News from OBRE

News from OBRE

October 12, 2001

Keys to Successful Financing of Senior Housing Healthcare PropertiesMortgagePress.comSenior Housing, Healthcare Properties
Throughout the past 24 months, senior housing, healthcare owner/investors and
owner/developers have learned the following painful lesson:
"Capital sources are only as strong as their weakest link," said Cambridge Realty Capital
Companies Chairman Jeffrey A. Davis. "Some funding options that appeared to be poised for
exceptional growth not too long ago are not even in the picture anymore. The federal
government's new payment system for Medicare and other regulatory reforms have dramatically
changed the industry's profit picture and how lenders and investors view current possibilities.
But lenders and borrowers continue to cope and make adjustments, and deals are getting done."
According to Mr. Davis, four interrelated components are the keys to success in any financing
transaction: availability of capital, flexibility of the lender, predictability of outcome and loan
terms suitable to the borrower and lender.
Availability of Capital
The investor or developer should begin any search for capital with the knowledge that borrowing
options are available for any type of loan, including new construction, substantial renovation,
acquisition loan or refinancing. The borrower must know or determine the amount of money that
is needed, as well as the purpose and length of time.
There are several questions to ask, including:
++Is the capital provider a regional or national money source?;
++Can the lender comfortably handle the size of the loan needed?
++Will one lender provide the entire loan or will it be securitized?
It is also important to know if the lender or loan broker facilitated this type of loan in the past,
and if so, how often and with whom.
Flexibility of the Lender
Both the borrower and lender begin negotiations with definite needs and attitudes. Differences
often exist in the ways a potential borrower and lender see the transaction evolving, but in every
situation, there is a need to create common ground.
It is reasonable for borrowers to ask if the lender is a problem solver or a problem creator who
intends on going the extra mile to find a reason for not approving a loan.
Other important considerations include:
++Is the loan officer partially compensated by completing loans or do they receive a steady
salary, regardless of the outcome?
++Will the borrower or lender exert the most control of structuring the deal?
A partial answer regarding the control issue depends on whether the lender is regulated or non-regulated. Many find it helpful to engage the services of a financial intermediary that can help
tailor unique loan structures to meet specific needs.
Predictability of Outcome
Similar to any endeavor, doing the right things over time allows an individual to predict results
with a higher degree of success. While no can promise absolute predictability for a loan, it is
possible for a borrower to improve the odds by checking the lender's track record. Important
questions to ask include:
++How many loans, of the type in question, has the lender closed in the past 12 months?
++How long has the company been processing loans in the industry?
++How committed to this type of loan is the company?
++Is there a dedicated lending team for this type of account or is this an add-on product line?
++How many internal and/or external individuals and/or committees will be involved in making
a decision about the loan and how it will be serviced?
++How close to the term sheet will the commitment be?
++Is the term sheet considered the beginning of a negotiation?
++How will the loan look in its final format?
Loan Terms
It is important to fairly assess all of the specifics of the loan, such as:
++Is the interest rate fixed or spread over treasuries?
++Is there personal recourse?
++What is the amortization period?
Borrowers should also concern themselves with additional vital information, such as release
provisions on multi-facility transaction, positive and negative covenants, reporting requirements
and the cost/return of application fees.
An owner/investor working with a financial intermediary or in-house counsel, needs to balance
these terms with other factors, such as how quickly a prospective lender can react to the
borrowers needs.