With little financing available for commercial properties, seniors housing owners and investors should be thankful that Fannie Mae and Freddie Mac are still in business. These government-backed agencies are buying mortgages from loan originators for assisted and independent living properties, providing liquidity to the market.

Fannie Mae invested more than $1.5 billion in seniors housing in the first half of 2008. While that figure represents a small portion of the $20 billion invested in multifamily during the same period, Fannie has increased its commitment to seniors housing in recent years.

In 2007, Fannie Mae invested $5.9 billion in seniors housing, up from $2.2 billion in 2006. Freddie Mac's investment has been growing, too. In 2008, the volume of loans funded by Freddie Mac totaled $1.2 billion, up from $425 million in 2004. One problem: Now that the U.S. government has placed Fannie and Freddie in conservatorship because of financing problems tied to the housing crisis, the future of the agencies is in doubt.

Meanwhile, transactions across the industry are likely to be less frequent and smaller than in past years as the credit crunch lingers, sources say.

One bright spot is that the government just streamlined its HUD Section 232 Program, making it easier and faster to secure funds for new and existing nursing homes and assisted living facilities.

AdCare Health Systems, for example, plans to start construction this spring on a new 42-unit building for the Nazarene Church in Grove City, Ohio. Red Capital will finance the $6 million project through the HUD Lean Program.

“For smaller companies like us, HUD is the only place to go,” says Dave Tenwick, chairman of Springfield, Ohio-based AdCare, an owner and operator of assisted and independent living buildings and nursing homes.

AdCare recently completed a HUD refinancing of four Ohio buildings for $6.6 million with Red Capital Mortgage under the old system. Three facilities have loan terms of 35 years; one is 30 years. Interest rates range from 6.5% to 6.65%.

“The beauty of HUD loans is that they're non-recourse and there are no balloon payments,” says Tenwick. Previously, the buildings were financed with bonds backed by letters of credit. Interest rates were reset every seven days.

“We really wanted long-term, non-recourse financing to clean up our balance sheet,” adds Tenwick.

Inside the numbers

Beyond the government loan programs, financing volume for seniors housing fell 84% in the third quarter of 2008 from the same period in 2007, reports the National Investment Center for the Seniors Housing & Care Industry. “When you go down the checklist of financing options, if you are not going through Fannie or Freddie, you're up a creek,” says Michael Hargrave, vice president at NIC.

Total financing for seniors housing in the third quarter of 2008 decreased to about $1 billion from $1.5 billion in the second quarter of 2008. Short and long-term loans, including Fannie and Freddie products, continued to perform well through the third quarter of 2008, with performing loans at 98.9%, a slight drop from 99.5% the previous quarter.

Borrowers are still fighting an uphill battle, however. Many lenders now deal only with established customers, and loan terms often require a large equity contribution. Meanwhile, securitized lending is on hold, putting an end to the big portfolio transactions of 18 months ago.

A large transaction like Fortress Investment's $6.6 billion purchase of Holiday Retirement in 2007 just couldn't get done today, notes one observer.