Across the U.S., some developers are finding it a little more difficult to get money to build new senior housing projects.
And it’s not just the developers saying that. Some of those big national capital providers also agree that construction loans for senior housing are generally harder to come by these days. Issues like construction and labor costs, oversupply, and government regulations are causing lenders to open their wallets a little less freely.
It used to be easier
There was a day not too long ago when a senior housing construction loan was easier to come by, says Charles Turner, president at developer and operator PinPoint Senior Living, which has 13 communities open or under development. These days, things are tightening up, however.
“It used to be easy to get construction financing if you had rate guarantor strength,” he says. “Now, [lenders] are a lot more sophisticated on how projects should operate.”
Developers who want to get a loan have to be ready to explain why their operating margins aren’t as high as industry standard or explain changes in operations, Turner adds. That’s not necessarily a roadblock for an established company like PinPoint, but it might be challenging for a company that is totally new to the business.
Dallas-based Capital Senior Living (NYSE: CSU), one of the nation’s largest senior living providers, acknowledges that lending is getting tighter, too. Though the company doesn’t build properties, it competes with some that do.
“It is clear that lenders have been much more constrained,” says Larry Cohen, CEO of Capital Senior Living. Cohen touched upon new senior housing financing during the May 4 Deutsche Bank Healthcare Conference.
Among the reasons for the tighter lending landscape are more conservative regulations enacted by the federal government, Cohen said. Specifically, Cohen pointed to new BASEL III requirements as a big reason for the borrowing crunch.
“These regulations for banks limit the amount of real estate loans that they can make for construction based on their capital,” he explained. “It also used to be that if somebody wanted to be a developer and they owned land, they could contribute the land into a venture and get credit for that land when they get that loan. That’s no longer the case.”
Other issues making lenders more skittish are rising lumber and building material costs, construction labor shortages, and rising interest rates, Cohen said.
Costs for mid-level assisted living projects currently range between $158 per gross square foot to $299 per gross square foot, depending on the type of materials being used and the location of the project, according to a Jan. 19 construction costs brief prepared by Larry Graeve, senior vice president of construction firm The Weitz Company. That is an increase from $156 to $296 per gross square foot, as recorded by Weitz last August. Costs also are up for other project types, such as independent living and skilled nursing.
Additionally, 70% to 80% of builders report difficulty in finding qualified labor, the brief noted.
But that’s not really bad news for a company like Capital Senior Living, which is so focused on acquiring senior living communities.
“There are clear changes that have constrained the amount of new financing that is available to others for construction,” Cohen said. “But we don’t build, we acquire.”
Capital providers weigh in
As with any national market, the senior development industry is complex, says Steve Kennedy, senior managing director at Columbus, Ohio-based capital provider Lancaster Pollard. But there are some bigger issues that developers might want to pay attention to.
One is a part of the BASEL III regulations called HVCRE, or High Velocity Commercial Real Estate. HVCRE says that borrowers who want a construction loan must hold at least 15% of the loan in cash equity. If they don’t, the loan would be labeled as HVCRE, which is a classification of a loan that banks prefer to avoid, Kennedy says.
The problem lies in the fact that some smaller developers can’t put up that much equity, and therefore, can’t get a loan so easily.
Markets with hot housing supplies are also making construction loans harder to come by.
The occupancy rate for senior housing averaged 89.3% in the first quarter of 2017, a drop of 0.3 percentage points from last quarter and 0.6 percentage points from the first quarter of 2016, according to the latest National Investment Center for Seniors Housing & Care (NIC) data.
It’s not that lenders are necessarily shelling out less money, but rather that they’re becoming more selective. Lancaster Pollard, for instance, prefers to deal with “proven operators who have real skin in the game and whose forecasts can generate and produce the kind of value creation that we need in order to meet our return thresholds,” Kennedy says.
Aaron Rulnick, managing principal at Connecticut-based HJ Sims, agrees that capital providers are still doling out money. It’s just different than it was a few years ago.
“On the senior housing side, the fastest growing segment has been the construction of new independent living and a number of banks are indeed lending,” Rulnick says. “On the nursing home side, there has been tremendous consolidation occurring and there are many banks that are very actively engaged in this lending practice, as well.”
Though Rulnick acknowledges that some markets are suffering from oversupply, he says that, overall, the capital markets have behaved “fairly prudently” and acted to constrain growth.
What’s trending in lending?
Developers are increasingly looking at the U.S. Department of Housing and Urban Development’s (HUD) Section 232 loans, Kennedy says. Section 232 is a Federal Housing Administration loan program that provides mortgage insurance to assisted living facilities, nursing homes, and other senior housing properties. A 232 loan may be used to finance the purchase, refinance, new construction, or substantial rehabilitation of those types of projects.
“That is a bit of a byproduct of private sector capital backing away a little bit and owner-operators saying, the 232 process takes longer, but at the end of the day, the cost of capital is fantastic, and there’s no refinance risk,” he says.
Rulnick adds: “HUD’s loan insurance programs provide long-term, fixed rate financing with full amortization and non-recourse provisions. Moreover, HUD is now able to accommodate more complicated financing and operating structures, giving it enhanced relevancy as a capital source.”
Written by Tim Regan