 million or $2 million.
The Business & Industry Guaranteed Loan Program (B&I), available to both for-profit and non-profit organizations, guarantees loans made by eligible private lenders to benefit rural areas in communities with a population of 50,000 or less and outside a metro area.
This program may also be used for acquisitions, new projects, renovations, expansions, equipment, or other capital expenditures. Up to 100% of the debt may be used to refinance existing indebtedness, making this program increasingly more attractive to not-for-profit borrowers.
• The B&I loan guarantee percentage is negotiated between the lender and the agency up to the maximum 80% for loans of $5 million or less, 70% for loans between $5 million and $10 million, and 60% for loans exceeding the maximum $10 million. The interest rate is negotiated between the local lender and the borrower, although subject to agency review, and may be fixed or variable. Repayment terms may not exceed 30 years; in the case of machinery and equipment, the maximum term is 15 years. The local lender drives the underwriting criteria and determines any covenants related to the guaranteed loans.
Loan vs. loan vs. loan
The CF loan guarantee program historically has been more attractive to lenders than the B&I loan guarantee program, because CF offers the higher guarantee level (up to 90%) and, therefore, a lower overall cost of capital. In theory, at least, the bank will offer a lower interest rate when the federal government backs more of the loan. Also, CF guaranteed loans may be amortized for up to 40 years, although most banks will not go that far. Rather, the borrower might have a 5.5% variable rate that is reset every five or ten years or a 30-year fixed rate at 7% or 8%.
A CF direct loan carries a much lower interest rate than either of the two guaranteed loan programs. Prior to the ARRA infusion of funds, direct loans traditionally made up a small percentage of the USDA funding structure and were used primarily to lower the cost of capital. No matter how strong the borrower, there’s virtually nowhere else in the market where borrowers can find a 4.5% loan for a term of up to 40 years.
In recent months, therefore, the direct loan program has become a very effective financing alternative for qualifying projects. And for large projects, borrowers have packaged the CF direct loan and a CF loan guarantee together. On a $20 million project, for example, they might request $15 million as a direct loan at 4.5%, put in $2 million of their own money from reserves, and finance the $3 million balance with a bank loan that is guaranteed up to 90% by the USDA.
In May 2010, Lancaster Pollard structured a $21.5 million replacement nursing home project for Pioneer Retirement Community in Fergus Falls, Minnesota, and 75% of the funding for that project came from USDA’s CF direct loan program. “It was an incredible opportunity to get the cost of capital down to the 4% range,” said Quintin Harris, Vice President and Health Care Banker at Lancaster Pollard in Lawrence, Kansas. “There was just no way anyone could achieve that level through more traditional financing.” Want to read more? Click here for a free trial and download the current issue today