Commercial Magazine

Senior Housing’s Fruitful Appeal

Understanding borrowers and financing options is key to grasping success in this growing market

By Trace Wilson

Imagine coming home to a spacious, open living space equipped with marble countertops, hardwood floors and an in-unit washer and dryer. Outside your front door are expansive common spaces filled with amenities. Both the public and private spaces are fitted with state-of-the-art technology.

Welcome to senior housing in 2018. Once a niche sector, senior housing has gone mainstream and is benefiting from increased demand from property investors and residents alike. Commercial mortgage brokers should take advantage of this increased demand, which is expected to grow in the coming years.

Today’s private-pay senior-housing properties — which include independent-living, assisted-living and memory-care facilities — are a far cry from the first modern-day units built in the 1980s, which had a hospital-like feel. Private-pay facilities rely on out-of-pocket payments, rather than government-subsidized funds. Present-day senior housing increasingly resembles upscale residential living, with a hospitality twist, and is appealing to a broad audience.

Given the fractured borrower base within this sector, there will be attractive opportunities for mortgage brokers to mediate. It’s critical for brokers to understand the borrower base, market size and desirable property characteristics, as well as the types and availability of financing for senior housing.

A fragmented market

Ownership of private-pay senior-housing stock is fractured, with the top 50 owners holding less than 40 percent of the market, according to a 2017 report from the American Seniors Housing Association. Because there is a smaller lender universe in this sector, brokers have a greater opportunity to introduce a client to a lender they didn’t already know.

Owners of smaller properties without deep banking relationships typically rely on mortgage brokers to source financing opportunities. Institutional owners, whose banking relationships may or may not finance senior housing, also value a broker’s ability to optimize their financing.

Senior housing remains an attractive and growing investment sector for owners and lenders. According to the National Council of Real Estate Investment Fiduciaries’ first-quarter 2017 property index, senior-housing returns — composed of capital and income returns — have exceeded those of almost every other major real estate property type by 2 to 5 percentage points or more over periods of one, three, five and 10 years.

Sales-transaction activities have been robust, but dollar volumes for senior-housing and nursing-care facilities totaled $14.4 billion in 2016, a 34 percent year-over-year decrease. Interestingly, the total of 513 closed deals in 2016 was only 9 percent less than the record number of 563 in 2015, meaning the average dollar amount of a deal declined from $38.7 million to $27.5 million, the National Investment Center for Senior Housing & Care reported. Government-sponsored enterprises Fannie Mae and Freddie Mac — two of the largest senior-housing lenders — provided $4.7 billion in financing in 2016, up more than 250 percent from 2012. 

Senior housing is poised for significant growth over the next 10 to 15 years, as the baby boomer generation, numbering 74 million in the U.S. in 2016, starts choosing or needing the lifestyles and services that senior housing offers. About 70 percent of people ages 65 or older will ultimately need some form of long-term care, although the average senior-housing resident is in their low- to mid-80s. By 2030, the number of people age 85 or older is expected to reach 8.9 million, a 34 percent increase from 2012.

Meeting modern demands

The notion that all senior-housing-properties are dark and musty with low ceilings could not be further from the truth. Baby-boomer residents of tomorrow, who are largely the decisionmakers for today’s older, silent generation, have tastes that favor more common-area space, larger and more open floor plans, and more natural light.

Residents also require modern amenities that promote their independence and are more in line with luxury resorts, such as cafes, bistros and fitness centers. Some properties even have rooftop bars, putting greens and game rooms. Property owners have taken notice and adapted, without sacrificing the quality of care that residents receive.

Owners of smaller properties without deep banking relationships typically rely on brokers to source financing opportunities. 

“We strive to create highly amenitized real estate, but do so in a building that, while it feels luxurious, is designed to provide the level of care that the residents and their families expect and deserve,” said Dan Gorham, a partner at Fountain Square Properties, LLC. Gorham also highlighted the importance of choice — from meals and activities to care and unit options — for empowering residents and their families to make the best personal living decisions.

Owners also are using technology to gain a competitive edge by appealing to the safety and peace of mind that residents and their families desire. In-room, motion-sensor technology can track a resident’s movements and alert staff to serious medical concerns. Other technologies enable operators to verify who is entering a resident’s room and how often medical staff is checking on them.

Financing options

Investors in today’s thriving senior-housing market need financing to purchase existing stock, build new properties and rehab existing properties to compete for current and future residents. Fortunately, commercial mortgage brokers can choose from a variety of capital options, although the availability and competitiveness of capital will vary.

Construction financing is the most difficult type of capital to obtain, Gorham said, noting that banks continue to be challenged from a regulatory perspective, which is creating an opportunity for nonbank lenders to step in and fill the void. New regulations, coupled with concerns about oversupply in certain markets, have resulted in banks requiring more equity — typically 30 percent to 35 percent — and, potentially, more recourse. Nonrecourse financing is available, but at leverage rates of 50 percent to 60 percent.

Transitional financing is more readily available. Commercial banks can work with loan-to-value (LTV) ratios up to 75 percent and focus on experienced owner-operators with consistent cash flow. There also are nonbank capital sources that may lend up to 80 percent LTV on a first mortgage and will consider mezzanine debt up to 90 percent LTV, or may provide preferred equity up to 95 percent LTV.

Stabilized senior-housing properties have a variety of borrowing options. Life insurance companies, as well as Fannie Mae and Freddie Mac, are competitive for properties with LTVs of 65 or less. The GSEs will likely offer the best terms on LTVs up to 75 percent. The U.S. Department of Housing and Urban Development (HUD) is active in the assisted-living and memory-care space. It provides a variety of financing options for new construction and stabilized properties. HUD loans have terms up to 40 years, are fully assumable and have attractive pricing.

What lenders want

In general, lenders will favor properties with open floor plans, which offer a more aesthetically pleasing building, enable larger units with amenities more in line with a traditional home, and allow for restaurant-style dining options and more common space. Older properties that lack these features may have difficulty optimizing their financing without the owner modernizing the space by investing significant capital.

Developers can make their new-construction properties more attractive to lenders by building for the long term. Properties must be functional and appealing to residents of today, but also to those 10 years down the road.

Lenders can assess how stable the operation is — or will be — by asking a simple question: Will the residents of today and tomorrow want to live there? The types of programs a senior-housing property offers can impact the residents’ quality of life and their desire to call the property home. A lender might check to see if the operator takes a one-size-fits-all approach to programming, or whether the staff customizes activity plans for residents.

• • •

Americans are living longer and the swelling ranks of an aging population are changing the face of senior housing. This is creating enormous opportunities for developers, owner-operators, mortgage brokers and lenders. Private-pay senior housing is poised for strong growth and is evolving to meet the modern demands of residents and their families. These modern properties combine the components of real estate, hospitality and health care, making them attractive and exciting opportunities for equity and debt investments.


  • Trace Wilson

    Trace Wilson is a director at PGIM Real Estate Finance. Since 2013, he has originated and closed more than $1.5 billion in loans secured by senior housing. PGIM’s senior-housing team offers a depth of expertise and has access to multiple capital sources, including Prudential Financial’s general account, Fannie Mae’s Delegated Underwriting and Servicing (DUS) program, Freddie Mac and a bridge-to-agency program. 

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