Financing Focus

Agency Programs Provide Financing for Seniors Housing

Less available capital is the result of overbuilding and profitability woes in today's seniors-housing market. However, several viable options remain, including government-backed financing.

Lenders Change As recently as two years ago, seniors-housing developers, owners, and potential buyers had numerous lending options for capital, including commercial banks, real estate investment trusts, commercial mortgage-backed securities, the Department of Housing and Urban Development, and the Federal National Mortgage Association, or Fannie Mae.

However, various seniors-housing segments have experienced turmoil since then, causing many lenders to limit financing options. Evidence suggests assisted-living overbuilding nationwide. Readily available capital produced too much supply in a short time period, far surpassing demand.

Further, the implementation of the prospective payment system, the new Medicare reimbursement method, decreased profits at many nursing homes, and numerous publicly traded seniors-housing companies have declared bankruptcy.

Additionally, independent-living and stand-alone Alzheimer's properties remain private-pay facilities in most states, meaning they do not qualify for Medicare or Medicaid reimbursement. They, too, have seen a slump in occupancy from overdevelopment.

In response, the CMBS market for seniors housing has all but dried up. Commercial banks are hesitant to lend to the industry due to their negative credit experience with the publicly traded companies, and they are even more hesitant to lend for new development. Additionally, many seniors-housing REITs have attempted to sell off their assets to access additional capital to pay off short-term obligations and lines of credit.

Seniors Specifics With today's tight capital environment, it is critical to find a financing source with seniors-housing experience. This primarily is due to the differences in reimbursement rates nationwide, the complexity of agency-backed applications, and the industry knowledge that is required of the lender.

Also, those who seek seniors-housing funding or refinancing will be held to standards relating to experience, location, and project stability. Seniors-housing lenders often require that a property owner have at least five years of experience in the specific segment targeted for purchase or refinance.

Even stable, profitable properties in overbuilt markets must have 85 percent to 90 percent occupancy over 12 months to be eligible for financing.

Agency-Backed Financing Many seniors-housing developers and experienced operators that never have considered agency-backed financing such as HUD or Fannie Mae have taken a new look in today's market. These programs provide long-term, fixed-rate, nonrecourse options that still are accessible.

HUD. The Federal Housing Administration Section 232 and 232/223(f) mortgage insurance programs are for construction, refinance, acquisition, and substantial rehabilitation of seniors-housing facilities. Both nonprofit and for-profit ownership entities are eligible; nonprofit entities receive a 5 percent higher loan-to-value ratio and an allowance for operational costs during fill-up.

With 90 percent LTV and a 40-year term for new construction and 85 percent LTV and up to a 35-year term for acquisition or refinance, these fully assumable loans provide long-term, fixed interest rates that track 10-year Treasuries. Escrows for construction loans require an initial operating deficit to cover cash needed to operate the property until stabilization, a working capital deposit of 2 percent of the mortgage amount to be used only to prevent default if construction time or cost certification exceeds schedules, and a minor movable equipment escrow of approximately $415 per bed. Any off-site improvements also are escrowed outside the mortgage.

Seniors-housing loans involving FHA mortgage insurance have a few requirements. Construction or substantial rehab projects require Davis-Bacon Act “prevailing wages” to be used for construction payroll, which can create higher construction costs due to union involvement in some markets and a requirement for all workers to be paid the minimum standard hourly rate. An annual audit must be presented to HUD for all properties, and owners can take out cash distributions only twice a year. Management fees and leases are both acceptable monthly expenses, providing the owner with a mechanism to access excess cash flow. Nonprofit entities are allowed an additional 5 percent LTV, but any excess cash available must be kept in the property.

The FHA 232/223(f) programs allow for additional construction or repairs up to 15 percent of the after-appraised value of the property. However, HUD does not allow borrowers to pull cash out under the FHA 232 program.

HUD has implemented a multifamily accelerated processing program that provides full underwriting and application preparation by approved lenders. HUD then reviews the application and a firm commitment is issued within 60 days for Section 223(f) loans. Section 232 new construction and substantial rehab applications require two stages: a pre-application submission of site, survey, market, revenue, and expense information and a firm-commitment application with full plans and specifications approved by the state, all third-party reports, and MAP lender underwriting. The loan then can be closed within 30 days of receipt of the HUD commitment. A list of MAP-approved lenders can be found on HUD's Web site,

Fannie Mae. Fannie Mae currently offers financing options for class A assisted-living and independent-living properties that are 90 percent occupied for the past 90 days. The program is a good option for borrowers wanting to refinance and pull cash out of assisted-living properties or buy out partners.

The program provides nonrecourse financing with fixed interest rates for 10 years with a 25-year amortization. Interest rates are quoted using tiered pricing over 10-year Treasuries. Several third-party reports are required: an appraisal, inspection, environmental assessment, and a management review.

Fannie Mae also offers a second-mortgage program after one year to profitable facilities that have increased rates or experienced improved market conditions. This program allows owners to access additional capital from their increased cash flow without the expense of refinancing all of their debt. The second-mortgage program offers 70 percent to 75 percent LTV while requiring a minimum 140 percent debt service coverage ratio for assisted-living facilities.

Fannie Mae loans often can be closed in less time than HUD loans. Most of the application and underwriting can take place during the preparation of third-party reports, leaving only a two-week review period for the FNMA delegated underwriting and servicing lender and Fannie Mae. These loans typically close within 10 days of receipt of the commitment. A list of DUS lenders can be found on Fannie Mae's Web site,

Louise C. Bairnsfather, CCIM

Louise C. Bairnsfather, CCIM, is managing director of J&L Finance in Nashville, Tenn. Contact her at (615) 370-3883 or


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