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September 2012 Finance Supplement 1
Waves of Boomers are on Their Way
Looking AheAd, opportunities Abound
2 Finance Supplement
FINANCING ALTERNATIVES FoR SENIoRS HoUSING AND HEALTH CARE SPACE
advertorial
A lthough the credit crisis of 2008 and 2009 largely has receded into distant memory, its reverberations continue to affect the mortgage
financing market, especially for borrowers involved in complex businesses like long-term care and seniors housing. Commercial bank and finance company lenders are returning to the space but most are more risk averse than in the past, and borrowers may encounter limited access to credit, more stringent terms and recourse requirements, and less attractive pricing than before. Property owners may wish to expand their horizons to include alternative financing vehicles and consider working with an integrated non-bank capital provider with proven seniors housing and health care credit expertise, like Red Mortgage Capital, LLC.
In an effort to demystify the process of securing a loan for your long-term care business, the following will consider a few alternative approaches to consider when seeking your next financing.
Let us first consider shorter-term needs. Owners of newly acquired or completed properties often require 3- to 5-year facilities to bridge properties to longer-term capital solutions. Although more active in this space recently, banks continue to send mixed signals to borrowers regarding their willingness and capacity to offer bridge financing to the long-term care industry.
Banks May Have ContingenCiesBanks with significant histories of providing credit for LTC providers may extend credit only to customers with whom they have existing and multifaceted business relationships. Credit may only be forthcoming when the borrower is willing to shift deposit, checking and money management business to the potential lender.
Customers seeking a new relationship may be welcomed at a number of emerging LTC bank lenders that have stepped into the market to fill the void left by traditional sources of credit. While recent market entrants may be more open to new relationships, their ability to execute could be hampered due to a lack of related experience and resistance from underwriters and credit oversight personnel. The complexity of the long-term health care business makes it ill-suited for on-the-job credit training.
Therefore, prospective borrowers should select a lender with dedicated LTC originations and underwriting staff. It also is helpful to engage a capital partner that possess both bridge and permanent lending capability, a rare combination of attributes that only a few fully integrated providers can boast.
When the time comes to seek permanent credit, traditional bank lenders fall to the wayside as most have chosen to ignore this segment of the health care market. Rather, this space is dominated by programmatic lenders originating loans directly or indirectly sponsored by the federal government, either through the auspices of the GSEs or the FHA.
seleCt lenders Cover ContinuuMFannie Mae and Freddie Mac products are targeted at the independent living, assisted living and memory care segments of the seniors housing continuum. GSE financings are originated by a defined group of approved lenders that meet the enterprises’ stringent capital and operational requirements. Red is among a very select subset of seniors housing lenders that possesses nationwide licenses from both enterprises.
FHA programs are open to a wider spectrum of properties. In addition to guaranteeing loans secured by independent and assisted living, the FHA also provides mortgage insurance for skilled nursing and acute-care facilities. Permanent loans have fully amortizing terms up to 40 years and bear fixed interest rates.
Each GSE and FHA program comes with a unique set of underwriting standards, loan terms, document requirements and application processes. GSE loans can be underwritten and funded in a relatively compressed period. Moreover, borrowers may be granted deal-appropriate modifications to some underwriting requirements. FHA loans, by contrast, are subject to a more complicated documentation and underwriting process that typically requires a longer period to complete. To expedite the application process and take full advantage of available exemptions, it is advantageous to engage an experienced capital provider with an excellent reputation with GSE and FHA risk underwriters and a dedicated staff of seniors housing and health care underwriters and application processors.
The landscape of the long-term health care market is shifting, and operators need to adapt quickly to change.
Access to optimally priced and structured capital is critical to success. Property owners are well advised to team with a fully integrated capital provider with a dedicated staff of experienced health care bankers and underwriters to set the straightest course. Red is among the few competitors in the space that can offer bridge financing capacity, a complete set of FHA and GSE executions and the expertise gained by providing over $52 billion in capital to the multifamily, seniors housing and health care industries since 1990.
