Senior Living Business: Finding Financing: Update From Active Bankers--
Flush With Funds, Banks Are Looking To Lend To Strong Borrowers
While the economy seems to be spurting along much too slowly for everyone, at least we’re seeing more financing and refinancing activity in the not-for-profit senior living sector than was the case a year or more ago. So how has the picture changed over this past year?
Generally, the economy has forced senior living organizations to slim down and run their ships a little tighter over the past couple of years—which many have done. New development has been put on hold, with very few green-field developments underway. Renovations and expansions were also at a minimum, although those types of projects have started to take off again in the last six or eight months.
Many not-for-profit senior living borrowers took advantage of the temporary stimulus measure—part of the American Recovery and Reinvestment Act (ARRA)—that raised the limit on bank-qualified loans from $10 million to $30 million, allowed each borrower its own limit rather than imposing a limit on each issuing authority, and allowed banks to hold those tax-exempt loans in their own portfolios. There was a flurry of activity on this front prior to the provision expiring in December 2010.
Bank-qualified loans continue to be an option, but a $20 million project today would have to be split up between two local issuers. That depends, however, on location. “You really need to understand your state,” cautioned Tanya Hahn, Senior Vice President at Lancaster Pollard in Columbus, Ohio, “because each state is unique in the way it allocates authority to issue debt.”
Massachusetts, for example, has only one issuer, so high-value bank-qualified deals are unavailable. And in Michigan, the local economic development corporation may have bank-qualified capacity, but borrowers looking to finance new projects must pay the prevailing wage—perhaps adding 10-15% to the project cost. If the budget is tight, that may not be feasible. For refinancings, of course, the prevailing wage issue would not apply.
Federal Home Loan Bank (FHLB) credit enhancement—which permitted the 12 independent FHLB entities to wrap tax-exempt debt issuances when an unrated or low-rated local bank provided a letter of credit—is no longer available for tax-exempt debt other than for affordable housing. Even though the tax-exempt FHLB wrap is gone, though, taxable FHLB-wrapped debt is still a viable option given current interest rates, Hahn suggested.
For smaller qualifying deals (under $5 million), USDA direct loans carry very attractive interest rates in the 4% to 4.25% range. For larger projects ($20-25 million) in larger communities (20,000 to 50,000 population), the USDA Community Facilities Guaranteed Loan Program and the USDA Business & Industry Guaranteed Program are options. These structures provide credit-enhanced debt with amortizations of up to 40 years, but underwriting standards for these programs necessitate the use of a lender familiar with the requirements and limitations of the programs and will differ by institution, according to Hahn.
As a result of the banking crisis, several banks got out of the letter of credit (LOC) business; others no longer provide LOCs in the senior living space. “When refinancing or renewing an LOC, the process will be easier if the organization has been well run,” said Hahn. “Unfortunately, organizations that have had any kind of financial hiccup should evaluate whether to refinance in a different way or work with the issuing bank to keep the LOC in place. Regardless, time is of the essence, and starting at least nine months in advance of the LOC expiration date is critical.”
LOC fees are increasing and will continue to increase in the future, a function of market conditions but also due to enhanced regulation based on Basel III, the new global regulatory standards (tentatively set to be implemented in December 2012) that will require banks to do a new liquidity test and then a capital test. Some banks are likely to drop the LOC business altogether because of the increased cost from a capital charge perspective, Hahn pointed out, and in lieu of LOCs may offer to underwrite a sort of “quasi” tax-exempt rate—a somewhat lower rate than fully taxable but not as attractive as, say, the bank-qualified deals.