The completion of more than $140 million in financing for a California nonprofit continuing care retirement community may signal good news for start-ups and more development ahead for a state that has traditionally had high barriers to entry for nonprofit CCRCs.
MonteCedro, the not-for-profit public benefit corporation that owns and operates the CCRC, achieved the financing through its work with specialty investment bank Ziegler, which has long been working with parent organization Episcopal Communities and Services.
Through the financing, MonteCedro plans to develop 186 independent living units and 20 assisted living units in Altadena, Calif. The community is affiliating with a separate entity to provide skilled nursing services to MonteCedro residents who require them.
Though there have been very few nonprofit CCRC developments in California in the last 15 years, the financing indicates a possible shift ahead, says Mary Muñoz, Ziegler managing director in the bank’s senior living practice, because the project required gaining insurance through the state-sponsored Cal-Mortgage program.
Ultimately, the Cal-Mortgage insurance proved an essential component of the project, in addition to typical challenges.
“California has a lot of barriers to entry,” Muñoz says. “It’s one of the most highly regulated states in the country for senior living. If you are an entrance-fee community, there’s a whole layer of regulation on top of that. It makes the project more expensive to build. The land is more expensive and the construction regulations are very onerous and challenging.”
However, Ziegler long worked with both Episcopal Communities and Services’ board as well as Cal-Mortgage, under the state’s Office of Statewide Health Planning and Development, on the project. Ziegler began work with ECS in 2004 on growth and operational benchmarking, then assisted its management in converting auction rate debt issue to a fixed rate in 2010 following recessionary pressure and disruption. Ziegler then assisted ECS through the ratings process in 2012 and achieved an A-minus rating by Fitch as well as a refinancing of all obligated group debt.
Gaining Cal-Mortgage approval, however, served as a groundbreaking event in the process for MonteCedro, as a means to insure the new development without support from the obligated group.
“Getting the Cal-Mortgage insurance was really a unique aspect of this project,” Muñoz says. “Normally systems like ECS finance start-ups on a non-recourse basis in order to isolate the risk of the new community, even though this leads to a higher cost of capital. In this case we didn’t have a conduit issuer who could make the deal happen in unincorporated LA County, and the county itself would only act as a conduit if there was an A rating on the bond issue, which meant doing whatever it took to gain Cal-Mortgage approval.”
Ziegler and ECS spent time educating Cal-Mortgage on start-up CCRCs, how their financing is structured and the protections in place for investors.
The program, created in 1969 to insure loans for construction, renovation and expansion of health care access, is modeled after the federal home mortgage insurance program. It works both with nonprofit and public healthcare facilities in obtaining financing toward its initiatives.
It has historically arranged some CCRC financing, with about $480 million currently insured for nonprofit CCRCs, with the MonteCedro financing being the largest to date. It has amounted to just a handful of nonprofit CCRCs financed over the last 15 years.
“Through our process we look very closely at demand,” says Carl McLaney, deputy director for Cal-Mortgage. “That includes the borrower and the sponsor. Its track record is important. From our perspective when the real estate market was impacted by the downturn, CCRC projects were affected.”
The agency says it is realizing there may be more demand for CCRC construction on the horizon.
“In addition to the MonteCedro development, the Cal-Mortgage Program has been in recent discussions with various nonprofit entities about potential CCRC construction, renovation, and expansion projects,” McLaney says.
Zielgler’s Muñoz says she is hopeful the progress achieved by MonteCedro may lead to future developments for new CCRC construction.
“It’s a pretty major accomplishment and hopefully will open the door for other more leveraged projects to take place in California,” she says.
Written by Elizabeth Ecker