Despite poor market conditions in 2009, there remain a demand and need for senior living facilities nationwide. Properties continue to seek financing for expansions, rehabilitation, acquisition and even new construction. The projects being financed speak to the importance of strong underwriting in a tough market. In the second half of 2009 and in early 2010, Lancaster Pollard financed senior living facilities with bank qualified private placements, Fannie Mae, HUD/FHA Section 232/223(f) and traditional letter of credit enhancements, among other financing options.
Securing financing in trying economic times is as much art as science. Financing is rarely simple and straightforward – even in the best of times. Lancaster Pollard prefers a multi-track financing approach in which various scenarios are analyzed in an effort to provide the most appropriate financing options with the lowest possible cost for each project. Flexibility in financing and using new options were an important part of getting deals done in 2009 and will continue to be the case in 2010.
Simultaneous Refinances through HUD
Consider, for example, WILMAC Corp. – a Pennsylvania-based company that manages skilled nursing, independent living and assisted living communities. The company sought to refinance three properties’ debt and finance a renovation.
Lancaster Pollard worked with WILMAC to refinance all three properties under HUD/FHA Section 232/223(f) mortgage insurance, but as three separate loan applications. In its loan applications, Lancaster Pollard emphasized the strength of WILMAC’s cash flow and its successful history in the senior living industry, but it also proposed that HUD consider accounts receivable financing, an immediate cash infusion sometimes called “factoring.” Factoring is the purchase of debts owed, or accounts receivable, in exchange for immediate payment. HUD recently formalized its approval process for factoring. WILMAC received $34.5 million in fixed-rate notes over 25 years via the HUD/FHA Section 232/223(f) program. The loans were the first group closed simultaneously under HUD’s LEAN process.
Assisted Living Facility in Minnesota Pays Off Debt, Restructures Ownership
White Bear Lake Suite Living is an assisted living community northeast of Minneapolis. Originally opened in 2007, the community is known as one of the best in its region. It consists of 44 private suites and one-bedroom apartments, with a memory care program, among other features.
White Bear Lake’s original investors came to Lancaster Pollard in 2009 in search of a financing solution that would enable them to pay off the original bank debt and its original partners so they could restructure its ownership.
Lancaster Pollard recommended credit enhancement through Fannie Mae, allowing the company to refinance $7 million. The owners were ideal Fannie Mae clients. They had over five years of experience in operating senior living facilities, have owned or currently own at least five same-sector properties and had a strong performance history. The Fannie Mae enhancement provided White Bear Lake a fixed rate, non-recourse refinancing loan. Lancaster Pollard competitively bid the notes, securing a low interest rate.
Lancaster Pollard also secured an important waiver for White Bear Lake during the underwriting: a Medicaid waiver to hold funds in a reserve should the Medicaid program fail.
Strong Balance Sheet, Keen Operations Sense Help First-Time Fannie Mae User Refinance
Mable Rose Estates is an assisted living community owned by Hillcrest Health Systems, which offers skilled nursing, short-term inpatient rehabilitation, memory support care, assisted living, independent living and other services. The Bellevue, Neb.-based company sought to refinance Mable Rose Estates to increase its leverage and extract equity for a new development.
A first-time user of a Fannie Mae mortgage-backed security, Hillcrest Health Systems refinanced $6.9 million in existing HUD and bank loans and extracted nearly $1.2 million in equity for a planned senior living development project.
Lancaster Pollard created a competitive bidding scenario to offer notes to institutional investors, retail buyers and Fannie Mae, ultimately creating competition that provided for a lower interest rate. Mable Rose’s new debt structure preserves the owner/operator’s financial reserves and operating liquidity. Lancaster Pollard advocated for a review of Mable Rose Estates’ appraisal. The property’s value increased by about 25 percent allowing Hillcrest to extract equity for the new development while remaining within the credit enhancement’s loan-to-value limit.
Non-Profit CCRC Obtains $18.4 million Bond Issue Despite Credit Crunch
Providence Care Centers is a CCRC in Sandusky, Ohio, consisting of an assisted living residence, an assisted living facility specializing in Alzheimer’s and other dementia, and an independent senior living complex. It was seeking financing to expand its rehabilitation center and renovate its 138-bed skilled nursing facility.
Lancaster Pollard worked closely with the management team at Providence Care Centers and recommended a multi-modal bank qualified bond issue. The Series 2009 bonds were sold via a private placement and served to facilitate the cost of construction and refinance the existing debt.
In addition, Lancaster Pollard served as a swap advisor and analyzed the organization’s assets and future liabilities to determine the amount of variable rate interest the care center could take on in. As a result, Lancaster Pollard structured and sourced a seven-year interest rate swap on 50 percent of the debt on an unsecured basis.
Lancaster Pollard underwrote an $18.4 million bond issue to add 14 private rehabilitation rooms and a state-of-the art rehabilitation pool. Providence Care Centers achieved a competitive interest rate and level debt service payments over the course of the loan.
Two HUD Programs Used for Senior Living New Construction
Sugar Grove is senior living facility in Plainfield, Ind., specializing in independent living, assisted living and memory care. It is one of three senior living properties owned by TDM Management, a company that has managed start-up operations for three large licensed senior living campuses that include independent homes, assisted living, memory care apartments and skilled nursing.
TDM Management came to Lancaster Pollard seeking financing to build 48 apartments, 76 assisted living and 33 memory care units on its Sugar Grove campus. The plans also included banking and other new services and amenities.
Because TDM’s plans called for independent living and assisted living, Lancaster Pollard recommended using two separate HUD mortgage insurance programs: HUD/FHA Section 232 mortgage insurance for assisted living; and, HUD/FHA Section 221 (d)(4) for independent living.
Although TDM has a proven track record in the industry, it is a relatively new company. However, TDM assembled a management team consisting of individuals with experience in start-ups, property ownership, project management, senior care, law and human resources.
In the underwriting package it submitted to HUD, Lancaster Pollard showed that TDM was a capable borrower. They also showed there was a strong market demand for new senior living units in Plainfield, which are important factors in HUD’s qualifying criteria. The firm also obtained a Medicaid waiver that could help the project in terms of initial and sustaining occupancy.
The two-loan strategy allowed for more than 25 percent of the units to be independent living and allowed the owner to fund additional project costs through the Builders and Sponsors Profit and Risk Allowance (BSPRA) boosting the loan to value above 90 percent.
TDM secured a $14.7 million, 6.5 percent fixed rate non-recourse loan with a 40-year term and amortization, insured by the HUD/FHA Sec. 232 and HUD/FHA Sec. 221(d)(4) programs.
Print this article
