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 49 February-March 2018 n Seniors Housing Business Advocate. Adviser. Ally. As a full-service capital provider and servicer, NorthMarq remains an integral part of your loan from beginning to end. We combine more than 50 years of experience with our deep knowledge of all aspects of your transaction to see you through the things you see coming... and the things you can't. C O M M E R C I A L R E A L E S T A T E D E B T , E Q U I T Y & S E R V I C I N G To speak to your local expert, visit northmarq.com/offices Refinance options? Defeasance? Partner buyout? Loan maturity? Supplementals? Disposition? Reserve draws? Prepayment? Ownership change? Lease approval? Property damage? Billing questions? We're here to help. a rising inflationary environment and a strong economy." The rising federal funds rate has a direct effect on short-term inter- est rates. LIBOR has followed it closely. The 30-day LIBOR rate hovered around 1.57 percent, as of Feb. 2. That's up from close to zero a few years ago. In the last year, rising short-term rates have added roughly a full percentage point to the floating interest rates that developers pay for their construction loans. That's a substantial increase, but seniors housing experts have been expect- ing interest rates to rise for a long time. Mezzanine fills the gap Seniors housing developers are still finding ways to increase their use of debt financing for seniors housing construction projects, even as many banks make smaller loans. Mezzanine lenders are eager to help developers fill in the gap. The combination of a mezzanine loan and a construction loan often cov- ers up to 85 percent of the cost of development. Mezzanine lenders typically offer interest rates rang- ing from 10 to 15 percent for their loans. Several specialty finance com- panies and real estate investment trusts have created funds to pro- vide this kind of financing, in addition to private equity fund managers. However, some of the lend- ers who make primary con- struction loans will not allow developers to pile on additional mezzanine financing. Mezzanine lenders often claim the right to seize the property in the case of a foreclosure. "You have to navigate which senior lenders and mezzanine lenders will play nice together," says Meridian's Adlerstein. "There are some senior lenders that abso- lutely will not allow mezzanine debt to go behind them." Developers can also take on extra capital structured as pre- ferred equity, which is similar to a mezzanine loan. Lenders who offer mezzanine debt frequently also offer preferred equity. The difference is that a pre- ferred equity partner cannot seize the property in the case of a foreclosure. Also, a preferred equity pro- vider does not receive interest on a loan. Instead the equity provider receives a set yield on its invest- ment that is usually slightly higher by about 100 basis points than the interest rates charged by mezza- nine lenders. Many primary lenders vastly prefer their borrowers to structure the extra financing they receive as preferred equity, instead of as a mezzanine loan. A contribution of preferred equity is much simpler than a mezzanine loan. The capital from a mezzanine loan to a developer is often provided as the funds are needed, along with the primary construction loan. The provider of the preferred equity often provides the capital upfront. "It doesn't get in my way," says Wells Fargo's Peart. The private equity funds that also offer mezzanine financing often would rather structure their deals as preferred equity. The transactions are often much less complicated, experts say. Borrowers are the only ones who seem to prefer mezzanine loans to preferred equity because the inter- est rate on mezzanine debt is typi- cally 100 basis points lower than the yield on preferred equity. n

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