How to finance multifamily senior housing facilities

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Ask a Lender
September 27, 2017


Key Points

Financing senior housing projects

  • You must have experience in senior housing operations to obtain financing.
  • Lenders assess your credit, finances, experience and the facility's income potential.
  • Several government-backed and Fannie- and Freddie-conforming loans exist for senior housing.
  • Life insurance companies also frequently finance senior housing facilities.

The senior housing market is viewed as a stable and profitable investment. That said, it is by no means a simple one. Depending on several factors, senior housing can be an investment that combines commercial multifamily real estate, hospitality and healthcare. It can also come with additional federal and state regulatory and licensing requirements.

As such, lenders do not issue loans for senior housing facilities lightly. In addition to your creditworthiness as a borrower and the income potential of the senior housing facility, one of the most important eligibility requirements is your experience owning or operating senior housing or comparable facilities.

Note that you’ll need to find a lender who has experience in this market. The right lender will help find the best loan for your project or purchase. While they do not issue loans directly, several federal agencies insure financing for a range of housing projects, including senior housing. Here are the most common financing methods for senior housing developments.

HUD/FHA Section 232 Loan

The U.S. Department of Housing and Urban Development (HUD) administers the Federal Housing Administration’s (FHA) Section 232 loans facilitating the construction, purchase or rehabilitation of assisted living, nursing care and memory care facilities. Interest rates are generally 4 percent or less, with terms of up to 40 years, though high pre-payment penalties apply. FHA Section 232 loans can take 12 to 18 months to fund, however, so investors sometimes take out short-term bridge loans to purchase a facility, then later refinance into an HUD/FHA loan.

Fannie Mae Multifamily Seniors Housing

Loans that conform to the Fannie Mae Multifamily Seniors Housing program finance the purchase or refinance of senior housing, but not new construction. Both lenders and borrowers involved in the loan must have experience owning or operating similar facilities to be eligible. Financing covers independent living, assisted living or memory care facilities, or a combination of these services. Fixed and variable interest rates are available for up to 30-year terms with loan-to-value ratios of up to 75 percent, or 80 percent for tax-exempt facilities.

Freddie Mac Multifamily Seniors Housing

The conditions for Freddie Mac’s Multifamily Seniors Housing program are similar to that of Fannie Mae’s. They can finance the purchase or refinance of independent living, assisted living and memory care facilities. Mixed care facilities with nursing care of no more than 20 percent of operations are also eligible. Borrowers must have experience in operating facilities of a similar nature. Interest rates can be fixed or variable with terms of up to 30 years and maximum loan-to-value ratios of 75 percent.

USDA Multifamily Housing Direct Loan

While not exclusively for senior housing, the U.S. Department of Agriculture directly issues loans for the construction, purchase and rehabilitation of low-income, elderly and disabled housing in eligible rural communities. USDA Multifamily Housing Direct Loans are reserved for borrowers who cannot obtain conventional financing due to the income structure of the operation. This loan can fund all senior housing facility types, but tenants must be low-income, over the age of 62 or disabled. Loan applications are accepted annually and processed through state Rural Development offices.

HUD Section 202 Supportive Housing for Elderly

The U.S. Department of Housing and Urban Development’s Section 202 Supportive Housing for Elderly is geared toward helping the frail and very low-income elderly with affordable housing. The program provides capital advances to fund the construction, purchase or renovation of affordable senior housing, and may also provide rental assistance and other operating cost benefits. HUD Section 202 is reserved exclusively for nonprofit organizations.

Life insurance companies

Many life insurance companies provide multifamily senior housing loans that can be as competitive as those from Fannie and Freddie. Life insurance companies offer both mortgages and construction-to-permanent loans, and are more flexible in their underwriting than government-backed loans. Typically, they can hold interest rates until closing and process faster than Fannie and Freddie, which make them a more attractive option for many borrowers. Life insurance companies prefer to finance independent living, assisted living and memory care facilities, notably shying away from lending to projects with income that is heavily reliant on Medicare and Medicaid payments, instead favoring facilities whose residents pay privately for services. Note that these facilities would still face federal and state oversight.

Despite strict underwriting requirements, the long-term outlook for senior housing is positive and there is plenty of money in the market. According to a report by commercial real estate banking firm Lancaster Pollard, the HUD/FHA Section 232 program comprised $2.84 billion in 2016, a 5 percent annual increase. Fannie Mae spent less on senior housing in 2016 than it did in 2015, but still produced $1.5 billion in senior housing loans. While it is not an investment for the novice, senior housing has the potential to generate great returns with the right investor experience, professional support and financing model.

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