Senior living owners and operators always should ask the question: “What is the best financing for my type of transaction?”
Based on the specific situation and the opportunity, it is important to weigh the merits of traditional lending (bank) and alternative lending (bridge loan). Although a traditional loan always will be cheaper capital, it may not provide the most flexibility. Certain situations and marketplace circumstances can drive the direction of which financing option makes the most sense.
Although a bridge loan isn’t a tool you will use daily, it is an important to tool to use when the time is right. Doing a deal with a bank an agency or the Department of Housing and Urban Development always will be cheaper money, but when circumstances change, you may need to explore other alternatives. (For the purposes of this article, we will refer to bank, agency, HUD and traditional financing as bank financing, a bank loan or traditional financing.)
On the other hand, a bridge lender may be willing to offer more flexibility than a traditional sources. Understanding how lenders view potential transactions also is helpful in deciding the best financing options.
All lenders will look at deals differently, but it is relevant to view a bank loan as a long-term transaction, whereas a bridge loan is short-term, bridging the gap to your next step. Banks are scrutinizing deals based on their regulatory requirements and internal lending parameters, because of this, banks tend to be more rigid in their permissible lending criteria.
By comparison, bridge lenders aren’t beholden to the same regulatory requirements, allowing bridge lenders to potentially have more flexibility and creativity when underwriting a deal. Within that flexibility, bridge lenders often focus on the alignment of a transaction, specifically alignment between the lender, owner and operator. Lenders want to know that the owner and operator are invested in the process and outcomes.
Why alignment matters
In any potential transaction, lenders are evaluating several criteria. Although the financials must make sense, the viability of the operational strategy driving the financials also must make sense. The facility’s management team charged with executing the strategy is crucial in making that happen.
A bridge lender may be more willing to provide flexibility if there is alignment with the owner and operator. That alignment is crucial because it often determines the viability and potential success of the project. Therefore, the lending process becomes more than just a monetary transaction.
Specifically, the value of an assisted living community is not in the building itself, but in the people and the operations. The business plan and how the team executes on that plan is what creates value.
Bridge lenders want to understand how the owner or operator intends to execute on the proposed plans and whether the team has the industry and in-market experience, knowledge and contacts to back it up. This underscores the importance of alignment. Think of it like betting on the jockey, not the horse. If the owner, operator and on-site management team isn’t aligned, then that will create problems and red flags within a deal.
Lenders also want to see owners and operators put at-risk capital into the deal. The specific amount of capital will vary by the facts, circumstances and structure of a particular deal, but the prevailing thought is that the person who has something invested in the transaction always will be more motivated to ensure they execute.
Bridge lenders want to see owners and operators with “skin in the game,” because that capital contribution proves they personally believe in the investment. Lenders will ask, “What does the money in this transaction represent to that particular individual?” Placing one’s own at-risk capital into a deal reinforces the commitment to a mutually desirable outcome.
Bridge lenders also are exploring whether all parties in the deal are in alignment. Does the owner want something different than the operator? Are there other parties in the deal, and if so, how do they factor into the equation? Are they also aligned with the business plan and owner/operator? Those questions are crucial to ensuring a successful financial solution.
Different circumstances and market environments affect which type of lender is the right fit. Understanding how varying types of lenders operate and view transactions helps determine which financial options fit your unique scenario. In certain instances, a bank loan will be your best bet. In others, a bridge loan may be the best solution for advancing business goals.
Don Pelgrim is the CEO of Wilshire Finance Partners, a real estate finance and investment company specializing in bridge loans and capital solutions for senior living and healthcare from $1 million to $10 million nationwide. Prior to joining Wilshire, he was a practicing attorney and held several executive positions in the banking and financial services industry. Pelgrim has a juris doctorate from Loyola Law School of Los Angeles and an undergraduate degree in business administration from Hofstra University.
The opinions expressed in each McKnight’s Senior Living marketplace column are those of the author and are not necessarily those of McKnight’s Senior Living.
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