Kathryn Burton Gray
FHA LendingScott L. [email protected]
It’s your move, make it with RED.Learn more and sign up to receive email news and updates by visiting www.redcapitalgroup.com or call 800.837.5100.
Offices: Columbus, OH_Charlotte, NC_Chicago, IL_Dallas, TXFairfield, CT_Newport Beach, CA_Reston, VA_San Diego, CA
Red: Three simple letters. One comprehensive capital provider.
Delivered.A Top Fannie Mae Lender
for Seniors HousingSince 2003
Over $300 million in seniors housing finance
provided in 2011*
$13,389,000 Chateau Pleasant Hill
Fannie Mae MBS/DUS®
Reliability. Experience.
gSe LendingPhilip A. [email protected]
PRinciPAL LendingKathryn Burton [email protected]
* Includes $90 million in Fannie Mae production
4 Finance Supplement
he economy is still struggling, but experts agree that there are long-term opportunities in long term care.
What some demographers are calling a “silver tsunami” is nearly upon the nation. Millions of aging baby boomers are going to need care.
“It’s going to swamp the industry,” says Michael
Byrnes, vice president for senior housing at Beech Street Capital. “There are not enough beds, there are not enough apartments, there are not enough build-ings to take care of everybody.”
“This is a great time to be in the industry and looking for opportunities to expand.”
A recent study by the Employee Benefit Research
The best opportunities are for the best operators, experts say.
experience pAys in Long term cAre FinAncing
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September 2012 Finance Supplement 5
Institute, for instance, found that nursing home stays among people aged 65 or older increased from 6 percent in 2000 to 8.5 percent in 2010. The problem is that those who stayed longest in nursing homes were also the poorest.
Those who lived in a nursing home for six months or more had a median household wealth of $5,518—and less than half had their expenses covered by Medicaid, the institute reported. Even more chillingly, the institute found that median housing wealth falls to zero within six years of an initial entry into a nursing home.
“The issue is,” Byrnes says, encapsulating the problem, “where’s the money going to come from?”
experience CountsBut the very economic squeeze that Byrnes and others highlight convinces them that the best opportunities are for the best operators. In the long term health care finan-cial sector, Byrnes and others say, experience matters.
“I think HUD [the Department of Housing and Urban Development] and banks are cautious,” he says. “And what they don’t want to see is the guy that has been building strip malls and gas stations coming and saying, ‘I’ve got a piece of dirt and a lot of old people around it, so I’m going to do some assisted living.’
“For us as a lender,” Byrnes adds, “it’s a challenging time because there’s going to be such an influx of new business coming, and it’s a matter of how do you find the right deal and how do you find the right financing?”
Andy Stokes is the senior vice president for marketing and strategic planning for LTC Properties. He says that
long term care can be a solid investment that offers good returns—if managed carefully.
“We look for a very seasoned company to do business with,” he says. “We need someone who’s an experienced developer and a reasonably experienced operator. We need it all backed up by someone who wants the building and knows how to run it.”
For most long term care professionals, HUD offers the best financing. But not the only one, LTC Properties Vice President and Controller Pam Shelley-Kessler says.
TaBle 1holdings of different types of household Assets (in 2010 dollars) by number of nights* spent in A nursing home
0-30 Nights 31-190 Nights More Than 180 Nights
Mean Median Mean Median Mean Median
Total Household Wealth $298,635 $108,300 $255,500 $67,836 $157,371 $5,518Total Financial Wealth 192,643 28,510 175,331 12,562 119,123 1,090Total Housing Wealth 105,991 51,918 80,169 5,596 38,248 0Stocks, Bonds and IRAs 101,900 0 91,773 0 63,458 0Bank Accounts, CDs, T–bills 42,485 5,060 45,209 3,243 29,622 506Transportation 7,691 2,424 4,941 0 1,929 0
* These are the total number of nights spent by an individual in a nursing home or long–term care facility in past two years.Source: Employee Benefit Research Institute estimates from the Health and Retirement Study
Stev
e Col
e
6 Finance Supplement
advertorial
The FHA LEAN program, implemented by HUD to streamline processing and make the 232 Program more efficient and effective, is only now
beginning to achieve its goals. For many borrowers in the seniors housing and health care sector, FHA can and must be the provider of low-cost, long-term, non-recourse financing.
