How Senior Housing Developers Are Reconfiguring the Capital Stack

As national and larger regional banks continue to conservatively underwrite acquisition and construction financing, senior housing developers are turning to a host of other options to put together their capital stacks.

Mezzanine lending and preferred equity are popular vehicles for borrowers looking for non-recourse lending. Debt funds are another option for borrowers seeking flexibility capital.

HUD and agency lenders, meanwhile, have become more aggressive lately and deploying capital on refinancings, and developers are taking advantage of this openness to restructure existing debt.


And there is a growing market for new financing sources — notably, borrowers are turning to clean energy financing as a platform to get developments underway.

These are a handful of alternatives available to developers, according to capital markets experts who spoke to Senior Housing News.

Most of these lending mechanisms come with higher interest rates and/or a financial partner. But the rates are tolerable for developers willing to accept a bit more risk in order to increase the leverage in their projects, CBRE National Senior Housing Vice Chairman Aron Will told SHN.


“It enables [borrowers] an opportunity to finance deals that otherwise the banks would not.”

Mezzanine debt gains momentum

While banks’ appetite for risk remains small, mezzanine lenders are stepping up to fill the void for borrowers seeking debt for a majority of their capital stacks, Dwight Capital Managing Director Adam Offman told SHN.

The New York-based real estate finance firm completed $121.6 million in health care financings in the first quarter of 2021, and $355.8 million through June 9.

A year ago, banks would have been willing to underwrite 60% to 65% of an acquisition or construction financing package. But Covid-19 disrupted the capital markets, and banks pulled away to focus on assisting existing clients.

The banks that have returned to the space are generally underwriting up to 55%. Mezzanine lending is a tried and true option to add enough debt to get a capital stack in a 60% to 65% loan-to-cost range.

“Borrowers are looking to [enter a project] with as little equity as possible. They’re trying to fill that stack on top of the bank with a mezzanine lender,” he said.

Preferred equity is another option for construction lending, and borrowers can expect lenders to be more involved in a financing arrangement, because they are looking to hit a certain return, CBRE’s Will told SHN.

So far in 2021, the Dallas-based commercial real estate services firm has completed over 10 distinct debt transactions totaling $533 million in volume.

There are three types of preferred equity lenders currently deploying capital: debt funds, mortgage REITs, and private equity investors. Within the latter category, there are traditional equity investors that also have the bandwidth within their fund constructs to deploy debt.

“They are doing it as a diversification strategy as part of their equity funds, across different asset classes, including senior living,” Will said.

More aggressive HUD, agency lending

The peak volatility of the early pandemic capital markets landscape opened opportunities for lenders to place bridge capital for borrowers with the expectation of permanent takeout financing through Housing and Urban Development (HUD) insured loans, as well as Fannie Mae and Freddie Mac backed loans.

VIUM Capital launched in April 2020 and specifically targets strong operators and developers looking for bridge loans to permanently finance through these vehicles, Executive Managing Director Steve Kennedy told SHN.

While the agencies have significantly tightened lending parameters, HUD has remained open for business and focused on Section 232/223(a)(7) and 232/223(f) refinancings throughout the pandemic. These funding tools provide lower interest rate debt on existing HUD loans or permanently refinancing non-HUD debt, including bridge loans

“That typically makes up 80% to 90% of HUD’s total LEAN [volume],” he said.

The balance consists of Section 232 new construction loans, and Section 241 expansion/rehabilitation loans. VIUM is working on a handful of 232 and 241 refinancing opportunities, and Kennedy notices that HUD has streamlined the process as the pandemic progressed, compared to placing new construction debt.

“A typical refinance for a 223(a)(7) can occur as quickly as 60 days. For a new 232/223(f), we typically say six months is a pretty good estimate of what the timing will take,” he said. 232 and 241 financing takes longer, sometimes approaching 9 to 12 months.

Another advantage HUD and agency lenders offer, compared to many private sector senior lenders, is a non-recourse structure. In specific instances, there are traditional carve-outs to mitigate risk, such as having debt service reserve funds in place. As the pandemic has eased and occupancy begins to rebound, debt reserve requirements are easing and borrowers are seeing the funds returned to them within a year of completing refinancing.

HUD’s focus on refinancing has lengthened the queue for construction debt, VIUM Senior Managing Director Tony Ruberg told SHN. A driver behind this is that refinancings are rate sensitive. HUD lenders are working to lock in loans for borrowers at lower interest rates because, although they remain low, they have fluctuated in recent weeks.

“If HUD can clean out [refinancings] faster and help people secure lower rates, they’re willing to do that,” he said.

C-Pace funding gains ground

One source of funding that has gained a foothold in the senior living capital markets landscape is commercial property assessed clean energy (C-Pace) financing — a public-private partnership which allows developers to borrow money for energy efficiency, renewable energy and sustainable projects. Borrowers then repay the loan via assessments on their property tax bills. Currently, more than 35 states and the District of Columbia have C-Pace legislation.

There are between five and seven firms specializing in C-Pace financing for senior housing developers, including Counterpointe Sustainable Real Estate (SRE), which closed on $2.8 million package for a planned 108-bed senior housing community near Houston developed by StoneCreek Real Estate Partners, Managing partner Eric Alini told SHN.

C-Pace is an attractive alternative to mezzanine debt because developers can use it to access up to 25% of a property’s stabilized value, allowing them to deploy capital for energy efficient building plant systems in new developments, or replace older systems in existing buildings.

The most attractive aspect of C-Pace funding is the interest rate, which is roughly half the percentage of mezzanine or preferred equity debt. Most C-pace loans carry interest rates in the 5% range, over a 20- to 30-year term.

“This puts a lot of money back into the property owners’ pockets,” Alini said.

Additionally, C-Pace funding can be used to complement developments with tax credits in place. Alini advises developers seeking tax credits for their capital stacks to also explore C-Pace funding simultaneously.

“Deals work out better when everyone is at the table at the same time. The mortgage lender is aware that there are tax credits coming in. The tax credit investors are aware that the C-pace is coming in. Everyone can see it all on board and that helps smooth out the process,” he said.

Companies featured in this article:

, , ,