How have the availability and terms of construction financing for seniors housing changed recently?
Big projects tough to finance
By Richard Ackerman
Big Rock Partners
The availability of construction financing has been limited during the last few years. For transactions less then $30 million, local banks have been the primary source of capital. Most of those banks are loaned up, as there has been a lot of construction of 100-unit assisted living product. Once that product is leased and refinanced, the source of loans will return.
For loans larger than $50 million, the market is very limited with a handful of national and regional banks playing the dominant role. The amount of leverage has declined from 75 percent to as low as 50 percent, and recourse both for repayment and completion are required. Only very well capitalized companies will be able to finance large projects.
The funding is still out there
By Sarah Anderson
We have seen the banks take a noticeably more conservative approach to construction lending over the last 24 months. In general, we see them reducing leverage, increasing spreads and requiring borrowers to sign more repayment guarantees.
That said, it’s not all bad news in construction lending right now. We have spent a lot of time educating preferred equity/mezzanine providers and debt funds on the seniors housing market landscape. They have entered into the space and are helping our borrowers take their leverage higher in the capital stack.
These groups can oftentimes provide loans that are seamless to the borrower, or simply provide a smaller preferred equity investment.
Alternate sources step up
By Timothy Fossa
Healthcare Group Head
After five years of construction financing growth, seniors housing construction lending took a breather in 2017. Banks in general appeared to pull back a bit from construction lending due to its inherent granularity and some lease-up softness in completed projects. This trend tightened capital availability and deal structures last year.
However, seniors housing construction demand is coming back strongly in 2018. Non-bank institutions and smaller, middle-
market banks with quality balance sheets are now stepping up to fill the capital breach, albeit with a more restrained pricing model and added emphasis on market studies.
Wider spreads, lower ratios
By Matt Johnson
McFarlin Group & Surpass Senior Living
We have seen the conventional bank loan construction financing market tighten up over the past few years. Specifically, loan-to-cost ratios have compressed from 75 percent to as low as 60 percent.
We have also seen interest rate increases, with spreads over LIBOR 25 to 50 basis points higher than a few years ago. The only constant has been that local and regional banks from $1 billion to $10 billion in size appear to still be providing a majority of the construction loans.
Only top projects pass muster
By Adam Kaplan
Founder and CEO
Solera Senior Living
It has become increasingly challenging to secure favorable seniors housing construction financing. Many local banks have reached their lending limits, while regional players have tightened their criteria. Banks have higher expectations regarding the experience and track record of the sponsors, underwriting assumptions around lease-up and cost escalations, and trends in the local NIC data.
While projects located in strong submarkets with conservative underwriting assumptions and high-quality sponsors can still yield attractive financing, the broader market for higher leverage, limited guarantees and favorable pricing has become more competitive.