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.