Seniors-Housing Funding Sources
Capital sources pump money into this thriving segment.
At last all segments of the seniors-housing industry appear
to be performing strongly at the same time. For independent-living and assisted-living
operators, occupancy and profits are moving toward record levels. After five
consecutive years of economic growth, states have regained much of the tax
revenue lost in earlier years and increasingly have been more receptive to
funding Medicaid programs, which has had a positive impact on skilled-nursing
As the industry outlook has improved, the number of lending
options available to borrowers has increased and is attracting new players with
higher yields. Over the past two years the number of potential industry
participants has increased between 200 percent and 300 percent, and it seems this
trend could accelerate this year.
Presumably seniors-housing property owners and operators
will be watching developments in the capital markets more closely in the months
ahead. It’s unlikely that today’s inverted yield curve will remain in place
indefinitely. Although long-term rates stubbornly have resisted upside pressure
triggered by the Federal Reserve Board’s tighter monetary policies, it’s
unlikely that rates will be able to defy gravity indefinitely. The key for
seniors-housing property owners is to get out of variable-rate, short-term
lending programs and into long-term, fixed-rate programs whenever possible.
Capital for seniors-housing projects essentially comes from
the same lending sources that fund other types of commercial real estate: government
agencies and quasi-government agencies, finance companies, banks, Wall Street
and commercial mortgage backed securities lenders, healthcare real estate
investment trusts, and insurance companies. While no new lending concepts have
emerged in the current cycle, various lending groups have attempted to improve
existing products and market them more aggressively. What follows is an
overview on the various funding sources available to seniors-housing borrowers.
Insured Government Loans. Federal Housing Administration-insured
Housing and Urban Development loans were available to borrowers during the lean
years of the current cycle, providing superior terms and conditions while other
providers were not. As a result, HUD has emerged as the preeminent lender of
choice for qualified borrowers in the skilled-nursing and assisted-living
segments. The expectation is that the federal agency will continue to validate
its role as a capital provider to under-served markets.
Quasi-Government Agencies. Fannie Mae and Freddie Mac both
entered the seniors-housing markets in the late 1990s with programs primarily aimed
at assisted-living and independent-living operators. Both providers have done
an excellent job of underwriting quality loans. To date, the products
introduced by these lenders have been well received and future prospects appear
to be even more promising.
Finance Companies. Because of large-scale defections and
capital shortages, some savvy finance companies have been able to obtain above-market
yields with below-market risk. These companies developed excellent strategies
for serving the seniors-housing market. They have the production platform and
systems in place to do deals and should continue to be a factor in the
Commercial Banks. Among the various seniors-housing lender
categories, commercial banks may have the largest growth potential. Many
commercial banks made strategic exits from the seniors-housing business during
the 1990s and now are beginning to test the waters more aggressively. Regional
banks have been active in their respective markets, primarily working with
existing clients. Both national and regional banks traditionally have focused
on independent-living assets and to a lesser extent assisted-living properties.
Not surprisingly, underwriting strategies for this group heavily stress
Wall Street. In recent years a few entrepreneurial Wall
Street lenders have entered the seniors-housing market with some degree of
success, putting together teams of seasoned industry professionals and creating
new programs based on floating-rate as well as fixed-rate loans. These
entrepreneurs have been able to generate above-market yields with below-market
risk. This year some lenders in this category may be contemplating new
Healthcare REITs. Last year some healthcare REITs pursued
sale-leaseback transactions nationwide and were able to close some major deals.
While rising asset prices and lower capitalization rates are making it harder
to find good investment opportunities, the expectation is that some players
will remain active this year.
Insurance Companies. Historically, insurance companies have
been major investors in seniors housing. But only a few companies express
limited interest in independent-living properties today.