For seniors housing professionals with big plans, now is the time to get the financing that will make them possible, say finance professionals.
Increased interest from lenders and investors has resulted in a financial environment very favorable to seniors housing.
Finance experts urge seniors housing borrowers to take advantage of today’s environment; waiting until later to get financing that will clearly be necessary may cost borrowers more than they think.
Strength Through Recession Convinced Many In Finance
That the seniors housing as a whole had weathered the recession more successfully than many sectors wasn’t lost on investors or lenders.
“The fact that [seniors housing] properties held on to fundamentals, such as their value, rents, and occupancy, throughout the last five or six years is very convincing to many people,” says Brent Holman, senior vice president, originations/operations/asset management, of Cambridge Realty Capital, headquartered in Chicago.
Imran Javaid, managing director, healthcare real estate, commercial and specialty finance, Capital One Financial Corp., agrees.
“A lot of players recognized that [seniors housing] had performed really well in the recession,” says Javaid. “The demographics are positive, but also important is that it held better in the recession than some other classes they’d typically lend to. They really recognized that it is more resilient to recession and downturns because it’s needs-driven.”
Even institutional investors were impressed. In 2013, they found seniors housing proved more attractive for new investments than any other commercial real estate property type, according to a recent Kingsley Associates survey conducted for the institutional investor sector.
The result is that seniors housing providers now have more options for financing than in the past, and that means finding a transaction that adheres closely to their needs will be much easier.
Favorable Terms
Along with more options and the fact that interest rates have remained low, terms attached to financial agreements are more favorable now than in the past—or will be in the future, experts predict.
“Loan terms are better than they have been in several years,” says Holman, and are “an important part of making a good mortgage transaction.”
Among terms that are often more favorable than in the past is the ability to take equity out of the properties, says Holman.
“The bank will lend you more than the amount of your existing debt, so you take cash out of the transaction” that can be used for improvements or other goals, he says.
Holman also says that limiting recourse is more of a possibility now. “Many bank loans have a guarantee that if the business declines so that you can’t repay the loan, the bank can go after your personal assets,” he says. “Right now is a good time to rewrite how much they can go after.”
Waiting To Finance Could Be Costly
“If you have a plan that five years from now will be absolutely necessary [to implement], do it now,” says Javaid. “Accelerate the timeline, and do it now. Expand or upgrade a facility now, don’t wait for five years from now when you might have a very different environment.”
Holman also emphasizes the importance of acting now.
“The costs of waiting for your current loan to expire in a couple years and an interest rate that may be higher, as well as the reduced quality of terms of the loan you may get, totally outweighs the cost and hassle of refinancing today,” Holman says. “Longer-term transactions are usually at least five years in length, so any increased costs will be multiplied five times if you wait a year or two rather than take advantage of the current environment.”
Further, he says, borrowers should consider fully amortizing
loans, which match the term of the loan to the amortization and so never force the borrower to refinance.
“Capturing a loan like that in today’s environment sets you up very well,” he says, “because you’ll never be forced to go into the capital markets when terms aren’t as good as today or when your business may not be performing as well.”
Considering Taking Action? What Steps To Take
For providers considering borrowing now while the environment is favorable, the first thing to do, says Holman, is identify exactly what their needs and financing options are.
“Speak with a mortgage broker or other knowledgeable person in the finance industry to help you put together your thoughts of what is needed, as well as help you have a greater world view of the options available,” he says.
“Frequently, we see people just refinancing with their existing lender without having a good grasp of all the other opportunities available in this market.”
Lenders will want a lot of information about your business before being able to accurately evaluate the risks and benefits of the transaction, he says.
Before you request the financing, put together the information they’ll want to see, such as:
■ A clearly articulated plan for how you will use the funds;
■ What benefit to the business’ financial performance will result from the finance transaction;
■ A good description and narrative of your business performance and personal background; and
■ Your goals and expected outcomes from the transaction (for example, a borrower who wants to sell the business in three years will need the option to change their debt). Much more information will also be required as well (see below and
Business Loan Tips).
One of the most important things to remember when putting the company’s information together and when communicating with financial professionals is don’t try to hide any elements of risk in your operations.
Both Javaid and Holman emphasize the importance of being up front about your company’s risks.
“Do as much disclosure as possible,” says Javaid—disclose the business’ outstanding aspects, yes, but first disclose the risks.
“If there were pitfalls, like you had bad surveys, highlight it up front,” he says. “I don’t want to find out in diligence that you hid something from me; that leaves a bad taste in everyone’s mouths. Being up front saves the time and energy of both the borrower and the lender.”
Being immediately forthcoming with the business’ situation, goals, and desired outcomes will benefit everyone, says Holman.
“Just express that up front so that all parties can do their best to exceed those goals and outcomes,” he says.