national housing & rehabilitation association’s 2013...

National Housing & Rehabilitation Association’s

March 6-9 | Loews Miami Beach Hotel | Miami Beach, FL

2013 Annual MeetingFinancing Senior Housing: Products and Structures

Speakers:• Moderator: John Mackey, Cohn Reznick, Boston, MA• Denise Troeschel, Love Funding, Washington, DC• Jerry Swiacki, Lancaster Pollard, Alpharetta, GA• Jeff Sands, Herbert J. Sims & Co., Inc., Fairfield, CT • Cody N. Wilson, Merchant Capital, LLC,

Montgomery, AL• Tony Bertoldi, City Real Estate Advisors, Boston,

MA


Denise TroeschelLove Funding

Washington, DC


FHA Programs for Senior Housing

Important Points• Senior housing is defined as Head of

Household 62 and older• Except for Sec. 231, project cannot

discriminate against families with children as long as one person is 62 or older.

• Senior housing projects with residents 55 and older are not eligible for HUD financing


• Services such as housekeeping, laundry and meals are allowed as long as they are not mandatory, and

• They are offered by a third party vendor (can be a related party), and

• The income cannot be used to calculate cash flow for the mortgage.

• Commercial kitchen and dining room space would be treated as commercial space


• Section 223(f) for Acquisitions and Refinances• Up to 35 year term depending on

property age and condition• 80% LTV with cash out (refinances)• 83.3% LTV on acquisitions• Fully amortizing fixed rate – current

rates are under 3%


• Section 221(d)(4) - New construction and substantial rehabilitation• 40 year term• Not a “value” program – loan based

on 83.3% of development cost• Current rates slightly over 3%


• Section 231– New construction and substantial

rehabilitation only– Entire project restricted to 62 and

older– Currently no program available to

refinance these projects• Affordable projects (Section 8 or

LIHTC) have more generous loan to value (up to 87%), loan to cost (up to 87%) and lower MIP (45 bps)


Benefits to FHA Financing• Lowest interest rates• Longest term and fully amortizing• Highest loan dollars• And because we are Love

Funding, we’ll give you a big hug at closing!!!


Jerry SwiackiLancaster Pollard

Alpharetta, GA


HUD for Health Care Facilities

• Types of properties– Nursing homes– Assisted living & memory care

• Types of projects– New construction– Substantial rehabilitation– Acquisition– Refinance


FHA 232: Key Features

• Permanent financing– Long term (up to 40 years)– Fixed rate (no renewal risk)– Lockout & prepayment

• Non-recourse• No financial covenants• Mortgage insurance premium

– Not risk-based pricing– Annual fee

• Effectively 80% LTV


The FHA 232 Programs

• FHA 232– For new construction or substantial

rehabilitation (> 25% of value)– Term of up to 40 years

• FHA 232/223f– For acquisition or refinance with

modest repairs/improvements– Term of up to 35 years (NTE 75% of

remaining useful life)• Centralized LEAN underwriting


FHA 232: Considerations

• Timing– Application processing– Obtaining firm commitment

• Davis-Bacon wages• Equity takeout prohibition• Seasoning requirements

– 2 years after equity takeout– 3 years after new construction


Fannie Mae

• Types of properties: – Independent living– Assisted living & memory care– NO nursing (unless < 25% of beds)

• Types of projects:– Acquisition– Refinance (equity takeout permitted)– NO construction


FNMA Candidates

• Stabilized property with 12 – 15 months of 90% occupancy

• “5 & 5” Rule– 5 years of experience– 5 stabilized properties

• Preference of facilities with 60 or more units

• Waivers available


FNMA Terms

• Non-recourse• Fixed or variable rates• 5 – 10 year terms• Amortization of up to 30 years• 75% LTV (70% w/ equity takeout)• Prepayment terms• Modest financial covenants (e.g.,

DSC)


USDA Business & Industry Program

• Guaranteed loan program for projects that create or save rural jobs

• Population constraint: 50,000• Tiered Guarantee• Fixed or variable rates• Terms of up to 30 years


USDA B&I Terms

• 75% LTV• DSC of 1.30x – 1.40x• Balance sheet equity

– 20% new construction– 10% existing properties

• 2% upfront fee and 0.25% annual• Personal guarantees during

construction and lease-up


Jeff SandsHerbert J. Sims & Co., Inc.

