Seniors Housing Business

FEB-MAR 2018

Seniors Housing Business is the magazine that helps you navigate the evolution of the seniors housing industry.

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www.seniorshousingbusiness.com 45 February-March 2018 n Seniors Housing Business Take the express to capital. The shortest distance to capital is straight talk. CapitalSource, a division of Pacifi c Western Bank, Member FDIC We know how to clear the way for an opportunity. Our industry expertise and effi cient loan process allow us to get deals done. And backed by our solid balance sheet and lending power, we deliver fl exible solutions for any size and type of skilled nursing or seniors housing facility. Whether you're expanding, diversifying, or responding to the reimbursement and regulatory environment, we can get things done. Give us a call to get on board. Don Kelly, Senior Director, Healthcare Finance (888) 674-1462, dkelly@capitalsource.com For more information, visit www.capitalsource.com/shb18. West Coast Portfolio Skilled Nursing & Assisted Living $30,000,000 Senior Term Loan East Coast Portfolio Assisted Living $11,000,000 Senior Term Loan Midwest Portfolio Skilled Nursing & Assisted Living $16,125,000 Senior Term Loan and equity opportunities at the firm. Lower leverage, higher rates Not every large lender has become more conservative about financing seniors housing projects, but enough have stepped back to make a difference. "Banks are becoming more con- servative with respect to loan to cost," says Christopher Fenton, managing director of seniors hous- ing for Berkadia. Fenton is based in the firm's office in Lenox, Mass. In part, smaller loans relative to the cost of development can give cautious lenders some security that even if rent projections fall short, the lender will still be able to recoup the money it lent on the project. Government regulations imple- mented in the wake of the Great Recession have also begun to slow down the commercial banks that issue many construction loans. The Dodd-Frank Wall Street Reform and Consumer Protection Act and the international Basel III bank- ing regulations have begun to take effect. These rules often require banks to hold money in reserve to offset the risk of investments like real estate loans. Federal regulations pertaining to high-velocity com- mercial real estate (HVCRE) man- date that development partners put equity into projects equal to at least 15 percent of the value of the deal. That has not been a difficult standard for most seniors housing lenders and developers to meet. However, ambiguity about the HVCRE standard has still created confusion. "Different lenders have vastly dif- ferent interpretations of HVCRE," says Adlerstein. Today, a typical construction loan provided by a large bank might cover 65 percent of the cost. By comparison, earlier in the recovery banks regularly offered construction loans that covered 75 percent of development costs or more for a seniors housing facility. "Four or five years ago, 75 percent was out there," says Will. Interest rates typically float from 275 to 375 basis points over the 30-day London Interbank Offered Rate (LIBOR) for con- struction loans from commercial banks. Most offers are clustered between 300 and 350 basis points over LIBOR for loans that cover 65 percent of the development cost, experts say. Credit spreads are above 400 basis points over LIBOR for high- leverage construction loans. For some lower-leverage loans, inter- est rates are significantly lower, with credit spreads as low as 275 basis points over LIBOR, accord- ing to Will. Staying the course Not all of the big banks have pulled back on the leverage they offer. "We have not changed our approach to structuring or pric- ing," says Erin Peart, a senior vice president with Wells Fargo Bank who manages the Northeast Region for the firm's Senior Hous- ing Finance Group from the firm's Washington, D.C. office. Wells Fargo regularly offers loans that cover 65 percent of the cost of a seniors housing development, with interest rates ranging from 275 to 325 basis points over LIBOR. Banks may also provide higher- leverage loans to developers with stronger track records — especially if those potential borrowers have a good track record with the bank. "For the tried and true sponsors,

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