Don Pelgrim headshot
Don Pelgrim
Don Pelgrim headshot
Don Pelgrim

Are you asking for a buyout or a bailout?

In today’s economy, there’s no question that senior living owners and operators have faced their fair share of challenges, ranging from a seemingly never-ending pandemic to inflationary costs and a tightening of the money supply by the Federal Reserve. Although many communities and facilities have turned a corner, others aren’t out of the woods yet.

As a lender who provides short-term financing solutions, I can tell you that there are several aspects that lenders will examine when owners and operators are seeking capital. The requests can run the gamut, but recently, because of shifting market dynamics, two types of requesters are more prevalent: those who are seeking a buyout, and those who are seeking a bailout.

When capital is used strategically after you’ve performed or executed the business plan, that is considered a buyout. When a property is struggling and seeking additional capital to keep the project moving forward, that is considered a bailout.

An example of a buyout scenario could involve a stabilized facility with equity capital now seeking a realization event — reaping some of the capital and the gain out of the facility, or considering longer-term financing, such as from the US Department of Housing and Urban Development or agency financing. Under HUD’s current criteria, it is difficult to pull equity out of a facility, but a two-step transaction using a bridge loan to release some of the equity in the property before obtaining the HUD loan may be a viable solution. 

Buyer’s considerations

If you are on the buying end of a buyout or transaction, there are several factors to consider when assessing a facility’s worthiness:

  • Location, location, location. Geographic location plays a crucial role in how successful a community/facility is. Is it close to high-quality healthcare services? How accessible is it to public transportation (not only for residents and families, but for employees, too)? Is the property located within a desirable neighborhood? If the answers are a resounding yes, then that location can enhance occupancy rates and continually attract residents.
  • Your market. Understanding the local market is imperative for the due diligence process. Become well-versed with the area demographics and aging population, as well as with your competition. Evaluate the competitive landscape and market trends to determine whether the facility can adapt and remain competitive in the evolving senior living industry. Doing so can help you gauge the feasibility and profitability of your investment.
  • The facility footprint. Consider the facility layout, the number of units, the common areas and the current amenities available. Explore whether the property can accommodate multiple levels of care and services or if it is strictly licensed, for instance, as an assisted living community. When flexibility exists in the layout, or there can be creative repurposing of layouts, you can cater to a broad range of resident needs with multiple revenue streams.
  • Regulatory requirements. Is the community/facility in compliance with state, local and federal regulations? Review all Centers for Medicaid & Medicare Services reports, annual surveys and findings, as applicable. Conduct thorough due diligence to avoid any potential compliance snags that could affect future growth.
  • Financial considerations. Assess the financial performance of the property, including historical occupancy rates, revenue growth and profitability. Consider working with financial advisers or consultants to conduct a comprehensive financial analysis. Garner an understanding of the purchase price, operating costs and potential revenue.
  • Human capital considerations. What is the current staffing structure and structure of the existing management team? How do staff members interact with residents? Evaluate management’s expertise, track record, and ability to handle day-to-day operations effectively as well as weather any potential crises or storms.  
  • Physical condition. Thoroughly inspect the property’s physical condition, assessing its age, infrastructure, equipment and safety features. Determine whether any renovations or upgrades may be required as well as what the associated costs would be.
  • Resident services. Review the array of services and amenities offered to residents while also considering the quality of care, recreational activities, dining options and social engagement. Are onsite medical services or clinics present? Does the community have an ongoing partnership with a local hospital system or physicians’ group?
  • Reputation management. When you research the community, what do you find in online reviews? Are they positive, glowing reviews, or are the reviews littered with complaints and negative feedback? Does the organization have any pending lawsuits or judgments? Positive word-of-mouth is imperative for attracting new residents and maintaining high occupancy rates and community goodwill.

Two sides to the coin

There are two sides to every coin, and if the focus is not on a buyout that already has been stabilized, then a bailout often is the next circumstance that comes to fruition.

