Assisted living facility financing can be a daunting task. But, it can be easier to navigate with a few basics. Here’s a story to help with the basics…
The other day, I was having lunch with my good friend, Hymie Barber who is the Managing Director for Catalyst/Cambridge Healthcare Finance in Los Angeles. We were fortunate enough to eat at an excellent kosher Chinese restaurant (I didn’t realize there were kosher Chinese restaurants!) and eventually, the meal conversation turned to the long term care industry, a topic that’s of interest to the two of us, and specifically about the number of individuals who had approached us recently wishing to explore opportunities to enter into the assisted living market, or by existing providers looking to expand their current operations.
With interest rates at pretty low levels, there are plenty of assisted living operators out there who are studying local markets, seeking construction loans to build new projects or add units to their existing communities, as well as to refinance existing loans. And with that in mind, over some excellent fish, we ended up comparing notes on what information we both would like to see long-term care providers have prior to seeking any assisted living facility financing.
Types of loans available for assisted living facility projects
In general, there are three main types of loans that assisted living providers, or any other healthcare facilities, seek:
- Construction loans: to build new facilities
- Acquisition loans: to acquire existing healthcare facilities
- Refinance loans:
– to replace current debt that is maturing
– to replace current debt that carries a high-interest rate
– to replace recourse with non-recourse debt
– to modernize or re-position a facility in an existing market
– to cash out with some equity
Typical assisted living facility financing lenders
- recourse loans (personal guarantees)
- 20-25 year amortization with a five-year maturity
- interest rate float with prime or LIBOR
- typically not interested in cash out
Specialty finance companies …
- recourse loans (personal guarantees)
- 20-25 year amortization with a three to five-year maturity
- interest rate float with prime or LIBOR (typically higher than bank rates)
- will entertain some portion to cash out
Government-insured products (FHA/HUD, FNMA, SBA, USDA) …
- non-recourse for FHA/HUD
- up to 35-year amortization, fully amortizing
- interest rates fixed for the entire loan term (at closing)
- no cash out
What makes for a good borrower in the lenders’ eyes?
Contrary to what some operators and owners believe, this is not one of those black-box questions with some mysterious answers. Here are some characteristics that lenders are going to be looking for…
- Industry experience (seems kind of obvious doesn’t it, but don’t forget to highlight your experience – it counts!)
- Accurate data with at least three years of operating results (please make sure it’s organized too!)
- Good credit history (if you don’t it’s not the end of the world, but it will definitely limit your options)
- Positive trend analysis (lenders are not particularly anxious to lend to someone whose operating results have been trending downwards for the past few years)
Don’t forget that a presentable facility with a good star rating is a definite plus in the lenders’ minds too.
What help should I consider when seeking financing for an assisted living project?
Well, of course, you should seek out a good healthcare consulting firm (hint, hint) that can guide you in the preparation as well as a financial consultant such as Hymie. Why? Lenders are constantly entering and exiting the market and each of them has its own sweet spot and its own appetite for certain situations. It helps to know what product(s) may best fit the owners’/operators’ short, medium and long-range goals. Plus, it is important, as I mentioned before, that the borrower be organized and prepared for the financing process. Good help can avoid wasted time, facilitate the financing process and better ensure financing success.
By now, Hymie and I haven’t even finished our fish and our veggies quite yet but that’s all the room I’ve got for this blog. In my next installment, we’ll finish our delicious meal (including my fortune cookie) and talk about some essential information that borrowers need to know before they start down the path of financing.