Project financing remains expensive and scarce for seniors housing as conventional lenders continue to exercise caution, despite an economic uptick and relatively stable occupancies.

Heeding the call, the government-sponsored entities (GSEs) Fannie Mae and Freddie Mac, along with HUD, have stepped up to the plate. The GSEs have provided liquidity to seniors housing at a time when other commercial sectors have languished due to a lack of funds.

In the year leading up to March 31, the GSEs accounted for 96% of all multifamily lending, or $235 billion, which includes the seniors sector, according to the U.S. Federal Reserve.

Beyond the GSE programs, however, seniors housing owners and operators can expect a long slog to secure debt capital. Private lenders such as Credit Suisse and Merrill Lynch Capital have exited the market. Others have pulled back after carefully assessing their risk tolerance while investors with cash sit on the sidelines waiting to snag distressed assets.

The few remaining active lenders demand high-equity contributions. Other lenders, eager to purge real estate loans from their books, are giving owners six months to secure new financing.

“It's not impossible to find debt financing,” says Joe Resor, CEO at Resor Financial Group, a Cleveland-based advisory group for seniors housing companies. “But it's a struggle.”

Times have changed. Two years ago, Resor's group would present a deal to four banks and two would make offers. Now, deals are typically shopped to 15 to 20 banks with one or two offers. “It's not like we can't get it done, but it takes a whole lot more digging,” says Resor.

The paucity of deals tells the story. Loan volume fell 80% in the first quarter compared with the same period in 2008, reports the National Investment Center for the Seniors Housing & Care Industry (NIC) based in Washington, D.C.

Still, seniors housing has continued to fare well. Some 98.75% of loans were performing in the first quarter, down only 55 basis points from a year earlier, says NIC, based on its survey of eight major lenders including the GSEs. Occupancies have dropped but stood at a relatively healthy 89.2% at the end of the first quarter.

Stepping up to the plate

Sensing a hint of opportunity, a handful of banks and commercial finance companies are selectively funding projects. REITs are buying and lending on some properties, too. And some equity investors are still active. Grubb & Ellis Healthcare REIT II, a new fund seeking to raise about $3.3 billion that launched in late August, will seek skilled nursing and assisted living properties.

Conventional lenders are clearly being cautious, however, and prefer to build relationships with seasoned operators. GE Capital, for example, only works with portfolios of at least two or more buildings. “We won't do one-off deals,” says Brian Beckwith, senior managing director at GE Capital in Chicago.

Health Care REIT prefers relationship-based deals, too. The Toledo-based company recently financed two projects operated by Senior Living Communities. Construction financing was provided for Watersong, a new continuing care retirement community (CCRC) in Viera, Fla. The REIT also purchased Marsh's Edge, a CCRC in St. Simmons Island, Ga., that had defaulted on its tax-exempt bonds.

Chuck Herman, chief investment officer at Health Care REIT, admits that its funds are more expensive than the tax-exempt bonds that had been used to finance CCRCs before that market dried up. But, he notes, “our speed of execution and the fact that we can do multiple transactions with a developer or operator is an advantage.”

Relationships aren't the only deciding factor, however. Private lenders are avoiding depressed housing markets such as Nevada and Florida. Ventas, a healthcare REIT based in Chicago, prefers markets with high barriers to entry, mostly infill locations in big metro areas. “Markets with strong economies are attractive to us,” says Ray Lewis, CIO at Ventas.

No big deals

Large loans remain rare, with lenders limiting commitments to no more than $20 million. Another shift is that the borrower assumes the risk.

“Lenders have to be convinced that the deal will never be their problem,” says Marc Thompson, a banking executive in California. That means low leverage and high equity contributions. “The outlook is so uncertain,” adds Thompson.

Two years ago, loans on skilled nursing or assisted living buildings typically were originated using a 75% to 80% loan-to-value ratio with a five-year term and 25-year amortization. The pricing was 175 to 250 basis points over the one-month London Interbank Offered Rate (LIBOR) with no floor, according to Doug Korey, managing director at Contemporary Healthcare Capital in Shrewsbury, N.J.

What's more, loans were available for experienced operators as well as new developers. Personal loan guarantees weren't necessarily required.

Today, loan-to-value ratios are 65% to 75%, with pricing in excess of 300 basis points over one-month LIBOR. Interest rate floors are in excess of 7%, translating into an effective rate of LIBOR plus 670 basis points. Loans are typically only granted to experienced operators on properties with solid cash flows, and personal guarantees are required.

Next Page: Short terms, big fees

Short terms, big fees

Loans with three-year terms are more common today, a reflection of the changing risk appetite of lenders, says Kevin McMeen, group president of real estate lending at MidCap Financial, a Bethesda, Md.-based health care finance company.

“Borrowers may find a local bank that will go out seven years at a fixed rate,” says McMeen from his Chicago office. “But that's the exception.”

Lenders also are raising fees, and borrowers can now expect to pay two to three points versus a single point two years ago. “Lenders are looking for something other than extending credit,” McMeen says.

Construction loans are hard to find. Bank of the West is an exception, recently closing two deals. A $25 million loan was funded in May for a 117-unit project, Segovia, in Palm Desert, Calif. The bank also provided an $18 million construction loan to Spectrum Retirement Communities for a 140-unit project, Palos Verdes Senior Living in Peoria, Ariz.

Capital for refinancing properties is more readily available. MidCap Financial closed in May on a $19.5 million senior credit facility to Goldstar Healthcare of Los Angeles.

Facing strong headwinds

Most industry observers believe conventional lending for seniors housing will languish for another 18 to 24 months. Other factors cloud the outlook. Sunrise Senior Living faces a December deadline to renegotiate its loans, and some worry a Sunrise bankruptcy could tarnish the industry and further unnerve lenders.

The troubled Sunwest Management portfolio continues to unwind. Over 100 Sunwest properties have been placed in foreclosure, receivership or bankruptcy. Other operators are still overleveraged, which may mean more distressed sales.

“The uncertainty of health care reform clearly does not help,” notes Herman at Health Care REIT. One bill would trim as much as $44 billion from Medicare payments to nursing homes over 10 years.

In August, the Centers for Medicare & Medicaid Services issued a rule that cuts $360 million in Medicare payments to nursing homes in 2010.

“Cash flow is holding steady” at our buildings, notes GE's Beckwith, “but we are watching Medicare.”

Jane Adler is a Chicago-based writer.