I don’t quite know why, but somehow this sounds not quite right.

I don’t quite know why, but somehow this sounds not quite right.

While at the NIC Conference in San Diego a couple of weeks ago there was a great breakout session on the types of financing available to senior living developers. This was sort of a 101 course, or maybe just a good place for developers to make sure they are aware of all of their options.

As the panel discussion progressed, there was some talk about traditional development financing where the developer would put in 20-35% of the project equity, (either the developers or investor partners), get a loan to finance the construction and then secure permanent financing when the community was full.


Connecting with a REIT where it is now possible to finance a project 100%. That 100% includes the cost of land, the costs of all the stuff that goes in the building and even initial start-up costs from marketing to reserves.

Pluses & Minuses – Traditional

The benefit of traditional financing is that the developer/owner actually owns the project, they ultimately have more control and the hope is that over time the mortgage debt will be paid down and the market value of the project will increase in value making a nice return for the owners.  

The downside is that wrangling equity capital is not always easy, which means the growth trajectory is modest.

Pluses & Minuses – 100% REIT Financing

The thing that makes this whole 100% REIT financing work is that given the current state of the capital markets REIT’s have a mind boggling amount of low cost capital. The big benefit for the REIT is a good rate of return. 

The big benefit for the developer is that experienced teams, who have little or no capital, can relatively rapidly grow a vast cash flowing enterprise.  

The downside is that while these teams are able to grow significant businesses, they don’t really own much of anything; though some of these financing agreements do include buyout provisions for the developer/operator. 

They face lease agreements with ever-increasing lease rates, which could limit the operator’s ability to really get ahead. It also means that looking down the road when the communities need upgrades to keep up with new competition, the cost of those upgrades could be problematic.

A Conflicted Situation – Jumbled Thoughts

I have spent a lot of time thinking about 100% REIT financing and I have a number of friends who are using this financing vehicle to grow substantial companies. And yet . . . there is something about the idea of 100% financing that just seems not quite right.

  • If demand keeps growing, meaning occupancy rates continue to stay high and rents continue to go up, then things will be dandy for everyone.
  • If things get dicey, I find myself concerned that operators will skimp on maintenance and maybe other things in order to hold on to what they have.
  • It is inevitable that the steady economic growth we are seeing won’t last forever. What happens when the economy stumbles again, people delay moving into senior living and the market won’t support rate increases? 

I may just be old fashioned about this because there are lots of very successful businesses that don’t own much real estate, think Starbucks. Yet the challenge is this. If a Starbucks store or a cluster of stores in a marketplace fail, a few people lose their jobs and consumers go to McDonalds, ARCO or the next coffee stop for their fix. 

If a Senior Living community gets in trouble and there is not much room to maneuver, it puts, not only a bunch of jobs in jeopardy, but a bunch of frail seniors.

I know, because I have had the conversations, that others see no downsides to this new financing. I would welcome a counterpoint article.

 Steve Moran