New construction starts remain significantly below peak 2007 levels, according to data from the National Investment Center for the Seniors Housing & Care Industry, and with financing largely unavailable for ground-up construction, is renovation or rehabilitation of senior care facilities a less-risky alternative for lenders?
With nursing homes across the nation an average of nearly four decades old, and providers seeking to meet shifting preferences for less institutional, more residential facilities, there’s an increasing need for facelifts and improvements.
As the population continues to age and demands for senior care evolve while financing remains elusive, some operators are forced to keep up by renovating old buildings.
“The question becomes, how much longer can you milk those assets, and how much longer will that particular kind of environment be acceptable to the consumer other than as a last resort?” says Phil Downey, principal of Senior Housing Analytics.
Nursing homes in the U.S. were built an average of 38 years ago, according to NIC data, and Downey says that while some facilities will end up falling out of service, there are still a “lot of quality assets in that age class that will probably sustain value and support renovation and rehab.”
That’s good, because it’s usually easier to get financing for renovating than for ground-up construction, according to Nick Gesue, Lancaster Pollard.
“From a credit perspective, it’s very difficult many times when there’s nothing but a field of grass, to sort of visualize and determine with good certainty whether building a senior housing project there is going to be well-received, especially in an environment when there weren’t continuous positive trends to get people to see that we were on an economic upswing,” Gesue says.
It’s riskier for lenders to do new development, he says. “When you have rehabs, it’s a lot easier because you have a facility first of all, you have residents in it, you can see clearly how it operates now.”
Rehabbing nursing facilities is a key way to attract target populations, says Jim Sherman, senior managing director of senior housing at RED Mortgage Capital, LLC, a top-3 FHA lender.
“Rehabbing and renovating is fairly common [for skilled nursing facilities],” he says. “Nursing home providers are trying to build up the quality of their facilities to get more Medicare patients.”
Many operators are looking to improve their facilities and to make them more residential in nature, Sherman says, adding that in some cases they’ll expand to add more private rooms, or convert three-ward rooms into private quarters.
Financing for this is easier to obtain, he says, adding that operators often go back to whoever originally financed the building to refinance or get additional loans for renovations or expansions.
“Most of the deals where we (or our clients) have to go to the bank to get refinancing, or to get some type of financing for renovations—that is a two to three month project, compared to deals we’re trying to put together for acquisition,” said Stephanie Harris, Esq., CEO of Turnaround Solutions, LLC. “[For the] ones that couldn’t pay cash—if it fell through, or they want to refinance the existing building, including in that some type of line of credit or additional funds for renovations—we’ve gotten every single one of those deals done.”
Getting a Federal Housing Administration-insured loan for substantial rehabilitation isn’t much easier than new construction, however, according to HUD.
“In many cases, substantial rehabs, because of the complications of existing, older construction can be more risky,” HUD told SHN. “If it is a full rehab, the market risk is similar to new construction.”
In that sense, conventional funding is thin for both new construction and substantial rehab, and both conventional lenders and HUD are cautious with either type of project.
For fiscal year 2011, the agency issued 31 commitments to 58 applications for Section 232 New Construction/Substantial Rehabilitation loans. Compared to 2010, the number of applications went down (from 79), but the number of commitments increased significantly from just 18.
Assisted living facilities, on the other hand, are generally much “younger” than nursing homes with a median age of 14, according to NIC data. They’re not as much in a position as nursing homes to need renovations or substantial rehab, and although the sector is still facing the “headwind of low home prices” according to HUD, it may have an easier time getting financing.
Despite the risk, some lenders, including regional banks, are putting their toe in the water and doing some construction, according to Sherman. RED currently has around 10 new construction applications submitted to various HUD offices, and also works with regional banks whenever it gets opportunities to refer deals.
“There’s a sense that there’s going to be a fair amount of construction of expansion that’s going to take place in the seniors housing sector,” Sherman says. “But it’s gonna be another year or so before you’re gonna see much. The lenders want to put money to work, and there aren’t a lot of good quality places to place capital. This is a sector that has very good characteristics, and I think more and more you’re gonna see the lenders loosen up.”
Written by Alyssa Gerace