A HUD lender is seeing a post-recession uptick in not-for-profit senior housing sales to for-profit buyers as organizations turn their focus to core assets that most strongly align with their missions.
For nonprofits left in a more precarious financial situation by the Great Recession, selling non-core assets is a strategy for maximizing capital that can be reinvested into their mission, said panelists during a Tuesday Senior Housing News webinar on financing not-for-profit acquisitions.
“We have seen an uptick in this type of transaction, where a nonprofit is is divesting to a for-profit,” said Steve Kennedy, managing director at Lancaster Pollard, an Ohio-based investment and mortgage banking firm.
A case study highlighted in the webinar is Indiana-based senior living owner/operator CarDon & Associates Inc.’s $12.75 million acquisition of Altenheim, a skilled nursing and assisted living property in Indianapolis formerly operated by a not-for-profit that’s still active in the marketplace. The deal closed in 2010.
The previous owner’s primary footprint is in Ohio, and the Indy community was a portfolio outlier, noted Kent Rodgers, CPA, chief financial officer at CarDon.
“From 2008 to 2010, all the nonprofits were suffering in one way or another, and [this organization] thought it best to offload this property,” he said. “Since it is right in CarDon’s neighborhood, we took an interest in the facility.”
Altenheim fit into CarDon’s geographic footprint, had a well-maintained physical plant, a great reputation in the community, and room for significant operational improvement, Rodgers said—factors very important to his company when considering not-for-profit acquisitions.
There was also the ability to fund the acquisition through the Department of Housing and Urban Development as a way to avoid personal guarantees.
After ruling out conventional/bank financing and GSE financing for reasons that included higher equity requirements and a mismatch between the debt terms and amortization schedule, requiring refinancing a few years down the road, CarDon worked with Lancaster Pollard to obtain debt financing through the HUD Section 232/223(f) program.
In addition to benefits of non-recourse financing, minimal equity requirements, and long-term fixed rate debt, the HUD program also allows buyers to disconnect the value of a property from the acquisition price for properties with significant upside opportunity.
“If you’ve got an experienced acquirer who can exhibit the ability and experience of buying underperforming properties and turning them around, FHA allows [approved lenders] to underwrite to 80% of future pro forma value, rather than to 80% of the actual purchase price, but no more than 85% of the total acquisition costs,” explained Chris Blanda, vice president at Lancaster Pollard.
That translated to an FHA-approved property value of more than $15 million, with total acquisition costs broken down into $12.75 million for the purchase price, $836,000 of cap ex reserve and $350,000 for repairs and improvements the buyer intended for the property.
At the time CarDon was purchasing the Altenheim property, backlog in the HUD queue was creating lengthy financing timelines, with applications taking up to four months to process. But with the queue reduced almost to zero in early April, HUD financing has become more efficient and timely.
In turn, conventional financing provisions could “potentially” relax as HUD becomes more attractive to buyers and competition for loans heats up, says Lancaster Pollard.
“We could see [provisions] relaxing a little bit,” Blanda said, adding that conventional lenders might relax recourse provisions on refinancing transactions, but not necessarily acquisition lending.
While Lancaster Pollard has seen an uptick in nonprofit sales to for-profits, that doesn’t mean this type of transaction is the rule, Kennedy said. It’s more common to see for-profit to for-profit deals, and, when it can work, nonprofit to nonprofit.
“Often times it makes sense to open up the buyer market to both for profit and nonprofit buyers,” he said. “Even if the nonprofit goes through the marketing of a property and gets bids and proposals back from both non and for-profit buyers, if it really wants to divest to a nonprofit, at least it knows where the market is.”
Some not-for-profit charters include a provision that the property must be sold to another nonprofit, but there are ways to work around that, including through joint ventures.
“If you’re a nonprofit and you’re divesting, it’s in the mission of the nonprofit to ultimately realize the value of its project in a way that continues to take care of its residents and maximize the amount of capital it can reinvest elsewhere into its mission,” said Kennedy.
Written by Alyssa Gerace