Niche properties

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 home facilities.

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.

Capital Sources

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 marketplace.

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 business fundamentals.

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 construction loans.

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.

Jeffrey A. Davis

Jeffrey A. Davis is chairman of Chicago-based Cambridge Realty Capital Cos. Contact him at (312) 357-1601 or