Senior Living Financing—It Exists, But You Gotta Get Creative. Here’s How.

The financial crisis that began in 2008 was like a large-magnitude earthquake, its aftershocks can still can be felt today by lenders and borrowers. It dramatically changed funding opportunities for both for-profit and nonprofit senior-living providers. So after this seismic shake-up, what does the financing landscape look like for 2012?

For starters, although interest rates are low, credit continues to be tight. Underwriting standards have become more stringent, emphasizing the importance of adequate capital planning. Even though most conventional avenues have been slow to recover to more affordable levels, numerous funding possibilities are still available. Senior-living providers can be creative by using these options singly or combined to build an affordable, tailored debt structure. Being aware of the available funding choices is key.

Taking it to the Bank


An option available to both for-profit and nonprofit providers is the federal home loan bank (FHLB) credit enhancement.

The FHLBanks, as they are known collectively, consist of 12 independent entities that lend to local banks. FHLBanks are rated Aaa by Moody’s and AA+ by Standard and Poor’s.

FHLBs can enhance senior-housing providers’ taxable debt issuances, which is comparable to or less costly than tax-exempt debt due to inefficiencies that presently exist in the markets. Further, taxable bonds require fewer upfront closing costs and there are fewer restrictions on the use of bond proceeds. This lesser-known option may require investigation and research on the part of the borrower and its investment banker.


Also, private or direct placement of tax-exempt bonds has been successful for several providers despite the markets. In this structure, an investment banker and borrower negotiate directly with a bank or banks to purchase the bonds as opposed to selling them into the general market. This path requires a lender with a firm grasp of what types of debt local, regional and national banks will purchase. Private placements, with their limited public disclosure, less onerous bond documentation and the ability to be structured as interest-reducing, draw-down bonds, can be a particularly cost-effective way to fund capital projects—especially construction—by eliminating negative arbitrage.

When tax-exempt bonds are designated bank-qualified, banks can deduct 80% of their cost of buying and carrying them. Banks pass along the savings to borrowers by way of a reduced interest rate. Normally, only $10 million can be designated bank-qualified by any bond issuer in one year, meaning if a municipality had commitments for the full amount of this limit, the nonprofit provider would be prevented from accessing bonds from that source that year.

Borrowers can get creative by looking for bond issuers other than the provider’s traditional municipal source. If providers can find more than one issuer with bank-qualified capacity, they may be able to combine those sources to overcome the $10 million limit. Providers should keep in mind that the more funding sources involved, the more legwork and project management required. Alternatively, nonprofit providers can consider phasing their projects over multiple calendar years to stay within the $10 million limit.

Lastly, off-balance sheet financing and real estate investment trusts (REITs) are also potential financing alternatives for both nonprofit and for-profit providers.

Backed by the Good Ol’ USA

Financing from government agencies and government-sponsored enterprises (GSE) has been an increasingly popular option through the Federal Housing Administration (FHA)/U.S. Department of Housing and Urban Development (HUD), U.S. Department of Agriculture (USDA), Fannie Mae and the U.S. Department of the Treasury (USDT).

FHA/HUD loans rose significantly in fiscal year 2011. HUD approved 415 FHA Sec. 232 LEAN loans for independent-living (IL), assisted-living (AL) and skilled-nursing (SNF) facilities for a total of $3.28 billion – about 32% more than the 309 loans totaling $2.54 billion in 2010.

Although strong demand since 2009 has led to a processing backlog, this is expected to be eliminated this summer since last year’s addition of HUD staff and private-sector contractors to process applications.

For many borrowers, the wait has been worth it. While the pricing of credit enhancement via private-financing methods has increased in recent years, the fee for FHA mortgage insurance is fixed at half-a-percent per year and the fixed rates are some of the lowest available in the market. FHA insurance programs offer amortizations and corresponding insurance commitments of up to 40 years depending on which program is used. The debt is nonrecourse and assumable, providing a borrower flexibility to accommodate future financing or divestiture plans. FHA options can allow providers to borrow up to 90% (for-profit) or 95% (nonprofit) of a construction project’s appraised value or 100% of substantial rehabilitation costs, although few borrowers are attaining these borrowing levels of late.

The USDA offers two loan routes: Business & Industry (B&I) Program for nonprofits and for-profits in communities of up to 50,000 in population; and Community Facilities (CF) Program for nonprofits in rural areas or towns of up to 20,000 in population. The guaranteed and/or direct-loan proceeds can be used for new construction, rehabilitation, acquisition or refinance along the continuum of care. Amortizations of up to 30 years for the B&I program and 40 years for the CF program can help make borrowing more affordable to rural providers. Because the guarantee applies to a portion of a USDA loan, it is helpful to work with a lender that can underwrite the debt, complete all program application requirements, sell the guaranteed portion of the loan into the markets and secure a lender for the nonguaranteed portion of the debt.

Fannie Mae Seniors Housing program is available for the acquisition or refinance of stabilized IL, AL and Alzheimer’s-care properties to borrowers with a minimum of five years’ experience in the seniors-housing industry and a minimum of five stabilized properties. Continuing care retirement communities (CCRCs) and properties with SNF units may be considered only after a discussion and authorization to pursue the business with Fannie Mae. Flexible loan terms are available, ranging from terms of five to 30 years and amounts of up to 75% of the value of the project, 80% for tax-exempt borrowers.

In addition, Fannie Mae recently enhanced its adjustable-rate mortgage (ARM) loans offering a variable-rate, flexible prepayment option called Fannie Mae ARM 7-6. This could be a very attractive option because of its nonrecourse nature, attractive pricing and the flexibility it provides for use in IL, AL and Alzheimer’s-care acquisitions and refinance transactions.

The USDT offers the New Markets Tax Credit Program (NMTCP), which provides federal-tax-credit incentives to investors for equity investments in certified Community Development Entities (CDEs), which invest in eligible low-income communities. The credit equals 39% of the investment paid out over seven years. The CDE loans the capital at below market rates to the borrower, who only pays interest until amortization commences after the initial seven-year period. Nonprofits may find the NMTCP attractive because banks often regard investor-provided equity as project equity, which reduces the equity needed to finance the project. Many states also offer a corresponding program that provides state tax credits.

Getting Ahead of the Game in 2012

This year, access to capital will remain competitive with an increased number of expiring letters-of-credit, which will bring borrowers to market to seek either extensions or revised debt structures. For those who must finance in 2012, particularly at less than optimal terms, special consideration should be paid to incorporating flexibility into debt covenants, prepayment penalties and other terms. The borrower may find that paying a higher interest rate is worth the benefit of future flexibility to refinance early. Also, the borrower may be able to negotiate smaller periodic enhancement fees, rather than annual fees, to smooth cash flows.

There are still ways to get projects done in the coming year. Resourcefulness and a good knowledge of all funding sources will be critical in obtaining financing at reasonable terms.

Written by Thomas B. Gale and republished from Lancaster Pollard’s February/March Senior Living Newsletter.