Regional owneRs/opeRatoRs stand to gain the MostFrom this lender’s view, the future of FHA financing in the long-term health care industry is promising but needs to be proven as an efficient capital provider. The regional and smaller operators are an underserved market, and they are the owners/operators who will benefit most from access to FHA financing for their projects. For these owners, the ability to access fixed-rate, long-term, non-recourse financing is key to their continued success. FHA can provide such capital through the 232 Program.
While it appears that the credit markets are loosening up, and capital is more available, this does not mean that there is money for all financing needs.
Competition for available capital will continue, and not all projects will be financed. Seniors housing, health care, and access to the capital that drives it, are constantly evolving. The needs of owners and operators change based on the demands of the consumer. And the availability of capital to respond to consumer demand is critical. For the most part, capital is easily accessible to large corporations and REITs. Access to capital for regional operations is more difficult.
From our perspective, meeting the capital needs for the regional and local operators is the key to the future development of new seniors housing and health care facilities.
a new and gRowing geneRation of senioRsWith the onset of the Great Recession in 2008, construction of new seniors housing and health care facilities came to a virtual standstill. At the same time, demand for seniors housing and health care only increased, driven by the aging Baby Boom generation.
This “Grey Tsunami” is wealthier, more active, in better health, and living longer than their parents. The seniors housing and health care options that were available to their parents are not acceptable today.
The Boomers remember when skilled nursing facilities were the last resort for elders. Lengths of stay were measured in years, rehabilitation was very limited, and there was little expectation that patients would be discharged home to continue living normal lives. Assisted living facilities, as we know them today, did not exist. Instead there were rest homes providing long-term residential services, with a focus of providing a safe environment. Recreation, entertainment, lifestyle, and fine dining were most certainly not on the menus.
Seniors housing today is more about lifestyle than the custodial care provided to prior generations. Demand for these services will only continue to grow over the next decade.
how will the industRy Respond to the futuRe deMand?The supply of nursing homes is shrinking, and there has been little recent expansion in assisted living as this “Grey Tsunami” is about to overwhelm supply. States have been reducing the number of nursing home beds, many have outright bans on construction of new nursing homes, and many more are limiting construction of assisted living centers.
To compound the problem, older nursing homes and assisted living facilities—those built 20+ years ago—are functional as real estate but are no longer functional in terms of services or amenities and should be replaced or rehabilitated. Another new challenge is the growing demand for Alzheimer’s care and construction of purpose-built facilities.
Seniors housing and health care is not different than most other industries—investment and job growth depend on access to the record low interest rates for refinancing, renovation, and new construction. FHA and its 232 LEAN Program has both the challenge and the opportunity to be the leading source of financing as we deal with the dual challenge of increasing demand and decreasing supply of seniors housing and health care facilities.
FHA FINANCING AN ImPoRTANT SoLUTIoN FoR THE
mIDDLE mARkET INVESToR
September 2012 Finance Supplement 7
8 Finance Supplement
“HUD is good if you can get it,” she says. “But not every property fits the HUD model. Typically, each property has to have a historical record.”
new investors emergeThat’s where private companies like LTC Properties come in, Shelley-Kessler says. Those finance companies, in turn, are attracting new players to long term care in-vestments. Shelley-Kessler just wrapped up a nearly $86 million deal with an insurance company, the first of its kind. There will be more, Shelley-Kessler says.
“Once you have that first deal done, you have a blueprint,” she says.
“Treasury yields are so low right now that [insurance companies] are yield-starved. They’re looking at a place where they can invest their money and get a good return
and still have a more conservative investment.”
