Senior Living Business: Banker Advice: Financing For Future Flexibility--
Insight On Comparing Financing Options And Negotiating Provisions
When closing on a debt financing, senior living providers should know the sort of flexibility that they can (and should) build into their closing documents in order to retain the ability to refinance or otherwise change the debt structure in the future, if necessary. Capital projects are inherently funded with longer-term debt—or at least should be, according to T. Brian Pollard, Managing Director of Lancaster Pollard & Co. in Columbus, Ohio. And given the long-term contractual implications to the borrower, great care must be taken to create sufficient flexibility to accommodate future needs of the organization.
“Whether incorporated into a loan agreement, regulatory agreement, or trust indenture, borrowers must be mindful of provisions within those legal documents that could limit the flexibility to expand, modernize, or take advantage of favorable economic conditions in the future,” he said. “While achieving the lowest cost of capital is a key objective in any finance effort, it can’t be pursued in a vacuum at the expense of future flexibility.”
Overall economic conditions drive some refinancings, but a good percentage—sometimes more than half—are pursued for non-economic purposes, such as borrowers reaching the upper limits of what their existing debt documents will allow them to do, according to Pollard. “Sometimes it’s difficult to see far enough into the future to know how much flexibility you might need within that contract, so you need to build in as much as possible,” he advised.
Flexibility for a changing environment
The dynamic environment in which senior living providers operate makes it particularly difficult to predict challenges or opportunities even a few years out. Whether it’s the housing market, health-care reform, reductions in Medicare/Medicaid reimbursement, accountable care organizations… “the business is always changing,” stated Aaron Rulnick, Executive Vice President at Herbert J. Sims & Co, Potomac, Maryland. “Organizations need to be flexible to adapt to the challenges of a constantly changing environment, as well as to pursue opportunities that may present themselves at any given time.”
In a down housing market, for example, there may be opportunities to acquire land for future development at a lower price or to acquire or affiliate with another organization. Less capital-intensive opportunities, such as taking on the management of another community or facility or becoming involved in new programs or services (e.g., home health), may be an opportunity to produce revenue to offset declining reimbursement rates, fewer contributions, or lower investment earnings. Some of those opportunities may require upfront resources.
While it’s important to have the flexibility to take advantage of these types of opportunities (e.g., liberal additional debt, transfer of assets, and liquidity covenants), the organization first needs to understand its long-term objectives.
For example: The threshold test for borrowing additional debt for a Phase Two expansion may be less stringent if the lenders know in advance that the borrower intends to issue debt in a subsequent phase. “In our fixed-rate deals, when the client is financing the first phase of a new project but hopes to further expand or enhance the community in the future, the Phase Two indebtedness can provide different requirements for borrowing or financing than blanket additional indebtedness,” he explained...Want to read more? Click here for a free trial to Senior Living Business and download the current issue today