Capital Corner: New Players, Regulations Tighten Financial Markets

Panelists included, from left, Joshua Rosen, Brian Robinson, Jeff Davis, David Sharp, Eric Halpern and Mike Taylor. Panelists included, from left, Joshua Rosen, Brian Robinson, Jeff Davis, David Sharp, Eric Halpern and Mike Taylor.

Lenders exercise caution amid a changing environment in seniors housing

By Jeff Shaw

Although seniors housing financing remains readily available, a few factors have led many lenders to tighten their underwriting standards, according to a panel of capital markets experts at InterFace Seniors Housing Midwest in Chicago on June 7.

The panel included Mike Taylor, senior vice president and group manager for healthcare lending at First Midwest Bank; David Sharp, managing director, MidCap Financial Services; Jeff Davis, CEO and founder, Cambridge Realty Capital Cos.; Eric Halpern, national head of healthcare lending, Bank Leumi USA; Brian Robinson, senior vice president, MB Financial Bank; and Joshua Rosen, senior vice president and team leader of originations, Capital One Commercial Banking. 

The first item discussed was the uncertain future of the Affordable Care Act, which many Republicans in the U.S. Congress are currently attempting to repeal and replace. In the skilled nursing sector, this leads to insecurity over how reimbursement structures from Medicare and Medicaid may change.

“For us as institutions that lend in this space, that’s a really hot topic right now. Is your underwriting changing?” asked Taylor, who moderated the panel.

Sharp, whose company has provided between $400 million and $500 million in direct loans and arranged $1 billion in credit lines for skilled nursing facilities, said that the political wrangling over the ACA signed into law in 2010 has an impact.

“The outcome is a more conservative view. We’re spending a lot more time in our initial underwriting than two years ago, and we’re spending a lot more time on ‘downside scenarios’ than we have in the past,” said Sharp.

Halpern noted that, in 40 years of business, “the only constant is change.” He said the market is still extremely active, but that Leumi has adopted more conservative underwriting practices as well. The company even produces “stress models” that account for all the possible consequences of healthcare reform.

On the HUD lending side — where Davis and Cambridge do most of their work and owner-operators of skilled nursing facilities turn to for non-recourse, fixed-rate financing for up to 35 years — things are more or less normal.

“HUD hasn’t changed their underwriting because there’s really nothing that has changed in reimbursement specifically,” says Davis. “It’s kind of business as usual for them.” 

Recent changes to the HUD mortgage insurance program allow owners to refinance with HUD earlier than in the past. Whereas borrowers used to have to wait for a two-year “seasoning” period before refinancing through HUD, it can now be done as quickly as six months. The rule changes have opened the door to attract more borrowers.

“We’re seeing a lot more interest from the public companies, REITs and big firms that used to pooh-pooh HUD,” said Rosen. “You’re going to continue to see that.”

New faces shake things up

The seniors housing industry has experienced an influx of new owner-operators and lenders, said Taylor. As a result, “we are getting pressured to do certain things as far as using higher loan-to-value ratios,” he said.

Despite those pressures, underwriting has stayed the same at their companies, however, all panelists said.

“The more things change, the more they stay the same,” joked Halpern. “We’re still doing the same dance with the [mortgage] brokers. They push us for 90 percent loan-to-value. We still hold at 80 percent loan-to-value.”

Robinson said MB Financial has even tightened its loan-to-value ratios despite the pressure.

“We dropped to 75 percent loan-to-value on average. We want to be a little more conservative as things sort themselves out,” said Robinson.