EXPERT OPINION: A Conversation with Len Lucas - May 2013

May 21, 2013

In this "Expert Opinion" interview, Len Lucas, Senior Director, Love Funding Corporation, discusses HUD, Love Funding, private equity, debt markets, and more....

Listen now     Watch the video      Read the transcript

Mr. Lucas joined Love Funding in 1998 and is based in Boston, Massachusetts. As senior director, he has consistently been named a top producer for Love Funding. Mr. Lucas originates direct loans for Love Funding in its capacity as an FHA MAP and LEAN lender. He also advises borrowers in all sectors of the senior housing industry: age-restricted apartments, independent living, assisted living and skilled nursing as to the type of financing vehicle best suited to meet the borrower’s immediate needs. In those situations where an FHA execution is not the most appropriate, he relies upon his extensive knowledge of senior housing financing vehicles and lenders to place the loan with the appropriate lender.
Mr. Lucas is an executive board member of the American Senior Housing Association and serves as an advisory board member to NIC’s Skilled Nursing Investment Forum. He has thrice been featured as a speaker at the LTC 100 and the NIC Skilled Nursing Investment Forum. Mr. Lucas has won the Love Cup twice during his tenure at Love Funding, an honor awarded to the top producing originator each year. He also originated the largest loan in Love Funding’s history for Atrium Healthcare. Mr. Lucas is a member of the Massachusetts Bar and holds a J.D. from the New England School of Law and a Bachelor of Arts (economics) from Kenyon College.
 
Contact Information:
Leonard A. Lucas
Love Funding
Senior Director
llucas@lovefunding.com


Watch the video of the interview: 



 
Read the interview transcript:

 

Steve Monroe:
HUD had an incredible year in 2012, it was a record year for the 232 lending program for skilled nursing/assisted living. Len Lucas of Love Funding has been working on HUD loans for quite a while; he has a lot of experience with it.

Len, you do a lot of FHA lending, obviously. If a buyer is buying a turnaround property, how long should they wait to refinance it if they're going with HUD? Or should they take it to HUD right away and do the substantial rehab-type loan?

Len Lucas
I don't know where you're getting your questions from, but that's a good question. And the answer to that question is not an easy one. It depends upon what the borrower is most sensitive to—rate versus leverage. Today rates are low and to go direct to HUD would get you a low rate. However, it's at a cost of leverage. And the situation is such that the HUD acquisition refinance 223(f) program is not a forward-looking program. And to take advantage of that program on a turnaround, you want to wait until your property stabilizes.

So you're going to spend a period of time while you get it stabilized and you want to get to that T12 [trailing 12 months] number. Because T12 is the financial number that HUD keys in on. So you're going to spend time getting to the T12. We look at your trailing 12 income expense and we start from there in determining what the value is of the property so that we can go down to the loan size.

So, you have to wait in that sense to get there and then you face the crossroads of, I've increased the value of my property, okay? Do I want to go right to HUD today and only finance the existing debt, which may be a lower leverage because of the value that you put on the property since you bought it? Or, do I want to take some of that cash out? If you choose that you want to take some cash out from the value you've created, HUD's not going to do that. So you need to go to a non-HUD lender, do your cashout refinance, then wait another two years before you go back to HUD.

Steve Monroe
So that's quite a bit of time. You've got all the rehab and the seasoning—rehab, the re-fill up. That's two year seasoning and then come back to HUD, so.

Len Lucas
Right. So it depends what you're most sensitive to. And where you are in terms of leverage today and where you think you're going to be with leverage tomorrow.

Steve Monroe
Skilled nursing prices just in the overall market have been higher. We had a record average price in 2010; 2012 we almost matched that. But just in general, prices are higher than 10 years ago. With that kind of lifting up of prices, is the average size of HUD loans getting bigger or is it staying the same or just no one really tracks that?

Len Lucas
Well, it's not something that I track on a consistent basis. I can say that, if you looked just in the last couple of years, they've stayed about the same and that would be by looking at the HUD volume and just measuring the volume, dividing the volume by the number of transactions. You have, it comes around $8 million a transaction.

I have to assume, though, that loans have gotten bigger because values have gone up and our loans are based upon a percentage of value.

Steve Monroe
I would think that, but who knows? There's been a lot of bridge-to-HUD financing of late. Isn't that, I always look at that and say, okay, you're doing the bridge-to-HUD. Why are borrowers so confident they're going to, two years later, qualify for HUD financing, not even taking into account the interest rate risk?

Len Lucas
Well, there are three types of bridge loans. There's a bridge loan that people need on an acquisition, because generally a seller doesn't want to wait for HUD and everything that goes with HUD to get their money. So sometimes people get a bridge loan just for timing purposes and they close. While they're closing on the bridge loan, they're also going down the road on the HUD loans to take the bridge out. In that situation, very low risk. The lenders all can see what the history of the property is and there's going to be a very short period of time between when the closing occurs and when you take it out.

The next situation when people would go for a bridge loan would be a cashout. Now, if you have a cashout and that cashout requires the two year's seasoning before you go to HUD, if it's a stabilized property, then there's more risk than the acquisition, but still not a whole lot of risk, because you have a history of the property's performance and you're assuming that that performance will continue. You do have risk that rates will go up in that two-year period. Although rates are not the big issue, debt service is not a big issue these days. We do that calculation because it's in the computer, but it's not a limiting factor on loans. So you're taking some operational risk and some reimbursement risk. Not that big a deal.

