Just when it looked like the forecast called for sunny skies ahead after the pandemic, inflation costs and whispers of a recession have rolled in like threatening thunderstorms.
A June survey from MagnifyMoney noted that 70% of Americans believe a recession is coming. Pundits and financial analysts are sounding the alarm bells, fixating on early 2023 as the possible start of a recession. Although not everyone is convinced that a recession is imminent, senior living providers already are juggling numerous burdens, from staffing shortages and lower occupancy to inflationary cost increases.
In an environment of economic uncertainty, short-term capital, or bridge lending, can prove invaluable in meeting business goals. Here are five reasons successful senior living providers leverage bridge loans to meet their strategic objectives.
1. The bank says no
Sometimes, even the best of business strategies won’t get funded by a traditional financing institution. Perhaps the bank isn’t interested in financing the transaction, or the timing is incompatible. In today’s climate, more operators experience bank-backed deals falling through, which is attributable to new restrictions on lending parameters. Bridge lenders often are on the receiving end of panicked calls from owners and operators whose transaction quickly evaporated. Economic pressures have ripple effects, and traditional financial institutions such as banks are not immune to those pressures. As a result, banks tighten their credit boxes, and that affects the existing pipeline of deals and future transactions.
2. Time is of the essence
Although real estate often is associated with the phrase “location, location, location,” bridge lending always is about “timing, timing, timing.” When time is of the essence and a transaction needs to happen in an expedited fashion, such as 45 days or less, short-term lending always will have the upper hand. When circumstances dictate fast and flexible financing, short-term lenders can perform extraordinarily well. Timing constraints within a transaction can happen for a variety of reasons, but it is precisely for those reasons that bridge loans are uniquely positioned to support strategic goals.
3. Complex transactions
There are transactions, and then there are complex transactions. Bridge lending specializes in the latter. Complicated transactions often have many nuances influencing whether traditional lenders even will consider financing a deal. A traditional lender may not be willing to take on the added risk or is unfamiliar with senior living. If the loan request is outside a lender’s wheelhouse, then that lender isn’t likely to pursue it. Complexities are further added when a transaction involves a value-add or opportunistic acquisition. In those situations, a facility that is struggling with falling occupancy, reputational risk or regulatory citations may be enough to scare off traditional lenders. Those scenarios might make a deal complex but are a good fit for creative short-term financing.
4. Rates aren’t everything
Rates are just one part of the equation when examining the effective cost of capital. Just look at how mortgage interest rates have fluctuated over time. Although many are accustomed to interest rates around 5%, in the 1980s, rates skyrocketed to 16 to 18%. Although bridge loan interest rates are slightly higher than traditional lending rates, it would be unwise to discount the product solely on that premise. A bridge loan is a tool designed to provide fast and flexible financing with execution certainty. It often is more costly to lose a lucrative deal than if you proceed with a bridge loan at a higher rate. Once stabilization is reached, it becomes that much easier to obtain permanent, long-term financing. That results in a two-step transaction where the opportunity is captured with the bridge loan and financed results are maximized through permanent financing.
5. Payoff is paramount
The goal of any transaction is to enhance operations, occupancy, and revenue—whether that is looking to refresh and rebrand an existing community or create acuity-level transitions within an existing building’s footprint. In the search for post-pandemic profitability in an environment of economic uncertainty, access to short-term lending is an imperative tool in your financial toolkit that creates options for success.
Successful owners and operators build a bridge to profitability and sustainability by starting with seasoned strategies and a trusted short-term lender who can finance the business vision. As traditional lenders tighten their credit expectations and lending parameters, explore bridge financing as a smart strategy to achieve business objectives.
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. Before 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 a bachelor’s 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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