Companies like LTC Properties are at-tractive for financing because insurance companies speak the same language. “With an operator, they don’t want to be exposed to the risk,” Shelley-Kessler says. But companies like LTC can partner with operators and offer attractive packages to investors, she says.
Not that it is completely easy. “I can tell you from experience,” Shelley-
Kessler says, referring to the recent insurance company transaction, “it was a very long process educating insurance companies to understand our space.”
alzheimer’s-specific ConstructionOne place where experience is likely to count—and per-haps for big dollars—is in Alzheimer’s care, experts say.
A pproximately 3.5 million loans of people age 50 and older were under water as of December 2011, according to a recent report from the
AARP Public Policy Institute. “Nightmare on Main Street” analyzes how the mortgage crisis has affected people age 50-plus over the past five years.
Data examined for the report found that 600,000 loans of people age 50 and older were in foreclosure, and another 625,000 loans were 90 or more days delinquent.
What’s more, from 2007 to 2011, more than 1.5 mil-lion older Americans lost their homes as a result of the mortgage crisis, the report found.
These figures present a startling dilemma, since many retirees rely on their homes’ equity to finance their relocations to independent living and assisted living facilities.
Without said funds, millions of seniors will be unable to take advantage of such services.
Delinquency rates rise sharplyThe Great Recession has had a serious impact on se-niors, particularly with regard to mortgage delinquency rates. Despite the fact that higher rates of serious
delinquency exist among the under-50 population, the rate of increase concerning serious delinquency was much higher for the 50-plus population from 2007 to 2011, with the percentage of loans defined as seriously delinquent skyrocketing by 456 percent for the age 50-plus community.
Delinquency rates are particularly problematic for the 50-plus community because these individuals lack extended periods of time to recover lost funds or regain their overall financial security, said James Carr, chief
report raises concerns about the economy’s impact on seniors’ retirement plans.miLLions oF AmericAns 50-pLus under WAter
Stokes
Fuse
September 2012 Finance Supplement 9
business officer for the National Community Reinvest-ment Coalition.
At a July 23 Solutions Forum, economists and civic leaders united to tackle issues presented in the AARP report. The panel concurred that no singular tool was going to solve the housing crisis.
The notion of mass refinancing and principal reduc-tion was brought to the forefront of the discussion.
“We’re talking about individuals,” said David John, senior research fellow at the Heritage Foundation. John emphasized the importance of utilizing individu-alized mediation techniques to better address specific problems.
experts offer solutionsThe report offers some policy solutions that could make it easier for seniors to make the move to independent or assisted living in their golden years.
One recommendation included the development of short-term financial assistance programs that aid homeowners who want to sell their homes to finance a move into an assisted living facility or continuing care retirement community.
“In recent years, occupancy rates of continuing care
retirement communities and assisted living facilities have fallen, partly as a result of homeowners’ inability to sell their homes quickly or at a reasonable price be-cause of the housing market collapse,” the report said.
“Programs that address the short-term financing needs of older Americans trying to sell their homes would facilitate their ability to move to more appropri-ate housing in a timelier manner.”
“Foreclosure can often be avoided with the correct legal counsel,” said Deborah Leff, deputy counselor for Access to Justice at the U.S. Department of Justice. Leff affirmed that many Americans facing foreclosure are
“The numbers for dementia … are really just starting to hit,” LTC’s Stokes says. “We’ve all been talking about the aging of America for a long time. If one looks at the graph of numbers for people as they grow older—not the percentages, but just the raw num-bers—the numbers of people who are going to need care are probably going to double. There’s very little supply.”
And baby boomers, America’s consum-ers par excellence, aren’t likely to settle for second best, Beech Street’s Byrnes says. That means that operators will have to think about their buildings right down to the brick, he says.
“One of the things that we see coming is people building purpose-built facilities for the treatment of Alzheimer’s,” Byrnes says. “So much of the treatment for the resident is in the design.”
That’s welcome news to Carol Steinberg, spokeswoman for the Alzheimer’s Founda-tion of America.
