But less experienced owners and operators face much bigger hurdles to secure financing than their seasoned counterparts
By Jane Adler
An improving economy has sparked a mini wave of seniors housing development, but borrowers still face financing challenges. Money is certainly more available than it was during the recession, and lenders are once again competing for deals. But lenders also remain quite cautious amid lingering memories of the debt debacle.
“The financing market is pretty good, but it isn’t robust,” says Rich Lerner, director of Housing & Healthcare Finance, based in Tenafly, N.J. The firm focuses on financing FHA/HUD-insured healthcare facilities and multifamily properties.
Regional and local banks are more likely than the big money center banks to finance new seniors housing projects. The big banks prefer to fund add-ons to existing projects with a proven track record. Leverage still hasn’t climbed to the levels seen prior to the recession. And non-recourse loans with limited repayment guarantees remain tough to secure even as lenders eagerly vie for deals with the best operators.
A custom solution
Kensington Senior Living, for exam-ple, is a relatively young company owned and operated by a handful of part-ners who were previously senior executives at Sunrise Senior Living. Ken-sington currently has two new assisted living buildings and three others under development. The company hasn’t pur-sued financing from some of the most common funding sources, such as the big REITs or large equity firms. “Our goal is to own and control these projects,” says Dan Gorham, finance partner at Kensington, based in Reston, Va.
The difficulty for Kensington isn’t finding permanent financing, mostly available from providers such as Fannie Mae and Freddie Mac. A bigger hurdle is securing construction loans. Kensington seeks highly leveraged loans that do not include a personal loan repayment guarantee, more commonly referred to as a non-recourse loan. These deals can be difficult to arrange in a market still suffering the overhang of the deep loan losses of 2007-08. “It creates a challenge,” says Gorham.
As a result, a custom financing structure is designed for each new Kensington project, Gorham explains.
First loans with debt leverage levels of 50 to 55 percent are coupled with mezzanine debt or preferred equity.
For one new project, Kensington is pursuing partial funding through the EB-5 program, which is financed by foreign individuals who provide investment capital and receive green cards in return if the project creates jobs. The investment is structured as preferred equity so Kensington retains ownership of the underlying real estate.
Kensington White Plains opened in 2011 and was financed with a fixed-rate, non-recourse HUD Section 232 construction loan, plus a 40-year permanent loan. The $40 million assisted living building includes 87 units. The Kensington of Montclair in New Jersey, which is scheduled to be built this year, is also being financed with a HUD 232 loan.
“If you plan to hold the deal and maintain ownership, HUD is a fantastic program,” says Gorham, adding that HUD deals aren’t always possible considering the long lead time of around 12 months to secure the funding.
The company is taking another approach at its new project now underway in California, Kensington Sierra Madre. The $20.6 million, two-story project will feature 75 assisted living and memory care units. Rents will run from about $6,500 to $9,000 a month.
Red Capital Partners, owed by ORIX USA, provided a balance sheet construction loan for the project at 70 percent loan-to-cost ratio, plus limited recourse and a five-year term. Kensington provided the remainder of the equity. “It’s attractive financing,” says Gorham.
Adam Sherman, managing director at Red Capital in Annapolis, Md., says it can generally provide higher leverage than banks — up to as much as 80 percent — and higher spreads on rates.
“We think new projects with good operators will be the most marketable and successful,” says Sherman. “We feel comfortable dipping our toes into construction over the next few years.” Red Capital plans to close two new construction deals in the first quarter of 2014.
In general, leverage levels range from about 55 percent to 75 percent, borrowers say. Rates for new construction are higher than for permanent loans, and vary widely depending on deal structure.
Local lenders step up
Regional banks are filling the financing gap for new construction lending. Bank of the West recently provided construction financing for new seniors housing projects in Colorado, Southern California and the Minneapolis area. Two more loans are in the works for new projects in Illinois and Arizona. Last July, Bank of the West refinanced the $124 million portfolio of Denver-based Spectrum Retirement Communities. Bank of the West operates retail branches in 19 western states and is owned by BNP Paribas, a French bank.
“We like to have clients in our footprint,” says Astrid Kramarz, vice president at Bank of the West, based in Denver.
The bank doesn’t avoid certain cities within its footprint, she adds, but prefers primary and secondary markets.
“Our sweet spot is loans of $15 million to $20 million,” notes Kramarz.
Bank of the West focuses on independent and assisted living as well as memory care properties either as stand-alone projects or in combination. It doesn’t lend to skilled nursing facilities because of the disparity in state Medicaid reimbursement rates.
