Managing Director, Capital One Healthcare
When it comes to financing real estate, each asset class has its own underwriting priorities—and this is certainly true of seniors housing. At a time when securing the right financing, and finding the right financial partner, is more critical than ever, understanding the criteria that lenders use in evaluating seniors housing can make the difference between a property that has the resources to succeed and one that struggles. It can give owners the insight they need to make improvements that will increase their property’s attractiveness to lenders as well as helping them zero in on the most appropriate source of financing for their property.
In seniors housing finance, there are three primary underwriting elements including the quality of the operator, the real estate itself, and the financial performance. Certainly, investor resources and reputation are important, but seniors housing is an operating business and a difficult one at that. It is a high-touch, publicly facing, relationship-centered segment that requires both operational discipline and specialized knowledge in areas that range from regulation and reimbursement to dining and hospitality. Lenders like to see an operator with a proven track record in the space.
The first impression sets the tone
The approach lenders use to assess operators depends in large part on the purpose of the funding. For instance, when refinancing, a site visit is paramount. Experienced lenders will know in just a few minutes after entering a building whether this is a transaction they wish to pursue. Is the building clean and well-maintained? Do residents seem happy and engaged? Is the staff professional and courteous?
The lender will follow up with a more detailed inspection and interviews, but that first impression is exceedingly important. Obviously, the elements that contribute to that first impression can’t be manufactured for the occasion, nor will veteran lenders be misled by superficial changes. Nonetheless, operators should make an effort to present their property in the best light.
For refinancing, lenders will also take into account the overall reputation of the operator, the size of its portfolio, and its experience in the specific market and property type. In cases of new acquisitions entailing a change of operators, lenders will combine this assessment with information extrapolated from the operator’s comparable communities. Accordingly, acquirers should choose their operating partners not only with their performance, but also with the relevance of that performance in mind.
Factoring in the real estate
At the same time, seniors housing finance is similar to every other type of real estate finance in its emphasis on the condition of the property and its location. Lenders understand that newer buildings can be more attractive to seniors and their families than older buildings. That being said, owners and operators work hard to find ways to improve the appeal of their older communities to potential residents by adding amenities, improving the dining experience, upgrading interiors to make them more inviting, and enhancing the landscaping. At the very least, lenders expect the properties they fund to be well-maintained.
Like lenders in other asset classes, seniors housing lenders also look carefully at the market. Are there competitors in a three-to-five-mile radius? Are new properties planned for development over the next 12-to-24 months? Is there already an abundance of supply? What is the percentage of age-qualified households in the market area?
Lenders mine demographic data and dig through state and municipal records to develop a sense of the local seniors housing pipeline. Some even engage in mystery shopping to gain a visceral sense of the competition. While owners can’t affect market conditions, they do what they can to ensure that their property compares favorably with the competition.
Assessing the financials
It bears repeating that seniors housing is as an operating business in a real estate setting. As a result, a property’s financials in large measure reflect the quality of the operator and the intrinsic value of the underlying real estate. Owners and operators can expect lenders to dig deeply into their financials, verify the numbers, and determine whether the net operating income and margins are sustainable. When an investor projects a substantial uptick, the lender’s view of the operator and the real estate situation will shape their analysis of whether it can be achieved.
So detailed and thorough is this three-part examination that many lenders view the final, third-party appraisal as a way to check the conclusions drawn from this intensive underwriting process. The appraiser provides a fresh set of eyes and an impartial judgment that lenders can use as an opportunity to reconsider their assumptions and their conclusions.
As the seniors housing landscape continues to evolve, it’s important to work with a financial partner with experience in seniors housing who understands these and the myriad of other nuances that come with this asset class. A lender that knows the space will work with the borrower throughout the process, and can often provide invaluable insights and advice along the way.