America’s aging demographic profile is no secret. Consequently, we have seen heavy inflows of capital, development and management into the senior housing sector in recent years, so much so that it has caused experienced senior housing lenders to evaluate new opportunities very carefully.

Experienced lenders in the senior housing market understand that it is an execution-based business where success often is predicated on the owner and operator having the financial wherewithal to operate the business, as well as the experience to handle the ups and downs that occur within the industry. As such, when it comes to the financing of senior housing projects, experienced lenders determine their interest by examining several critical factors surrounding each property individually.

It begins with the sponsor’s experience in the senior housing market. Simply being in the space is not enough to attract debt.

Ideally, lenders look for sponsors who possess successful track records in developing and / or operating senior housing facilities. Hiring and retaining experienced caregivers arguably is one of the biggest challenges in the senior housing industry. Although not a new issue, it continues to affect the market, especially with the continuing growth in the space.

A well-thought-out business plan that clearly identifies an exit strategy is crucial in obtaining bridge financing. Relying on hope that a sponsor will execute its plan is not a strategy with which lenders generally are comfortable.

Lenders also want to know what would happen if the business plan does not go exactly as planned. Does the sponsor possess the experience and financial depth to weather the storm, get through those rough spots, and come out the other side? Ideally, the sponsor also will have “skin in the game,” because bringing more equity into the deal demonstrates the sponsor’s confidence in its own execution strategy and protects the lender’s downside risk.  

A strong census helps create a clear vision of the market. Before committing financing, a lender conducts a comprehensive analysis to see how viable the product offering is for each specific market.

Whether it’s independent living, assisted living or memory care, lenders need to determine what the census is in the market to fill those beds. Where are the potential new tenants coming from, what is the average household income, what is the size of the population that is aged 75 or more years, what is the current occupancy in the market, and what is the pipeline for new product coming online?

Due to the large amount of growth in the senior housing sector, it is taking longer to get a senior-housing project to market from inception, and then taking longer to lease it up.

Multiple reasons exist as to why a sponsor can benefit from a bridge loan. The most common:

  • To refinance a construction loan that is at or near maturity because the lease-up is taking significantly longer than budgeted, or to free up construction financing for the next project;
  • Repatriation of equity to investors whose repayment expectations have matured and who would like to be paid;
  • Heavy cash-out refinancing for capital improvements or partnership consolidation;
  • Acquisition of a distressed asset — to serve as a bridge to stabilization;
  • Management companies exercising their purchase options and needing to close quickly.

There clearly is a need for short-term money in the seniors space.

For example, we recently provided a bridge loan to a behind-schedule senior-housing development that was only 50% occupied. Proceeds from the financing allowed the sponsor to pay off the existing construction loan and provide the time needed to stabilize property.

With the payoff of the current construction loan, the sponsor was able to obtain a new construction loan with the same bank for its next development deal. The sponsor is expecting to increase occupancy and take out the bridge loan with long-term permanent financing in 18 to 24 months.

As a sponsor, it is important to select a lender with a keen understanding of all care levels within senior housing and care. A lender with understanding of the complexity and subtle nuances of the specific asset and operations underlying the loan is paramount to certainty of execution and a quick close. More importantly, a knowledgeable and experienced lender provides the value add of being able to contribute to a sponsor’s business plan.