Post-Downturn, Balance Sheet Lending Finds its Place in Senior Housing

Despite the dominance of government assisted financing and Real Estate Investment Trusts (REITs) in senior housing, more traditional balance sheet lending is coming back after the collapse of the market in 2007.

While Real Capital Analytics, which tracks industry statistics, did not have specific data on the prevalance of bank financing in the market to date, several people in the industry told SHN that bank financing all but dried up in the wake of the economic downturn. Others now say that it is coming back, or that it never fully left in the first place.

Chevy Chase Maryland-based CapitalSource has used its its subsidiary CapitalSource Bank to provide financing through the downturn, even as others retreated.


Generally, says Steve Gilleland, managing director, health care real estate, CapitalSource underwrites 95% of its portfolio, so it has certain “smell tests” like per bed caps.

For that reason, he says, the company was not impacted as strongly as some other financing sources by the recent 11.1% Medicare cuts to skilled nursing.

“It’s not what we lend on, it’s who we lend to,” he said. “We’re in partnership with a good operator who knows how to operate through these tough times.”


The company has done upwards of $200 million to $250 million in health care real estate deals to date in 2011, and has offered an additional $100 million of working capital loans and $150 million in cash flow loans, providing even more flexibility for operators

Because the company is so operator-focused, it’s seeing competition from the large Health Care REITs in the sector.

“They’re going after the same mid-size chains as we are,” he said. Unlike the REITs, which are required to own the property, CapitalSource allows the operator to take cash out to re-invest or acquire new properties without selling outright.

Small to mid-size regional banks are slowly starting to lend again in certain regions, but it’s still a small slice of the market compared with other sources available today.

“Transaction activity has resumed, although at a lower level than the REITs,” says Kevin McMeen, president of real estate for MidCap Financial.

The commercial finance firm anticipates a $200 million year in 2011 with an additional $100 million in working capital. But, bank financed transactions typically are relatively straightforward and simple, he says.

“There’s still a lack of bank activity when you get into things that have more of a story to them,” he says. Those might include certain acquisitions with a turnaround component, renovations or expansions.

“Bank financing is coming back under the right circumstances,” says Steve Ervin, senior vice president and co-head of the senior housing platform at Berkadia, which recently re-entered the senior housing finance industry after a yearlong hiatus, and works mainly in the origination of agency loans from HUD, Fannie Mae and Freddie Mac. “It is still not easy to come by and it’s harder to come by for people who don’t have a high quality profile.”

While agency lending may provide more flexibility to operators, it lacks the ability to tailor offerings to individual clients.

Add the delays from HUD, and balance sheet lending provides a fast and flexible alternative to established operators looking to quickly get a deal done.

“I’m 60 days, the [HUD] queue is 9 months to a year,” Gilleland says.

Written by Elizabeth Ecker