Skilled nursing facility financing can be an intimidating process. With some of the information presented in this post, it can be less so. In part one of my long-term care financing post, I discussed types of loans, lenders, borrower qualifications, and financing assistance. While the previous post was labeled with assisted living facility financing, the principles we discussed in that post, plus the discussion today, also apply to skilled nursing facility financing. So today, we’ll be offering up some considerations before you embark on the financing journey. When I ended my last post, my good friend Hymie Barber who is the Managing Director for Catalyst/Cambridge Healthcare Finance in Los Angeles, and I were enjoying an excellent lunch at a local Chinese restaurant and discussing financing in long term care. We discussed some ideas on thoughts we’d like to share with long-term care operators/owners out there that are considering financing or refinancing their skilled nursing projects.
Nursing Home Operators … “Understand your financing needs”
“Man’s got to know his limitations” – a great quote from one of my favorites, Clint Eastwood in his role as Harry Callahan. Okay, so what does Dirty Harry have to do with your financing needs? Well, the message here is to know yourself and what your financing needs are.
- What do you need the funds for? Is it for expansion, rehabilitation, construction or simply to replace an existing loan?
- Do you know how much you need? It is unfortunate that many projects are under financed. Make sure you have taken the time and engaged enough expertise to accurately project the amount of financing you require. (And don’t forget that unexpected costs happen and to account for that also!)
- What terms are important to you? For example, loan term, equity requirements, cash out options?
- How does the financing fit into your skilled nursing facility’s strategic plan/goals? For instance, you may be looking to refinance an existing loan to free up cash flow to acquire or build another facility.
- Get help! One other thing is to understand that while you are the expert in long-term care operations, you are not the expert in financing. Be willing to listen to the lender or your consultant. And, don’t be afraid to ask questions!
Skilled nursing project financing requires an acute awareness of your operations and your market
“Luck happens when opportunity meets preparation” – I heard this one many years ago while listening to a tape (yes, it was that long ago!) by the great Earl Nightingale. It has always stuck with me since part of this valuable message is that we can make our own luck.
- Have three years of operating and financial data ready to go for the potential lenders. Include census and payor mix information for those three years. In many cases, lenders are asking for five years.
- Make sure that you are familiar with your skilled nursing operations revenue and expense details, including revenue rates, staffing patterns, labor costs.
- Understand your primary and secondary market well – know your referral sources and competition.
- A firm understanding of your competition and how your facility stacks up against them is a must. Your ability to articulate your competitive edge will make your project stand out to the lender.
- If this is a new project, make sure you have either a marketing and/or feasibility study for the project. And a good feasibility study should include a financial proforma that at least brings the planned operation to breakeven, as well as to the point of census stabilization. It is advisable for the pro forma to have at least three years of operating data and preferably, five years. (Please make sure you are familiar with what it says!) It should be noted that most lenders require a market/feasibility study be conducted by an outside third party expert.
- Your intimate knowledge of your operations and your market and your ability to clearly and confidently articulate that knowledge will go a long way towards assuring a lender that you are a good borrower. Like with most situations, mastery of your facts and figures engenders confidence.
Skilled nursing facility financing … quality documents, timely submission, and be ready for curveballs
“Don’t confuse effort with results” – in my corporate days, I was notorious for saying this. Okay, you know your facility and you can talk a good game, but can you really close the deal?
- While it’s important to be able to effectively convey your expertise in nursing home operations, financing your project is also a lot about the paperwork. So be ready to commit the resources necessary to get the required paperwork to your lender in a timely fashion.
- It won’t matter that your paperwork is in on time unless the content is quality. Does the documentation address the needs of the lender? Is the information contained in the paperwork reflective of your skilled facility? Are your responses to the lender’s questions clear, concise, and well written?
- A skilled nursing project or any healthcare project’s financing process can be one that is filled with additional informational requests. Make time and be prepared to quickly respond to these requests. Remember, the lender can’t do this process alone.
- Carefully review any documents that you will be submitting to the lender. The information on these documents must be accurate. As an example, it does not engender confidence in the eyes of the lender if the operating data, such as payor mix, is in conflict with what you say the payor mix is in your facility.
Financing transactions for healthcare projects will take time. Even the faster ones can take 90 to 120 days. So be realistic in your expectations when you start the process. Proper preparation with special attention paid to the items we have discussed in this blog will go a long way towards making the process as efficient as possible. Be mindful that lenders want to loan funds to a good candidate (notice I said “good”) so they will work with you to make it happen.
If this is your first project or if you simply would feel more confident and comfortable having assistance in this process, don’t hesitate to reach out for help. With the amount of money at stake, it’s worth the added cost.
To my good friend Hymie, thanks so much for a wonderful lunch and for sharing your thoughts on the financing process for skilled nursing and assisted living operators.
So now, I hope that you’re a bit more prepared for the financing journey should you choose to go down that path. And if you do, your fortune cookie will hopefully say, “Your endeavor will be successful”.