New Construction Finance: All About Relationships

When eyeing new construction in the senior housing market, it takes more than positive supply and demand characteristics for borrowers to get the green light on financing from lenders.

Even with favorable demand, demographics and experience in new construction — whether in senior housing or other multifamily housing types — finance experts say it’s all about relationships. And operators.

The wave of new construction has attracted providers nationwide, with some markets such as Dallas, Denver, Detroit and of late, St. Louis, seeing a particular boom in activity, said industry experts during a webinar Wednesday hosted by SHN and Red Capital Group.

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In the first quarter combined properties — typically assisted living and memory-care — made up 73% of new construction. Thirty percent of that 73% is memory care construction, said Chuck Harry, managing director and director of research and analytics for the National Investment Center for the Seniors Housing & Care Industry (NIC) during the RED Capital-Senior Housing News webinar.

In the first quarter of this year, assisted living had the most construction overall at about 9,000 units, which represents 5.1% of existing supply, Harry said, adding that independent living ranks second at 3,000 units under construction, which represents 2.5% of existing supply.

Strong construction lending relationships can lead to future partnerships, said Adam Sherman, managing director with RED Capital Group, noting the potential for spearheading not only present projects but those over the long term.

“Over time these projects will steal market share from less modern properties in many markets, and newer projects are going to be favored by investors,” Sherman said.

But for borrowers to even consider launching a new construction project in senior housing, they must take many factors into account: design, potential risks, relationships with community leaders, and many other variables.

“The challenges faced by the entire industry are shifting consumer preferences,” Sherman said. “Seniors and their adult children are looking at style, decor and amenities. Development should keep these preferences in mind and be forward in thinking.”

Design — floor plan, dining layout and segmentation of residents with different care needs — can drive marketing appeal and operational efficiency, Sherman said, noting the appeal from an investment standpoint.

“Many elements may be invisible to the consumer, but create subtle efficiencies,” he said.

Banks, real estate investment trusts (REITs), and finance companies, on a limited basis, are the main financing sources in the sector currently, with relationships being paramount for any projects coming to market that are seeking financing.

With some multi-family providers now eyeing the senior living sector, Sherman advises those potential borrowers to focus on and highlight their strengths.

“Local market knowledge is a confidence builder,” Sherman said. “It’s very helpful for the lender to understand that potential borrower has a flavor for the local community — they have gone through the zoning process. Alignment between parties is a big one for us.”

But lenders want to know that borrowers have covered all their bases, including pre-operating costs, knowing what risks might occur and how they will be handled, what happens if construction is delayed and more, he said.

“The terminology can be intimidating,” he said, adding that if you’re not an operator you should have an operating provider selected before approaching a lender.

Ultimately, borrowers must align with the right lender and offer quality services, said Kathryn Burton Gray, senior managing director and head of healthcare at RED Capital Group.

“Location is important, but in our industry operator, operator, operator [is key],” Gray said. “If you provide good quality care, the message will get out into the marketplace about your quality of care.”

Written by Cassandra Dowell