Financing Senior Living Communities
Ready to build?
So here you are, ready to consider an expansion of your community or a completely new development. In our earlier blog, we discussed the three major areas in pre-development for assessing the viability of an expansion or new development; financial viability, market demand, operational viability. Now we take the next steps and invest real time and more importantly, real money. This includes preparing for soliciting money from institutional sources that will make up the bulk of the capitalization for the project.
There are many sources for financing a community, and these will vary depending on the type of money sought. For this blog, we will focus on the more traditional sources, recognizing that an infinite number of more creative options may exist.
Financing Sources
Conventional Bank Financing
Real Estate Investment Trusts (REITs)
Government Financing Assistance
HUD 232 Program & USDA Community Loan Fund and Guaranty Program
Tax-Exempt Bond Financing (non-profit organizations)
Tax Credits Programs
Conventional Bank Financing
The goal is to balance the debt/equity ratio to attract lenders and investors to the project, while mitigating the risk and enhancing the returns. With conventional financing, it is safe to assume that the debt ratio will be no greater than 75% of the total project, with some lenders as low as 65%. That leaves the developer with having to raise 25%-35% in equity or other sources of mid-level debt. This is pretty straight forward and many operators have existing investor relationships who can raise the needed equity. For the rest of us, we need additional sources of funds to structure the right capitalization plan.
REIT
Not long ago many REIT’s were funding development projects very aggressively. This has slowed in the past five years, but the typical approach is that these Trusts will supply the capital needed to construct and then buy the real estate component of the project. Then, the REIT would structure a long-term lease with the operator of the community that will provide for a healthy return to the REIT. This means that the lease terms will be costly, but it does put you in business, allows you to assess management fees and ultimately earn some profits once the community is stabilized. Today REIT’s have become quite particular about where they place their funds.
Government Financing Assistance
There are many programs available that will provide some assistance, all the way up to as much as 90% project financing. These are often available through local town or state organizations where small grants and other economic development incentives can be obtained.
At the federal level, there are direct loan programs through HUD and the USDA and finally there are tax credit programs that help to support the economic growth of targeted communities by directing investor dollars to them in exchange for tax benefits.
All of these Federal programs, whether administered locally or from the national offices, impose additional lending criteria that will have a material impact on how the community will operate. Some of these conditions include: reserving a portion of the housing units for low and affordable income levels; committing to a pre-determined number of jobs created and wage levels for those jobs; all construction labor to be paid at the Davis-Bacon Wage rate rather than awarding to the lowest bidder; among other conditions. That said, there are projects where many of these requirements also meets the goals of the prospective development.
Wrapping Up
Again, these are some of the more traditional sources, there are other options and there are even variations on those listed above, including private equity funds for experienced operators and developers. If you want more information, follow the links provided below or send us an email to us and we’ll be happy to share more information.
