3 Reasons Senior Housing Projects Don’t Get Financed

With an abundance of new investors and senior housing providers vying to enter the senior housing market, it might seem as though relationships with lenders and banking institutions are easy to come by.

“We’re in a dynamic lending environment,” says Matthew Huber, senior vice president at First Niagara Bank. “More lenders and banks are getting into lending for construction and acquisitions. We are seeing a lot of increased development, and a lot of merger and acquisition activity. But not every bank looks at senior housing projects the same.”

Getting new or existing senior housing projects financed can be likened to forming new dating relationships — and it’s not uncommon for some interested parties to get the cold shoulder from financiers.


“The key is, you can’t flinch,” says Drever Capital Management’s Chairman Maxwell Drever. The Belvedere Tiburon, Calif.-based company aims to allocate $500 million in potential acquisitions and/or developments in the senior housing space within the next decade.

“You have to have realistic operators that totally understand the market,” he says. “The senior arena is littered with apartment real estate guys unfamiliar with senior housing. We want partners who have done their homework.”

Here are three reasons why some finance institutions walk away from potential relationships in the senior housing big-money dating game.


1. Not ready to commit

While many lending institutions are eager to align themselves with the senior housing and care space — which boasts attractive investment returns and a strong underlying demographic demand — there are a few key missteps some make in the process to seek project financing.

“Either you don’t have a seasoned operator, or maybe you don’t have a developer wholly dedicated in the space — it’s not the experienced team that a finance institution would want to see,” says David Sharp, director of real estate at MidCap Financial, about reasons why some projects don’t get financed.

Operations is everything, industry members agree.

“It’s all about the operator who is going to run that project,” Huber says. “You could have the greatest developer/owner but if he/she doesn’t understand senior housing and care and doesn’t hire somebody experienced you’ll get squashed.”

2. You’re not invested enough

The group ultimately responsible for the performance of the asset is the operator, and if the operator is working under a management agreement without an equity role it can deter investors.

In addition, a plan with unrealistic or overly optimistic assumptions will cause lenders to pause.

“On significant renovation or development deals sometimes you can see an unrealistic expectation of cost of the equity returns to investors,” Sharp says. “You see people setting their projections on cap rates in today’s favorable environment, without regard to a rising interest rate environment a few years out when the project will actually be refinanced or sold.”

Operators should also have ”a war chest of data points,” he says, noting that those seeking financing need to be able to present thorough projections based on specific per unit rental rates and detailed expense assumptions. “An operator with industry experience and specific market experience should be able to benchmark the revenues and expenses based on the property’s market position relative to its competition.”

3. It’s not you

Sometimes, through no fault of the project proponents, the project just isn’t a good fit for a financier or investor’s portfolio.

For example, when seeking U.S. Department of Housing and Urban Development (HUD) financing, there are certain requirements that must be met, says Bruce Gerhart, Midwest regional director at Love Funding Corporation, a national HUD lender.

“Generally HUD guidelines require three years of experience for operators of licensed facilities,” Gerhart says. “FNMA and Freddie Mac want to see owners with a portfolio of six or seven properties. Both with HUD and the agencies, we’re all looking at experience levels as critical underwriting requirements.”

In other cases lending institutions, such as First Niagara Bank, don’t get involved with projects outside of their geographical footprint.

First Niagara Bank, based in Buffalo, N.Y., strictly lends to operators and developers in select states in the eastern region.

“That’s a bank philosophy,” Huber says. “Lending to health care in the United States is like lending to 50 countries because you have very different Medicaid rules and health licensing rules that vary from state to state. So, unless you have people that understand the Missouri market, for example, as a lender you’re taking a significant risk.”

Written by Cassandra Dowell

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