Fairfield, CT


Tax-exempt Bond Financing

• Introduction– 142(d)– Available to For Profit Owners of Residential

Rental Housing– Access Tax-Exempt Bond Market– Not Available for Health Care or Nursing– New Construction or Acquisition/Rehab– Not Available for Refinancing– Subject to Award of Volume Cap– Low Income Set Asides (20-50 or 40-60)



• General Project Rules – Must provide residential rental housing

• Separate and complete facilities for living, sleeping, eating, cooking, and sanitation, may include assisted living

• No nursing or health care• Does not require rent restrictions

– Low income occupancy requirements (i.e. 20/50 or 40/60)

• Annual income certifications• Income Test/ Not Asset Test

– Qualified Project Period – Generally 15 Years



• General Bond Financing Rules– 95% of the bond proceeds must be used for

qualified costs (land or depreciable property)– Can’t finance working capital or operating

reserves, with exceptions– Not more than 25% of the bond proceeds may

be allocated to the cost of land – 15% rehab requirement on acquisition

financings (not required for non-profits)– 2% Costs of Issuance Limitation (e.g. legal

fees, title insurance and underwriter’s fees) – Arbitrage – You can’t borrow too much, too

soon, for too long, or for a a bad purpose



• Required Approvals– Volume Allocation– Issuer Approval

• Inducement Resolution• Bond Resolution

– Public approval or “TEFRA” requirement– Bond Allocation


Tax-exempt Bond Financing • Advantages:

– Owned by a for-profit entity• Partnerships

– No limitation as to Management Contracts– Developer and Asset Management Fees– Full ownership and profit potential– 4% LIHTC/EB-5/Equity– Longer Term– Non-Recourse

• Limitations:– Income Limitations – 20/50 or 40/60– Volume Cap– 15% rehab requirements for Acquisitions for

for-profit owners


Conventional Construction Debt

• Introduction– Slowly returning to market

• National Banks• Local Banks• Finance Companies• REITs



• Terms– 70% LTC– Recourse– Strict underwriting of market and

operator– Activity has been focused on larger,

national and regional players



• Mezzanine Debt– Because of lower leverage available many

are doing mezzanine debt and preferred equity to complete capital stack

– Increase leverage to 85% - 90% LTC– Terms

• 5-7 year hold• Mid teens IRR• Preference on cash flow• Various amortization methods (cash flow

participation)


Equity

• Institutional capital has re-entered the market– Prudential, Blackstone, KKR, Grosvenor– Generally looking to build a portfolio with a

set exit strategy– Return parameters

• 20%+ IRR• 7-10 year hold


Cody N. WilsonMerchant Capital, LLC

Montgomery, AL


Current Market UpdateHistorical Taxable Yields versus Tax-exempt Yields

Source: Bloomberg. Reflects market conditions as of February 24, 2013

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

Mar-91 Mar-94 Mar-97 Mar-00 Mar-03 Mar-06 Mar-09 Mar-12

30-Year "AAA" GO Yield 30-Year US Treasury Yield

% timebelow

Current current High Low Average"AAA" GO Yield 3.16 1.0% 7.01 3.06 5.01UST Yield 3.15 6.1% 8.55 2.45 5.47


Current Market UpdateHistorical High Yield Spreads versus Average (basis points)

Source: Bloomberg. Reflects market conditions as of February 24, 2013

0

50

100

150

200

250

300

350

400

450

500

Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13

High Yield Spread Average Spread

Credit spreads continue to compress as investors search for yield


Standard & Poor’s• While many senior housing projects (SHP) are structured

with credit enhancement, unenhanced SHP are rated based on the underlying real estate.

