Ultimately making sure you have access to ready capital is key to growing a senior living company.
This article may have limited appeal, but is still worth publishing. This article is for two groups of readers:
- Anyone who is involved in the development or financing of senior housing communities.
- The curious.
If you don’t fall in one or both of those categories you will want to skip this article.
Growing a Senior Living Business
Owning, operating and growing a senior living company is no piece of cake. The challenges include:
- If developing from scratch: finding the right property in the right marketplace with the necessary entitlements (land use approvals).
- If acquiring operating communities: finding the right properties and making sure they have enough upside potential to make the risk of acquisition worthwhile.
- Finding the right staff and getting them trained.
- Getting and keeping the building full, which means having a great marketing team and doing a great job of resident care.
- Finally: making sure you are on the right side of the regulatory environment.
Money Makes the World Go Round
Ultimately, though, making sure you have access to ready capital is key to making this all happen. Recently Freddie Mac rolled out a new program that provides senior housing owners a revolving credit facility that is particularly helpful to owners who are developing new properties or purchasing existing properties and enhancing value (improving cash flow). Scott Kavel and Neal Raburn, Managing Directors at Greystone, recently completed the first of these transactions for Oakmont Senior Living. I spent some time talking to them about the nuts and bolts. Here is how it works:
- It’s a product that is only available to established senior living developers/operators, which generally means at least 5 senior living communities.
- It’s a tool to free up capital from projects that are cash flow positive but have not yet reached stabilized occupancy.
Scenario One: New Development
You have developed a new assisted living community and almost immediately you hit 75% occupancy. The building is cash flow positive with occupancy continuing to improve. You have a construction loan that you want to clear and a number of additional projects in your development pipeline you would like to get underway. The challenge is that you need to be at stabilized occupancy for six to eighteen months before you can roll into permanent financing. You can use this revolving credit facility to pay off your construction loan and free-up some initial development cash. Then, as cash flows increase, you are able to draw down additional funds to continue your development process. Finally, once the community supports the desired loan amount and seasoning, the property will be moved out of the revolving line of credit with permanent financing freeing up the revolver for your next project.
Scenario Two: Acquisition
Your business strategy is to acquire existing senior housing assets and enhance their value. This could include single properties or portfolios of properties. Your model is to do what needs to be done to enhance value, refinance the properties and then do it all over again. The biggest challenge is that, even after you start to improve cash flow, it takes an impossible amount of time to get to new permanent financing that allows you to do further acquisitions. The way you can use this line of credit is twofold. If the properties are already cash positive it could be used as part of you capital source for the acquisition of these properties or, as the properties become cash flow positive, you will be able to draw from the line of credit to fuel further acquisition before obtaining permanent financing. Key Points
- There is no minimum occupancy requirement
- The interest rate is floating based on 1 or 3 month LIBOR.
- It is interest only for the full term of the loan.
- While there is a valuation test, the primary test is debt service coverage.
- It is designed to generate a pipeline of high quality permanent financing business through Freddie Mac.
The seasoning of the asset(s) in the revolver helps additional assets to be added sooner rather than later, so there is a benefit to leaving seasoned assets in the facility for up to 2 years.
The Fine Print
- In looking at assets to secure the revolver the will need to support appropriate debt service coverage ratios.
- They will also need to meet appropriate loan to value ratios (something that can be helped by other assets already in the revolver.
- Increased performance by assets in the facility make it possible to bring in new assets that may not on their own support debt service coverage and loan to value ratios.
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