Over the past few years, the financing landscape for both for-profit and nonprofit senior living providers has changed dramatically. Underwriting standards have become more stringent across the board, emphasizing the importance of adequate capital planning. Further, the end of 2010 saw the expiration of a number of options for nonprofit providers seeking financing for capital projects. These temporary measures stemmed from the American Recovery and Reinvestment Act (ARRA) and other congressional action, and their expiration leaves providers with yet another shift in the financing landscape that requires re-examination of available avenues. And while for-profit providers could not take advantage of some of these tax-exempt options, their very presence in the market impacted investor interest in senior living debt.
Yet the changes to these options have not left holes behind. Rather, they leave a different set of financing options for nonprofit providers and changing investor attitudes that impact all providers. Although most conventional avenues have been slow to recover to more affordable levels, numerous other options are still available. Senior living providers can use these financing options on their own or combine them to create an affordable, tailored debt structure.
FEDERAL AND GSE PROGRAMS
Federal and GSE-or government-sponsored enterprises-financing remains a viable option through the Federal Housing Administration (FHA), Fannie Mae and the U.S. Department of Agriculture (USDA).
Strong demand since 2009 has led to an FHA loan processing backlog, though this is expected to ease in 2011-2012 with the addition of HUD staff and the use of private sector contractors to process applications. For many borrowers, the wait is worth it: While the pricing of credit enhancement via conventional or private financing methods is subject to market whims and has increased compared to recent years, the fee for FHA mortgage insurance is fixed at half a percent per year, and the fixed rates are some of the lowest available in the market.
The various FHA insurance programs offer amortizations and corresponding insurance commitments of up to 40 years (though this maximum is subject to FHA scrutiny of the project's useful life and depends on which program is used). The debt is non-recourse and assumable, providing borrowers flexibility to accommodate future financing or divestiture plans. Programmatically, FHA options can allow providers to borrow up to 90 percent (for-profit) or 95 percent (nonprofit) of a construction project's appraised value or 100 percent of substantial rehabilitation costs, though practically, few borrowers are attaining these borrowing levels of late.
The Fannie Mae Seniors Housing program is available for the acquisition or refinance of stabilized independent living, assisted living and Alzheimer's care properties to borrowers with a minimum of five years' experience in the seniors housing industry and a minimum of five stabilized properties. Continuing care retirement communities (CCRCs) and properties with skilled nursing units may be considered only after a discussion and authorization to pursue the business with Fannie Mae. Flexible loan terms are available, ranging from terms of five to 30 years and amounts of up to 75 percent of the value of the project, 80 percent for tax-exempt bonds.
These ceilings remain realistically attainable in the 2011-2012 market. In addition, Fannie Mae recently enhanced their adjustable-rate mortgage (ARM) loans offering a variable rate/flexible prepayment option called Fannie Mae ARM 7-6. This could be an attractive option for use in independent living and assisted living/Alzheimer's care acquisitions and refinance transactions because of its non-recourse nature, attractive pricing and the flexibility it provides.
The USDA offers its Business & Industry (B&I) Program to for-profits and nonprofits and its Community Facilities Program for nonprofits. The programs are restricted to use in communities of fewer than 50,000 and 20,000 people, respectively. The guaranteed and/or direct loan proceeds can be used for new construction, rehabilitation, acquisition or refinance along the continuum of care. Amortizations of up to 30 years for the B&I program and 40 years for the Community Facilities Program can help make borrowing more affordable to rural providers. Because the loan guarantee applies to only a portion of USDA loans, it is helpful to work with a lender that can underwrite the debt, complete all program application requirements, sell the guaranteed portion of the loan into the markets and secure a lender for the non-guaranteed portion of the debt.
A lesser-known option available to both for-profit and nonprofit providers is Federal Home Loan Bank (FHLB) credit enhancement. The FHLB consists of 12 independent entities that lend to local community banks. Most are rated AA+ by S&P. For the past couple of years, the FHLBs have been permitted to credit enhance both taxable and tax-exempt healthcare debt when an unrated or low-rated bank provided a letter of credit. This meant local banks could provide senior living providers investment-grade credit enhancement usually available only from larger banks. A local bank's familiarity with a provider's community impact may make it more willing than a large bank to participate in a project.