Page 36 —
COLORADO REAL ESTATE JOURNAL
— March 2-March 15, 2016
Senior Housing & Care
Peter Wessel
Seniors housing owner-operators
have a number of choices in how they
capitalize the acquisition, development
and opera-
tion of their
facilities.
Choosing
between
various
sources
of equity
versus debt
involves
several con-
siderations:
a) cost of
capital, b)
emphasis on
ownership
versus oper-
ations, c)
predilection
for risk and d) return on investment.
Banks offering floating-rate debt gen-
erally offer the lowest cost of debt, how-
ever, bank loans tend to be lower lever-
age, shorter term and recourse. Lower
leverage requires higher investment of
equity, with higher yield requirements,
thereby offsetting the nominal advan-
tage of low-cost debt. Shorter terms
expose owner-operators to interest rate
and market risk upon loan maturity.
Recourse provisions trigger personal or
corporate guarantee exposure on the
debt.
On the other end of the spectrum are
real estate investment trust sale-lease-
back and other forms of participating or
quasi-equity financing structures. These
are more expensive sources of capital,
but provide high leverage and may be
best suited for seniors housing opera-
tors who desire to emphasize operations
over real estate ownership as a business
strategy.
Federal Housing Administration-
insured (U.S. Department of Housing
and Urban Development) financing
offers nonrecourse, high-leverage, fixed-
rate debt financing to owner-operators
who desire to maximize investment
return in the real estate assets as well
as operations. Although fixed-rate
debt tends to carry a higher nominal
interest rate than floating-rate debt, it
eliminates interest rate risk. The high
leverage of an FHA-insured loan means
less equity is required, thereby bring-
ing down the effective blended cost of
capital.
Michael Thomas
Private equity and REITs have
increased investment in the senior hous-
ing demographic based on the indus-
try’s favorable risk-reward. Health care
REITs now
represent
the fourth
largest sec-
tor of equity
REITs, com-
prising 11.3
percent of
the market,
following
behind
retail, resi-
dential and
office.
Senior
housing con-
tinues to be
bolstered by
the retire-
ment community’s industry revenue
growth, predicted to accelerate in the
next five years due to more retiring
baby boomers. Industry value added (a
measure of the industry’s contribution
to the overall U.S. economy) is forecast
to grow at 5.9 percent annually over the
10 years to 2020; gross domestic product
is projected to grow only by 2.5 percent.
While there are multiple lenders in
the senior housing space, the HUD/FHA
programs will remain a viable option for
many developers. The new-construction
program is the only one that offers a
construction/permanent loan with no
recourse and a fully amortizing, 40-year
fixed-rate loan. Further, HUD has
recently announced lower mortgage
insurance premiums for certain afford-
able projects and also properties that
meet a variety of energy standards. This
drop is a significant savings to proposed
projects that qualify. The other sources,
such as bank financing and REITs, also
will remain viable options. Banks are
limited by “concentrations” defined
Michael Thomas
Vice president, multifamily
and health care, Gershman
Mortgage
Peter Wessel
Senior director,
Love Funding Corp.
“The sources
of equity and
financing for
seniors housing
and care have
made a dramatic
shift over the
past few years.
It is critical to
understand the
impact of these
shifts and the
future of funding
for new develop-
ment. I want to
thank these three professionals for
sharing their thoughts.”
MODERATOR COMMENTS
Elisabeth
Borden
Principal,
The Highland
Group Inc.