A bailout scenario might be a property that is struggling and not yet stabilized, and the partners want their money off the table.

Let’s assume an investor group acquired a newer assisted living community in 2019 when demand and competition for assets was fierce and capital was cheap and abundant. They paid a premium for the property based on the projected returns and valuation upon stabilization.

Despite aggressive stabilization timelines, it still was considered financially feasible. Then COVID hit. After months of lost operational and economic ground, fast forward to 2023 and the facility is struggling with occupancy, retention and recruitment, regulatory burdens, and a $50,000 per month operating deficit.

The road to stabilization

Several factors go into stabilization and whether a particular community or facility ultimately can turn the tide to reach those goals. Every circumstance is unique, but working toward stabilization benefits all parties involved. The road to stabilization requires patience, tenacity and flexibility.

It is possible that one management team simply is not able to achieve stabilization, yet another team with a fresh vision can. Sometimes, external circumstances such as a pandemic or even catastrophic weather events could significantly alter a stabilization timeline.

In today’s economic climate, this endeavor is not for the faint of heart. Evaluating systemic risk versus nonsystemic risk can help inform the quest for stabilization and what risks or challenges may lie ahead.

Systemic risks may include political, social or economic factors that affect the business from an external standpoint (for instance, rising interest rates, inflation, COVID-19, etc.). Nonsystemic risks are factors that exist within a company/organization (for example, poor management resulting in poor resident care and lawsuits; unionization efforts; botched deployment of a particular service line, etc.).  This risk-reward evaluation is key to understanding whether it is time to turn over the reins or give it another go.   

As both buyout and bailout scenarios become increasingly common, every owner and operator should consider his or her unique circumstances to evaluate the best path forward. Possible financial solutions to explore:

  • Traditional capital: Traditional loan providers often are the first step for debt financing, including banks, HUD, the Small Business Administration, Fannie Mae and Freddie Mac, among others. Traditional loans are lower cost and longer term than other loan alternatives, but they often take much longer to close. Some traditional lenders also have a “bridge loan clone” product, which may be shorter-term but more flexible than their long-term financing. It has become increasingly more difficult, however, to garner traditional approvals due to credit restrictions and a tighter regulatory environment.   
  • Bridge capital: Nontraditional, nonbank providers of bridge capital deliver loan solutions that generally are faster and more flexible than traditional capital providers (an average of 30 to 45 days to close), with loan structures and terms tailored to the request’s specific criteria and circumstances. Drawbacks can include the higher cost and lower advance rates (or loan-to-values) as compared with traditional lenders, as well as the unique lending criteria across nontraditional providers.
  • Partner capital: Depending on a variety of factors particular to the facility’s performance and management’s abilities, raising additional capital through sponsors and existing equity holders may be a viable option. If the existing equity holders are not willing to put additional capital at risk, then raising new or fresh equity may be an alternative. Challenges include raising the additional capital and the dilution that occurs from a new capital infusion. If additional capital is obtained, then the sponsor may have a higher probability of delivering on the plan and later providing a liquidity event for the investors through the sale or refinance of the property. 
  • Combination approach: A combination of new debt and equity capital may provide the solution required to satisfy the requirements of both the debt and equity holders, striking a balance to offset the lower loan-to-value of the new bridge debt while delivering sufficient capital to complete the plan. When equity holders put additional capital into the facility (that is, a cash-in refinance), lenders view that as a positive commitment, and the equity holders may experience less dilution and risk than if they had funded all of the capital through equity.
  • Strategic alternatives: Strategic alternatives could include restructuring management, creating a strategic partnership or joint venture, and/or selling the facility.

Although these approaches are not all-encompassing, this list provides some insight into how lenders view the buyout versus bailout requests within senior living, as well as prudent options to consider. Owners and operators should explore all financing solutions at their disposal while remaining cognizant of how lenders may view their scenarios, to produce the best possible outcomes for their community, residents and investors.  

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 real estate 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 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.

Have a column idea? See our submission guidelines here.