Housing finance for the elderly: more than just loans

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Geri Borger Urgo

Discussions on the retirement home sector in commercial real estate are ongoing. On the one hand, the pandemic has had a definite impact on the type of product, leading to changes in regulatory environments and lower occupancy rates. On the other hand, with COVID-19 potentially shifting from pandemic to endemic, senior real estate developers and investors are bracing for a wave of aging baby boomers.

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

One of the challenges is that “senior housing” represents a wide range of segments, ranging from independent living and assisted living to skilled nursing and memory care. Some senior housing consists of multi-family apartments with age restrictions, while others require licensing to provide assisted living services and care. Experts tell Connect CRE that the differences mean financing strategies for this sector are very different and can be more complex than those involving other types of real estate products.

“The senior housing space is highly stratified,” said Geri Borger Urgo, production manager at NewPoint Real Estate Capital. “With a range from age-limited multi-family housing to memory care, senior housing can be highly tactile, operationally intense and heavily regulated.”

A specialized segment

In addition to various product types, the senior housing segment attracts “a smaller demographic of renters, with different requirements,” said Cliff Carnes, executive vice president of capital markets, Matthews Real Estate Investment Services. Although strictly independent residences operate the same way as multi-family apartments at market rates, assisted living, skilled nursing and memory care “operate much more like a business, with much higher costs”, Carnes added.

While pro formas and borrower backgrounds are important to lenders in this space, “there is nothing more critical than operational expertise when evaluating a senior housing transaction,” said Urgo, whose company recently announced the addition of agency loans to its senior funding platform. “Operators of retirement homes must train and retain staff in an increasingly difficult labor market and enforce policies and procedures to keep residents safe. »

Marc Myers

Walker & Dunlop managing director Mark Myers explained that lenders also look at a senior housing sponsor’s experience in other areas, such as hospitality (food and housekeeping) and the overall component. care (help with daily activities and nursing care). Equipment is also different, especially in assisted living facilities and skilled nursing facilities. Says Myers: “We don’t need swimming pools and big kitchens. But we have a great need for communication and connection with the staff on site, as well as common spaces to gather.

The underwriting process can also be more complex than that involving multi-family properties. One reason is that filling and stabilizing occupancy takes much longer. But Myers said once the units are full, they tend to stay that way for a while. “There’s generally less resident turnover and less wear and tear on units,” he said.

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

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

What Borrowers Want

Borrowers looking for capital to build and invest in senior housing want fair loan terms, and that’s pretty obvious. But Myer said those active in this sector want low interest rates, especially at the start of an acquisition or construction. “That means more cash flow as occupancy and rents go up,” Myer said. “They also want the least amount of personal recourse possible, as well as the longest loan period that allows for prepayment, with the fewest penalties.”

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

Beyond standard financing

Carnes Cliff

there is no doubt that the demand for senior housing will increase. Urgo explained that the oldest baby boomers will turn 76 in 2022, and “at approximately 71 million people, this generation represents more than 20% of our country’s population and will prove to be a powerful catalyst for demand and of the future of this product.”

Myers added that steep increases in rental rates, stable occupancy, word-of-mouth marketing and an altruistic framework can add to the financing appeal of this particular type of product. However, “senior housing is more susceptible to oversupply than multifamily housing, given lower absorption rates as well as lower percentage of seniors and lower percentage of age and income cohort older people who choose to live in communities for the elderly,” he said.

Then there is demographics. “It’s important to consider the age and retirement income of potential future residents,” Carnes said. “The income of retirees does not have the same fluctuations as that of active people.”

Because of these and other factors, Urgo said, lenders tend to evaluate senior housing offers on a case-by-case basis. “Agencies favor borrowers who have a proven track record of operating at scale, successfully, across multiple institutions,” she said.

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