Flood of Equity Helps Offset Tighter Construction Lending in Senior Housing

Senior housing developers and owners looking for construction financing are adjusting to a changing lending environment — scaling down the size of new projects, placing more equity in their capital stacks and turning to other sources as banks tighten lending and construction costs continue to rise.

The lending environment, the high costs of building, and concerns about oversupplied markets are all contributing to an overall slowdown in new construction starts within senior housing. Still, new projects continue to break ground thanks in large part to money that continues to flood the capital markets from real estate investment trusts, private equity, high net worth funds, alternative lenders and urban developers such as Related Cos., McCaffery Interests and Hines Interests, in addition to banks, Wohlsen Construction Senior Vice President Ken Noreen told Senior Housing News. 

Lancaster-based Wohlsen works with developers on 20 to 25 projects annually, totaling $510 million in value. Noreen leads the firm’s senior living development division, which accounts for $230 million in pipeline.


“There is no sense that equity investors are looking to pull back,” he said.

Investor pressure to deploy capital

The availability of capital is having an impact on bank lending.

Respondents to the Federal Reserve’s July 2019 Senior Loan Officer Opinion Survey on Bank Lending Practices reported lower demand for construction and land development loans from small firms. The loan applications that banks are receiving are not as aggressive because there is so much equity in the market, Live Oak Bank (Nasdaq: LOB) Senior Vice President Adam Sherman told SHN. Sherman heads Wilmington, North Carolina-based Live Oak’s senior care vertical.


Lenders historically underwrote loans ranging between 75% and 80% loan-to-value (LTV). But new money in the space raised specifically with senior housing in mind a couple years ago — private equity in particular — are now feeling pressure to deploy capital and are willing to underwrite projects for as low as 65% LTV.

“They’d rather write the check and see lower returns in exchange for getting money to work,” Sherman said.

The money in the space is chasing good operators and opportunities and, because senior housing remains a regional business, the most successful groups are still able to secure the necessary funding, Walker & Dunlop Managing Director Mark Myers told SHN.

Even so, in some cases the majority equity provider is requiring the operator to put some skin in the game, and Myers is seeing capital stacks where the operator lays down equity stakes between 5% and 10%. This is becoming more commonplace as RIDEA operating structures become more commonplace with REITs, and private equity and family office funds also prefer JV structures.

“It provides more opportunities for the equity partners,” Myers said.

Some general contractors are even putting their own equity stakes into senior housing developments, Donohoe Construction Senior Vice President Neil Stablow told SHN.

“If we know the project is solid, we’ll put skin in the game,” he said.

Smaller, more creative projects

The tighter lending environment, combined with an extended economic recovery period and rising construction costs, is another factor in banks scaling back on lending.

Developers are responding to that by penciling in smaller projects and, by extension, banks are seeing smaller loan requests, Sherman told SHN.

Live Oak is seeing senior housing developments in the 60 to 90 unit range being planned these days. A couple years ago, the standard size was between 100 and 130 units.

Developers and owners are also adding senior housing to otherwise traditional multifamily developments, which opens them up to loans via the Federal Housing Administration’s Section 202, 231 and 232 loans to fill their capital stacks.

“Banks will not compete on risk. That’s where we are in the cycle,” Sherman said.

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