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Senior Housing Finance: More Than Just Loans

Geri Borger Urgo

Discussions about commercial real estate’s senior housing sector are ongoing. On the one hand, the pandemic had a definite impact on the product type, resulting in changing regulatory environments and declining occupancies. On the other hand, with COVID-19 potentially moving from pandemic to endemic, senior housing developers and investors are preparing for a wave of aging baby boomers.

Potential demand for senior housing raises another issue. Namely, how to successfully finance this product type.

One challenge is that “senior housing” represents a broad array of segments, from independent living and assisted living, to skilled nursing, to memory care. Some senior housing consists of age-restricted multifamily apartments, while others require licensure to deliver assisted living services and care. Experts tell Connect CRE that the differences mean financing strategies for this sector are vastly different and can be more complex than those involving other real estate product types.

“The seniors housing space is highly stratified,” said Geri Borger Urgo, Head of Production at NewPoint Real Estate Capital. “With a range from age-restricted multifamily to memory care, seniors housing can be high-touch, operationally intense and heavy regulated.”

A Specialized Segment

In addition to varying product types, the senior housing segment attracts “a narrower demographic of tenants, with different requirements,” said Cliff Carnes, executive vice president for capital markets, Matthews Real Estate Investment Services. Though strictly independent living facilities operate in a similar fashion to market-rate multifamily apartments, assisted living, skilled nursing and memory care “operate much more like a business, with far higher costs,” Carnes added.

While pro formas and borrower track records are important to lenders in this space, “there is nothing more critical than operational expertise when evaluating a seniors housing transaction,” said Urgo, whose company recently announced the addition of agency loans to its senior finance platform. “Seniors housing operators must train and retain staff in an increasingly challenging labor market and employ policies and procedures to keep residents safe.”

Mark Myers

Walker & Dunlop Managing Director Mark Myers explained that lenders also examine a senior housing sponsor’s experience in other areas, like hospitality (dietary and housekeeping), and the overall care component (daily activity assistance and nursing care). Amenities are also different, especially in assisted living and skilled nursing facilities. Said Myers: “We have no need for swimming pools and large kitchens. But we have a great need for communication and connection to on-site staff, as well as common spaces for congregating.”

The underwriting process can also be more complex than that involving multifamily properties. One reason is that occupancy fill-up and stabilization take much longer. But Myers said that once units are filled, they tend to remain that way for a while. “There tends to be lower resident turnover and less wear and tear on units,” he said.

Both Urgo and Myers explained that senior housing operating margins are lower, due to staff requirements, dietary costs for special meals and additional vendor expenses. How much lower?

The ratio of NOI to revenue among most multifamily properties is typically 55% and higher, Urgo said, while “this ratio is 40%-55% for independent living, 30%-40% for assisted living and 25%-35% for memory care.”

What the Borrowers Want

Borrowers seeking capital for building and investing in senior housing want fair loan terms, which is fairly obvious. But Myer said those active in this sector want low interest rates, especially on the front end of acquisition or construction. “This means more cash flow as occupancy and rents increase,” Myer said. “They also want the least amount of personal recourse possible, along with the longest loan period that allows for pre-payment, with the least amount of penalties.”

Urgo added that bridge loans are in high demand “as a mechanism to buy more time to secure the cash flow needed to obtain low-cost permanent debt,” though she cautions that the Agencies and HUD/FHA tend to be cautious when underwriting senior housing assets.

Beyond the Standard Financing

Cliff Carnes

here is little doubt that the demand for senior housing will increase. Urgo explained that the oldest baby boomers will turn 76 in 2022, and “at roughly 71 million strong, this generation represents 20%-plus of our country’s population and will prove a powerful catalyst for demand and what the future of this product looks like.”

Myers added that strong rent rate increases, occupancy stability, word-of-mouth marketing and an altruistic framework can add to the appeal of financing this particular product type. However, “seniors housing is more sensitive to over supply than multi-family, given the lower absorption rates along with lower percentage of people in the senior population and the lower percentage of the senior age and income cohort that choose to live in senior communities,” he said.

Then there are the demographics. “It’s important to take into consider age and retirement income of the potential soon-to-be residents,” Carnes pointed out. “Income for the retired doesn’t have the same swings that income for those in the workforce does.”

Because of these and other factors, Urgo said, lenders tend to evaluate senior housing deals on a case by case basis. “The Agencies are showing favor to borrowers that have a track record of operating at scale, with success, across multiple facilities,” she said.


Inside The Story

NewPoint's Geri Borger UrgoWalker & Dunlop's Mark MyersMatthews Real Estate's Cliff Carnes

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