Lending to Senior Care Facilities

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As the population ages, the demand for facilities that provide care to older adults is increasing. Accordingly, financial institutions are seeing more loan applications from providers of senior care services. Lending to this industry can be profitable, but banks need to perform due diligence.

Jack Dwyer, owner of CFG Community Bank, Baltimore, has considerable experience in this area. He was interviewed recently by Mary Jo Taylor, a member of The RMA Journal Editorial Advisory Board.

Taylor: Senior housing is a growth industry. Why haven't the credit markets been receptive to this industry in recent years?

Dwyer: Many banks have put their toe in the water with respect to independent living and assisted living because those industries are funded privately There is more reluctance to fund the nursing home segment because Medicare or Medicaid reimbursements pay for about 70% of the cost of caring for the patients. Each state has its own Medicaid system that gets partially funded--about 50%--by the federal government. The states are responsible for the rest of it.

Lenders view those reimbursements as riskier because of state budgetary issues. But government reimbursements are a sure form of payment. Clients receiving Medicare and Medicaid represent a guarantee that the operator will be repaid. These facilities represent a much more certain form of payment than a non-age-restricted apartment building, where occupancy rates can be determined by market conditions.

Taylor: Historically, the issue with government receivables is that it's extremely difficult to ensure that the payment comes through to the bank.

Dwyer: Payments may lag, but you're ultimately going to get paid. It's just a matter of time until the provider of the service at the facility gets paid by Medicare and Medicaid. There are different aspects and different asset classes of risk in an apartment building versus a nursing home. I'm much more comfortable with senior facilities than with the market risk attached to apartment buildings.

Taylor: Are there permanent financing sources?

Dwyer: Yes. Even though they're government controlled now, Fannie Mae and Freddie Mac are probably the leaders in the assisted living and independent living space. They don't finance nursing homes, unless it's a small aspect of the project. But HUD [Department of Housing and Urban Development] has a great program for long-term financing for nursing homes, which is predominantly made up of nonrecourse loans with terms of up to 40 years at a fixed interest rate. The interest rate is a function of the GNMA mortgage-backed security market, and today it's probably in the low 4% range.

As an FHA-approved lender, I can request that HUD insure my loan. I can then issue GNMA mortgage-backed securities to ultimately fund the loan. The current 4% interest rate, coupled with the HUD annual mortgage insurance premium of 50 basis points, equates to a rate of approximately 4.5%, which is a great fixed rate. The ultimate goal would be to get most providers on long-term fixed-rate financing because that's what has worked best in the nursing home space. Frequently, though, we provide bridge loans for acquisitions, with the understanding that our ultimate goal is to put the provider, or the owner of the real estate, on a fixed-rate mortgage.

Taylor: We have clients who come directly into the bank for nursing home financing.

Dwyer: Yes, they can go directly to banks. The difference is that banks typically do only five- to seven-year loans. Most providers or owners of the real estate on nursing homes or assisted living are looking for long-term fixed-rate loans. Some are comfortable with a five- to seven-year loan, similar to those for an apartment building or office building. Either is a good financing mechanism; it's just not as broad for apartments or office buildings, and banks haven't gotten completely comfortable with it yet. …