“The nation is currently facing really an epidemic of Alzheimer’s cases,” she says.
Designing a building to take care of those stricken patients means thinking differ-ently, Steinberg says. For instance, nearly 60 percent of Alzheimer’s patients will wan-der during the course of their illness. That means buildings will have to emphasize security to keep patients from wandering off completely.
interiors must Be supportiveThen there are questions of interior design,
Steinberg says. “There is growing evidence that people with Alzheimer’s
disease need to be mentally and physically stimulated,”
report raises concerns about the economy’s impact on seniors’ retirement plans.miLLions oF AmericAns 50-pLus under WAter
figure 1: Foreclosures by income bracket: 50-plus - 2011
Income Bracket
n $1 - $49,999n $50,000 - $74,999n $75,000 - $124,999n $125,000+
Source: Source: AARP Public Policy Institute tabulation of CoreLogic data
Foreclosure Rate
32%
27%
26%
15%
Shelley-Kessler
➤
10 Finance Supplement
unaware of their legal options and that the creation of broad educational tools is essential.
minority seniors more BurdenedThe significance of gathering regional data was raised by Janis Bowdler, director of the Wealth-Building Project at the National Council of La Raza.
Having worked closely with the Hispanic community, Bowdler described the ripple effect a single foreclosure can cause a family.
She recounted stories of families under “dual track,” when, despite being in discus-sions for loan modification, foreclosure proceedings advanced, and families lost their homes in default.
The study found that in 2011, Hispanic borrowers age 50 and older had foreclosure rates of 3.9 percent on prime loans, African American borrowers had 3.5 percent, and Caucasian borrowers had 1.9 percent.
The panel agreed that the foreclosure crisis has damaged the credibility of Ameri-can financial institutions, but that special-ized government programs like the Home
Affordable Modification Program (HAMP), which modifies loans to an affordable level for struggling individuals, can assuage fears and offer relief.
The study is the first of its kind to contextualize the age, race, and income brackets of the individual borrowers studied.
—sarah Langmead
she says. “It’s really incumbent on facilities to meet those stimulation needs.”
Local, or regional, long term care companies are prob-ably in the best position to capitalize on the opportunity, Byrnes says. “That’s the family store, and they want to make the store bigger,” he says.
Stokes says he’s expecting “a frenzy” around Alzheimer’s-specific building.
“We think that some people are going to go at it too hard,” he says. “There’s going to be too much building.
There’s going to be over-building. Underwriting will get slack.”
“It always does.”The key for operators—and their financiers—will be to
take a deep breath and proceed with caution. Experience, again, will make the difference, Stokes says.
“We still like skilled nursing facilities,” he says. “Much of the post-acute care is done at skilled nursing facilities. That is the new treatment model, and it’s a very successful treatment model.” n
TaBle 1: Foreclosure rates by Age
Age 2007 2008 2009 2010 2011 % Change 2007–2011
<50 0.42% 0.97% 1.84% 2.83% 3.48% 729%50+ 0.30% 0.66% 1.32% 2.27% 2.92% 873%50–64 0.31% 0.68% 1.37% 2.34% 2.98% 861%65–74 0.25% 0.55% 1.07% 1.90% 2.55% 920%75+ 0.33% 0.66% 1.33% 2.38% 3.19% 867%
Source: AARP Public Policy Institute tabulation of CoreLogic data
TaBle 2: percentage of Families With mortgage debt
Age of Head 1989 2010 % Change
<35 34.9 34.0 -3%35-44 57.9 57.6 -1%45-54 58.3 60.4 4%55–64 37.0 53.6 45%65–74 21.7 40.5 87%75+ 6.3 24.2 284%
Source: Survey of Consumer Finances, 2007 and 2010
‘Foreclosure can often be avoided with the correct legal counsel.’
12 Finance Supplement
“looking ahead, opportunities abound”a finance supplement to Provider magazine
www.providermagazine.com1201 L St. NW, Washington, DC 20005
