The seniors housing deal factory that churned out record numbers over the past three years hasn't shut down completely. But financing terms have become increasingly difficult as lenders and investors alike retool their expectations amid the credit crunch.

"Deals are just more expensive," says Bruce Gibson, a broker at CB Richard Ellis in Miami.

Cap rates have raised 50 to 100 basis points compared with pre-August levels, industry sources say. Five months ago a well-located freestanding assisted living facility that was 95% occupied would have sold at a cap rate of 6.75%. Now the same property would trade at about 7.5%.

A cap rate is the return an investor receives based on the purchase price of the asset and the income the property generates.

Another big change in today’s financing climate: Lenders that previously required 15% equity in deals, now demand 25% to 30%.

Credit spreads on tax-exempt bonds to finance non-profit continuing care communities have widened 75 to 100 basis points, according to Dan Hermann, managing director and group head of senior living finance at Chicago-based Ziegler Capital Markets.

For now, lenders are seeking safety in conforming loans. Fewer exceptions to loan policies are allowed, notes Angela Mago, senior vice president and national manager at Cleveland-based KeyBank Real Estate Capital Healthcare Group.

When the market was hot, she explains, lenders granted exceptions to policies such as certain loan-to-value ratios in order to win business. "Lenders aren't aggressive now," Mago says.

Lenders won't underwrite properties with negative net operating income, according to Michael Berne, co-head of the senior housing & healthcare group at Cushman & Wakefield in New York. Previously, loans were written on a pro forma basis using estimates of future revenues.

Berne uses the example of a new assisted living building 60% occupied and losing money. Nine months ago, financing was easy to obtain based on a future higher occupancy. "Lenders are not buying future promises anymore. They are buying present day reality,” says Berne. "The underwriting criteria are stricter today than it has been in 30 years,” Berne adds.

Only the best properties are getting sold, Berne says. For instance, he recently brokered the sale of a Class-A assisted living facility in the Northeast. The building is 97% occupied and sold at a 6% cap rate.

New construction is getting harder to finance, and not just because credit is tight. A move to an independent living or continuing care building is typically a choice-driven decision. But if seniors are struggling to sell their existing homes, then they can't move to a new facility.

A report from the National Investment Center for the Seniors Housing & Care Industry shows that in the third quarter of 2007, the average occupancy in independent living properties in the top 31 metro markets was down 1.3% over the previous two quarters.

Revenue per occupied unit slowed to a 3% annual growth rate in the third quarter of 2007, down from annual growth rates in excess of 6% just a few quarters ago.

“We believe it will be very important to monitor developing economic conditions, as well as markets where there are multiple projects scheduled to open in the next few quarters,” says NIC Vice President Michael Hargrave.

Adds Mago at KeyBank: "Lenders are paying attention to how much exposure they have to seniors housing in their portfolios in light of the housing market."

A lot of private investors are sitting on the sidelines, trying to gauge market direction. But foreign investors along with some REITs and lenders are eager to put their cash to work.

"We have a lot of money, and we still like the sector," says John Cobb, senior managing director of real estate at GE Healthcare Financial Services in Chicago. He admits deal terms aren't as attractive as they were six months ago. "It's not the endless checkbook we saw in '06 and '07,” Cobb says.

But Cobb thinks it could be the right time to sell a top-notch portfolio since so few good projects are on the market.

Can the industry expect fire sales of assets in the near term? It all depends on who will need to sell properties in 2008, says Cobb. “The jury is still out."