Where you really do see the risk and where your bridge lender more than your borrower has to be concerned, is in that turnaround situation. Because in that turnaround situation, you're not only looking at risk of interest rates going up, but are they going to be able to turn the property around and are they going to be able to turn the property around quick enough to be able to get to that trailing 12 number that HUD likes to see when determining the value.

Steve Monroe
When you're underwriting the property, is there one major thing about a property that can worry a lender the most? Some risky aspect? I mean, 20 years ago there was underground oil tanks that could be the kiss of death. But is there anything like that?

Len Lucas
Well, in terms of physical plant, it's the unknown unknowns that you worry about. I mean, there are problems with septic systems. There are nursing homes, believe it or not, that are on septic systems. That gives people the willies in terms of how long, what's the length of time that the system is going to …

Steve Monroe
Before it explodes.

Len Lucas
Right. And is there land available for a replacement system? Environmental issues. I mean, HUD is tough on environmental issues and, even if they're offsite and there's a potential—we're dealing with a situation right now where there was an offsite spill that has the potential to come down-gradient. That can cause some concerns. So, environmental is a concern.

The other, inside the building, you also run into concerns, especially with older properties as to what is the remaining useful life of the facility? Because HUD's—although their maximum loan term is 35 years, that's based upon 75% of remaining useful life. So if you get to an older building, you may find that useful life being cut short and you may end up with a 25-year amortization or a 30.

And also, another problem we try to deal with—take your Alzheimer's care. This is a good time that you run into conflicts with HUD on a physical structure standpoint. You could have a brand-new, purpose-built Alzheimer's care facility and it will not have one full bathroom suite—toilet, sink, shower—for every four residents, because in fact they don't want the residents showering by themselves. This isn't a hotel. And that's a problem.

HUD's gotten a little bit better in terms of thinking about bathroom waivers, but you have to be ready to build those extra showers and put them someplace, if the issue comes up.

Steve Monroe
Even if they're not used. How about the borrower itself. Is there anything about a borrower that can stick out as a risk factor?

Len Lucas
Well, when you start talking about the borrowers, clinical performance is the issue that you really need to bear down on. Know special focus. Hey, that's the first—you want to make sure that you don't have any focus problems. You want to make sure that you don't have high claims on your policies. HUD is going to look at all of the facilities that are on the policy, of the property that you're bringing to HUD. So claims become an issue. Surveys become an issue.

HUD has become much more aware in recent times or sensitive to the fact that these are operating businesses. And they want to know that people know what they're doing. So the clinical side of it really comes into play.

Steve Monroe
You've been doing this for a little over a decade. Are the borrowers today that are coming through to you, are they any different today than five and 10 years ago? Are they better? Are they more sophisticated?

Len Lucas
The prototypical HUD borrower of years ago was more of the onesie-twosie type of guy. Today, fueled by the fact that, since the economic crisis, there are fewer competitors out there, non-HUD sources of funds, and the fact that interest rates are at historically low levels and have brought everybody into the fold. So you see everybody from a smaller, onesie-twosie, right up to big chains coming into HUD, trying to lock in the long-term financing.

Steve Monroe
Especially some big chains on the private equity front, as well, lock that in.

Len Lucas
Yes, it's very, very attractive. I mean, if you can end up with, just to pick a number, a 3% up or down, plus or minus interest rate for 35 years, it takes a lot of worry off the table.

Steve Monroe
With interest rates so low right now, especially with HUD on the long end, I would hope everyone is thinking about longer-term maturities. But is maturity really a big factor for your clients? Are they looking at the maturity or are they looking at the rate?

Len Lucas
That's a good question. I mean, it's rate. But followed closely—you're almost splitting a hair there, because if the rate and the fact that you know that, regardless of what happens in terms of reimbursement, that this is what my debt service is going to be for 35 years, then it's up to me. You can always prepay it. The HUD loans are prepayable. Almost always prepayable without penalty after year 10. But you have options. And that's the security that people are looking for today.

Steve Monroe
Yeah, if you can get 2.5 to 3%, you don't have to worry too much about your capital structure for a long time.

Len Lucas
That's right.

Steve Monroe
How's your 2013 pipeline looking?

Len Lucas
It looks pretty good. Both for myself personally, for Love and I know for all of my competitors. HUD business is up. I mean, from 2010 to 2012, it doubled. It doubled and we'll see a big increase this year, as well.

Steve Monroe
Oh, really? Because 2012 was a record year not only for HUD, but for most of the HUD lenders. You think 2013…?

Len Lucas
I suspect that this will be a big year. You know, the interest rates, again, people are driven by interest rates. Interest rates probably bottomed out in the fall. When people saw that number go down, that just brought even more and more people into the fold, so to speak.

Steve Monroe
Well, good luck in the 2013, and any comments on the debt markets in general or outside of HUD?

Len Lucas
I'd have to defer—I read The SeniorCare Investor quite a bit… And I'm sure that they have some very cogent thoughts on it. Thank you.

Steve Monroe
Thank you, it was good sitting down with you. Good luck this year.

Len Lucas
Thank you very much.
 

 

Comments

Post new comment

The content of this field is kept private and will not be shown publicly.