Frost Bank operates only in Texas and recently provided construction financing for Autumn Leaves of Stone Oak, a $10.7 million memory care community with 46 units slated to open in a few months. The project is by The LaSalle Group, an Irving, Texas-based developer with 36 memory care communities open or under way in Houston, Dallas/Fort Worth, Chicago, Atlanta, Tulsa and Edmond, Okla.
MedProperties Holdings, a private equity firm based in Dallas, provided equity for the Stone Oak project.
The construction loan is a five-year mini-permanent structure that will be rolled into a bridge loan and eventually replaced by permanent debt from Fannie Mae or Freddie Mac.
“Capital is available for strong borrowers,” says Brenda Brantley, CFO at The LaSalle Group.
The company plans to build seven or eight new projects in 2014. “If you are a good operator with a strong track record and balance sheet, lenders are comfortable with you.”
Non-recourse loans without repayment guarantees are difficult to secure, borrowers say. Some lenders provide non-recourse construction loans, but usually only if the loan-to-cost is 40 to 50 percent.
“Construction and non-recourse is difficult,” says Mike Lugli, executive president and national manager, KeyBank Real Estate Capital Healthcare, Cleveland.
Many construction loans have a completion guarantee that requires the developer to finish the project according to approved plans and keep the project free of liens. This guaranty is terminated when the project is complete.
Red Capital does not have a mandatory personal or corporate guarantee for new construction. Guarantees are requested on a case-by-case basis and depend on the risks in the deal, ranging from anywhere from zero to 100 percent of the loan amount.
“It’s one of our selling points,” says Red Capital’s Sherman.
Construction lenders prefer working with established owners/operators.
Bank of the West selects borrowers with at least three to five established properties that have been through construction, lease-up and a period of stabilization. Owners with an operating arm
“They have more skin in the game,” says Kramarz. “They’re creative when they have to fill
Like many lenders, Bank of the West also prefers repeat borrowers that have operational efficiencies, such as multiple buildings in a single market.
The bank will lend outside of its retail branch footprint, but only after it has completed several successful projects with the borrower.
KeyBank also seeks owners and operators with multiple buildings, typically at least five or more properties. KeyBank completed $250 million in senior housing lending in 2013.
“We look for companies with depth, so cash flow is stable” says Lugli.
For example, KeyBank recently provided construction loans to Legend Senior Living for two projects in Jacksonville, Fla: $11.9 million for the Windsor at Timuquana, a 94-unit assisted living/memory care project; and $11.7 million for the Windsor at San Pablo, a 94-unit assisted living/memory care project.
Legend Senior Living is a privately held Wichita-based company that operates 18 assisted living and retirement residences in Kansas, Oklahoma, and Florida.
KeyBank also works with Tradition Senior Living. It has a project that opened in the Dallas area
Last year, KeyBank pro-vided $58 million for a new project in Dallas, The Tradition Lover’s Lane. It will have 312 units (202 independent living, 86 assisted living, and 24 memory care).
In search of risk premium
National lender Capital One prefers to fund expansions or renovations of existing facilities rather than ground-up development.
“We think there should be a risk premium on new construction,” says Imran Javaid, managing director at Capital One Bank based in Chevy Chase, Md. “Right now, there isn’t.”
He explains that more banks are venturing into the seniors housing space and competing for new ground-up projects by offering aggressive pricing.
“New construction has its good points, but the business model has to be proven,” says Javaid.
He adds that proposals for new construction often have aggressive fill projections, with a lease-up of about 12 months.
Javaid figures that it could take as long as two-and-a-half years and there could be “hiccups” along the way.
“I want a premium,” he says.
The premium should range from 25 to 75 basis points and depends on the amount of equity provided, as well as the quality of the sponsor and development team. “I can drive results just as good or better by funding existing properties,” adds Javaid.
Capital One recently provided a $48.25 million, five-year term loan that will be used to refinance and expand Sagewood, a senior living community in Phoenix.
Sagewood features 278 independent living units, including 16 villas and casitas, as well as a 48-bed assisted living and skilled nursing center.
The loan will also finance the construction of 14 additional casitas and the completion of a second dining venue.
The borrower is LCS-Westminster Partnership, IV, a joint venture of The Westminster Funds and LCS, a developer and operator of retirement communities.
Javaid is closely monitoring underwriting trends. “When the market prices in a risk premium, then we will play more in the construction market.”