Seniors Housing Business is the magazine that helps you navigate the evolution of the seniors housing industry.
Issue link: https://seniorshousingbusiness.epubxp.com/i/484276
12 www.seniorshousingbusiness.com Seniors Housing Business n February-March 2015 Capital Corner Love Funding has been lend- ing for over 30 years, but the past eight have marked a shift. FHA and HUD lending has always been a hallmark of the company, which offers refnance, construction and acquisition fnancing programs for multifam- ily and affordable housing, as well as senior housing/healthcare facilities and hospitals. But in 2007, the company decided to play to their strength and focus solely on government-backed loans. Seniors Housing Business spoke with Love Funding Senior Vice President Jonathan Camps about the company's experiences with HUD lending in the seniors hous- ing sector. Seniors Housing Business: How long has Love Funding been in business, and when did the com- pany start lending in the seniors housing industry specifcally? Why, on the seniors housing front, does the company focus exclu- sively on providing HUD loans? Jonathan Camps: Love Funding has been in business since 1984 and this past April marked our 30th anniversary. We closed our frst seniors housing transaction in 1999. Although Love Funding has always focused primarily on the HUD multifamily and seniors housing programs, in 2007 the company made the strategic deci- sion to focus exclusively on those HUD programs. This decision was made because of the very specialized nature of HUD fnancing, and Love Funding decided it was better to be a mas- ter of one type of fnancing than a generalist that offered multiple types of fnancing. With respect to skilled nursing, HUD fnancing undoubtedly pro- vides the most favorable long-term execution and we anticipate that will continue to be the case for many years to come. Love Fund- ing has established a very strong relationship with the healthcare leadership at HUD and we con- tinue to be encouraged by their desire to work with the industry to make further improvements to the programs. SHB: Len Lucas, senior director of Love Funding, recently told Seniors Housing Business that HUD has made great strides toward improving the execution of the program. What's different about the HUD new construction program and how are the improve- ments making an impact? Camps: During the last few years, the HUD new construction program has been used sparingly by developers mainly because of the extraordinarily long lead time. The delay was largely attributable to the huge volume of refnances that forced HUD to create queues, as well as the lack of resources HUD was able to dedicate to the new construction program. At the height, some new construction transactions would wait in the queue for more than a year, then take another 120 days for the HUD review, and up to 90 additional days to close. The atmosphere is different today. The HUD new construction queue is essentially non-existent, meaning 30 days or less of wait time. However, another piece of the equation is the review pro- cess by HUD once an application exits the queue. HUD recently announced that it is committed to a 60-day review period for new construction and they expect to meet this timeframe on a consis- tent basis because of the additional resources they have allocated. SHB: Starting this year, new reporting requirements from the U.S. Department of Housing and Urban Development require that operators of healthcare facilities fnanced under Section 232 of the National Housing Act must sub- mit quarterly fnancial reports. What's the impetus behind that move by HUD and what impact does that have on lenders and borrowers? Camps: Prior to the implemen- tation of this requirement, only an annual audit was performed on the mortgagor. This meant that the operations of the facility were not being captured in the audit, except in the rare instances where the owner and the operator were the same entity, or no operating lease was in place. Even if the operations were captured in the annual audit, once a year is not really suffcient to properly monitor the operations of a seniors housing facility. Both HUD and the lenders have taken a more proactive approach to asset management, with the primary goal being to head off an issue before it becomes one that is insurmountable. Quarterly reporting of the opera- tions makes sense, but there will be some initial kinks to work out with the reporting system itself. SHB: Technology seems to play an increasingly impor tant role in the seniors housing industry on the operations side. When you are underwriting a loan on an existing property, to what extent does the operator's tech-savviness play a factor? Camps: Although initial start- up costs associated with the purchase of new technology may be high, we expect to see savings in the operating expenses due to the effciencies gained. Utility expenses, as an example, should be lower with regard to LED light- ing and maintenance supplies due to the long life of these products. Technology improvements almost always translate to improvement in risk management as more tools are available to management to track and report areas of risk. In particular, for skilled nurs- ing facilities we've noticed that improvements in technology have led to a higher CMS star rating, which is highly scrutinized by the lender and HUD. Higher star ratings and patient satisfaction should lead to higher occupancy and revenue. Technology could also be a competitive advantage in the mar- ketplace if the competing proper- ties in the area do not utilize such technology. Overall technologi- cal improvements demonstrate the operator's commitment to improved operations, manage- ment and resident care. SHB: Does Love Funding underwrite a loan on a stand-alone memory care facility much differently than an assisted living facility that has a memory care component? Camps: I would say no, especially for stabi- lized assets. Memory care residents are considered higher in acuity. Therefore, a memory care operation carries higher operating expenses and a lower margin. Our underwriting takes this into consider- ation, but the historical performance for stabilized assets is typically the driver. A new construction transaction or substantial rehabilitation trans- action adding new memory care units must account for the market demand. Different assumptions are used to determine memory care demand, such as the target popula- tion group and the income qualifer. It is important that the operator or management agent has a strong level of memory care experience. SHB: Is there a sense of compla- cency settling in among lenders and borrowers alike that these extremely low rates are the new norm, or do most industry experts know the current interest rate environment is not a permanent condition? Camps: I don't think anyone in the industry ever believes that a low rate environment is a per- manent condition. With that being said, I think the industry as a whole believes the low rate environment will remain in place for the bal- ance of the year. Love Funding is certainly in that camp, based on our experience and the market intelli- gence we receive from our business partners. The current political and economic environment point in the direction of stable interest rates, which is good for HUD lenders and borrowers alike. n — Matt Valley and Jef Shaw Please see complete interview at www.SeniorsHousingBusiness.com. ". . . for skilled nursing facilities we've noticed that improvements in technology have led to a higher CMS star rating," says Love Funding Senior Vice President Jonathan Camps Love Funding relishes its role as a specialist in HUD lending