CapitalSource Launches Construction Financing Platform for Skilled Nursing Providers

CapitalSource, a commercial lender to small and mid-sized businesses, has launched a new national financing program to help skilled nursing providers upgrade their physical plants and keep up with healthcare trends.

The Healthcare Construction Finance program is designed to provide funding for the replacement or substantial renovation of skilled nursing facilities, which will allow the facilities to reposition themselves in local markets and be better equipped to deliver quality care.

Under the new program, CapitalSource will provide loans to skilled nursing owners and operators with market-based pricing depending on leverage and credit. The structure includes up to two years for the construction period with rollover to a four to five-year mini-permanent loan. The loan-to-cost will be up to 75%, and terms will include a 25-year amortization schedule on the principal balance after the construction phase has ended.

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“There is high demand to upgrade or replace the current nursing home stock,” says Steve Gilleland, CapitalSource’s senior managing director of healthcare finance, as nursing homes are an average of 45 years old.

What operators are looking to do with their facilities varies by location and proximity to referral sources, he says. In more rural areas, it’s more common for operators with a majority Medicaid census to want to upgrade their facility to differentiate from local competitors. In other markets, operators may want to focus on converting units to private rooms, or adding post-acute or sub-acute care units as they look to partner with Accountable Care Organizations.

Sometimes this can be done through extensive renovations.

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“If an existing facility has good enough bones and can do enough to get the latest technology, and all the bells and whistles to help deliver care in the existing building, then that’s a less expensive option,” Gilleland says.

However, some things just can’t be retrofitted, he says, and at that point, if extensive renovations aren’t possible, a facility replacement can be the solution.

While the program has a national platform, for operators to qualify for loans, existing relationships and strong operational track records are a must.

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“We’re only going to do business with people we know and [have good relationships with],” Gilleland says, “or for someone we haven’t done business with, but has a well-established track record.”

The golden rule, he says, is this: “It’s not what we lend on, it’s who we lend to. We’re more concerned with who we’re lending to, rather than for what.”

A possible benefit of the program includes the offer of fixed-rate financing, something a regional bank may not be able to provide on the construction side, according to Gilleland. Additionally, unlike some regional lenders, CapitalSource does not require cash accounts.

CapitalSource plans to lend in the ballpark of $70 million in 2013, says Gilleland. While the program is currently only for skilled nursing replacement or renovation lending, he adds, there are plans for rolling out a senior housing program as well, with an ultimate goal of also doing new construction lending.

Written by Alyssa Gerace

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