• Standard & Poor’s currently rates unenhanced SHP in the investment grade category (typically “A” category).

• Financing observations include:– No credit enhancement

– Third party reports include audit, appraisal, market study, phase I and capital needs assessment reports

– Typical projects include acquisition / rehabilitation

– New construction is available, but more complex

– Execution can be used on 4% bond deals

– 35-year rate is 5%1

Notes:1 Reflects market conditions as of February 24, 2013 and assumes bonds are rated in the “A” category


Standard & Poor’s (cont’d)• Bond structure observations include:

– Non-recourse to Sponsor

– No fee stack (only customary trustee and issuer fee)

– 35-year amortization

– 10-year par call

– Interest only period (usually 12 months)

– Debt service coverage ratio of 1.20x (HAP); 1.40x (non-HAP)

– 100% loan-to-value

– Repair and replacement are typically $300 per unit

– Reserve fund sized at 50% of maximum annual debt service (HAP); sized at maximum annual debt service (non-HAP)

– 45-60 days for bond closing


Standard & Poor’s (cont’d)Par Amount of Standard & Poor’s Bond Financings

Source: Bloomberg. Reflects market conditions as of December 31, 20121 Estimate only

$55,485,000

$29,800,000

$168,200,000 $173,205,000

$205,250,000

$0

$50,000,000

$100,000,000

$150,000,000

$200,000,000

$250,000,000

2009 2010 2011 2012 2013E

Over the past few years, the Standard & Poor’s financing program has gained momentum

1


Case Study• In June 2012, Merchant Capital served as

sole manager on $9,360,000 of ResidentialCare Facilities for the Elderly Authority ofFulton County, Series 2012.

• Bond proceeds were used to finance theacquisition of an 125-unit senior apartmentcomplex known as Hellenic Tower, located inAlpharetta, Georgia (the “Project”).

• The Project will be owned and operated byHellenic Tower, LLC, a 501(c)(3) organization.

• The Project is operating under a Section 8HAP contract and was underwritten with a1.20 DSC constraint.

• The Series 2012 Bonds were rated “A” byStandard & Poor’s and will be amortized over30 years. The financing rate was 4.88%.

Sources of FundsPar Amount 9,360,000 Original Issue Discount (270,300) Total 9,089,700

Uses of FundsProject Fund [1] 8,004,673 Debt Service Reserve Fund [2] 383,149 Operating & Maintenance Fund 100,000 Cost of Issuance [3] 601,878 Total 9,089,700

Maturity Par ($000) Coupon Yield Spread [5]2024 1,890 4.000% 4.310% + 2252032 2,365 4.625% 4.860% + 2152042 4,580 5.100% 5.300% + 220

2015 [4] 525 4.250% 4.570% + 390Total / Ave 9,360 4.710% 4.948%

Sources and Uses of Funds

Pricing Observations

Notes:[1] Includes acquisition price and rehabilitation[2] Sized at 50% maximum annual debt service[3] Includes underwriters discount, counsel, trustee fees, rating agency fees, Issuer’s fees and other costs of issuing the bonds[4] Taxable tail was issued to cover the 2% cost of issuance limitation[5] Tax-exempt yields are shown as a spread to MMD. Taxable yields are shown as a spread to US Treasury yields


Tony BertoldiCity Real Estate Advisors

Boston, MA


Performance of Senior LIHTC Properties

95.5%

96.0%

96.5%

97.0%

97.5%

98.0%

Median Physical Occupancy

1.20

1.22

1.24

1.26

1.28

1.30

Median Debt Coverage Ratio

$400

$420

$440

$460

Median Per Unit Cash Flow

SeniorOverall

1.29

1.24

$458

$419

97.5%

96.6%

Source: The Low‐Income Housing Tax Credit Program at Year 25: An Expanded Look at Its Performance, CohnReznick, December 2012

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