Today’s financial landscape has certainly improved compared to the difficult markets that borrowers, whether for-profit or not-for-profit providers, faced in 2008 and 2009. The inflow of funds into the mutual fund marketplace has created demand for the senior living product, and larger deals are now getting done, according to Mark Landreville, Executive Vice President at Herbert J. Sims & Co. in Minnetonka, Minnesota. The traditional capital sources accessed in the past have improved, REITs are looking more closely at the senior living space vs. some of the traditional real estate classes, and some for-profit and not-for-profit organizations are becoming involved in rather unique joint-venture projects.
“Capital is available,” Landreville said. “The national market is somewhat limited, but regional lenders are actively looking for deals in the $20-25 million range—they don’t seem to like mega deals. To spread the risk, they’d rather do two, three, or four small deals than one $100 million deal.”
So today, developers need to consider all available financing sources: banks, tax-exempt and taxable bond funds, REITS, even filling a gap with construction company financing. Cash-out refinancings, however, are very difficult. “We’ve worked with banks on short-term loans, where the bank finances construction and stabilization of a project, and then we go to Fannie Mae for long-term non-recourse financing,” he added. With their limited capacity, though, banks are primarily interested in either working with existing customers or establishing a significant relationship with the new borrower. Financing a project through a bank where the potential borrower has only, say, an existing letter of credit is nearly impossible in today’s market environment.
Sponsor equity (having skin in the game) and liquidity support agreements (the capital position and track record of the developer and operator) have also become hugely important. Whether it’s bank or bond financing, lenders taking all the risk up front is a structure that just doesn’t work anymore. “The banks are currently at 80% loan to value and 70% loan to cost,” Landreville said. “While the borrower’s contribution doesn’t have to be exactly 20%, lenders are looking for a meaningful contribution to the deal.”
For CCRCs, banks have implemented higher requirements for established reserves and days cash on hand. And there’s an increased focus on debt-service coverage—ideally funded from revenues rather than relying on entry-fees from unit turnovers. Presales, too, are getting extraordinary scrutiny due to some of the difficulties the industry has experienced in the last few years, where depositors faded away once the project was done. Stabilized occupancy is considered…………Want to read more? Click here for a free trial to Senior Living Business Interactive and download the current issue today
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