By Quintin Harris

Minnesota’s Pioneer Retirement Community closed this spring on $21.5 million in financing to build a new facility that returns portions of the lives many seniors thought they had to leave behind when they move into nursing homes. The project replaces an 82-year-old building, and the dream of the new facility nearly fell through when the tight capital markets made construction financing hard to come by.

Pioneer Care Center, a replacement 105-unit facility in rural Fergus Falls, is being built as six conjoined communities. Each has its own living area, kitchens where residents can participate in preparing meals, and outside patios and porches to bring back the memory that “breathe in deeply” didn’t always involve a stethoscope.

The project is the culmination of the forward thinking of Pioneer, which provides senior apartments, memory care and a nursing facility in rural Minnesota. The Pioneer Care Center skilled nursing facility was built in 1928, at a time when facilities were not designed for patient-centered, community-focused care. Chief Executive Officer John Richards and his team defied the tumultuous economy and started a $2.2 million capital campaign and the pursuit of $21.5 million in financing in the midst of the market meltdown. The capital campaign has hit $1.9 million in just over a year in a community of 14,000. Ground was broken in late 2009; move-in is anticipated for spring 2011.

“We had a choice between remodeling again, and borrowing a little more to get something really special,” Richards said. “The economy might have suggested a different course of action, but this is something we really believed in. We’re hoping to return to our residents some of the details that are missing from institutional nursing homes – like the smell of cooking food, or sizing up the latest snowfall with the neighbors.”

Architect Dale Tremain, owner of Tremain Architects and Planners, said he designed the new building to let residents “escape the tyranny of 8-foot ceilings.”

“One of the things that I’ve been conscious about with people who live in nursing homes is their access to the outdoors. I believe that to be a healthy person, you have to once in a while let the sun hit your skin,” Tremain said. Besides the multiple screened-in porches and patios in each wing, the central community space will include an arboretum where a pine tree-lined brook will bubble down a hill mirroring the one outside the glass walls.

The new Pioneer Care Center nearly derailed when Pioneer couldn’t get financing to build it. The U.S. Department of Agriculture had committed $21.5 million, half in direct loans and half in federally guaranteed loans, to provide permanent financing, but USDA financing guarantees do not kick in until after construction is complete; Pioneer was faced with issuing bonds for construction financing in the midst of the tightest credit markets in decades, when health care borrowers couldn’t find investors to refinance existing projects, let alone build inherently riskier new ones.

Lancaster Pollard was brought in to find a way to make the transaction work. The firm secured the original USDA loan commitment, and ultimately negotiated to increase the amount of USDA direct loan money to $16.5 million and reduce the guaranteed portion to $5 million. The firm also brought in financial partners to provide interim construction financing. And while other health care providers are just now revisiting tabled projects, Pioneer is watching walls go up because of the combination of local and federal financing resources.

Increasing the direct loan portion saves Pioneer considerable interest expense and fees. USDA guaranteed loans require payment of an origination fee, and their interest rates were about 7.5% at closing. USDA direct loans, however, charge no origination fee, and their rates were closer to 4.25%.

Increasing the direct loan also made it possible for Pioneer to turn to the Minnesota Rural Water Finance Authority for additional construction financing. The MRWFA provides interim financing at very low interest rates – 3.5% for Pioneer – but is not permitted to provide interim financing for debt that will be paid down by federally guaranteed loans.

The more that could be issued as a USDA direct loan, the more construction financing MRWFA could provide, and the less interest expense Pioneer would have. The $16.5 million construction loan is the largest ever provided by MRWFA. The remaining $5 million in construction debt was issued as tax-exempt bonds and will be taken out by a local bank at the end of the construction term. The construction loan itself is being issued on a “draw-down” basis, meaning the notes are issued as Pioneer needs funds to pay for contractor and other work. Pioneer will thereby save considerable capitalized interest cost.

Several USDA programs are available to fund new construction, renovation or acquisition for senior living providers, hospitals and affordable housing communities. A financial adviser that is aware of the nuances of these programs can help structure the transaction and identify financial partners willing to provide construction financing, or the local equivalent of the MRWFA to take out construction loans and provide permanent financing. The low interest rates achievable by USDA financing make it an appealing financing option for unrated rural facilities.

Of course, even more key to any project in a below-average credit market will be the commitment that Pioneer clearly evidenced in advocating for its new facility. Government-sponsored enterprises and other agency financing programs have taken an increased interest in projects’ viability, the community’s need for any new facility, and the developer’s and operator’s commitment and capability. Hospitals and housing and care providers should work with their financial advisers to tell the stories behind their numbers, providing compelling qualitative and quantitative arguments in their loan applications and credit profile synopses.

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