National Housing & Rehabilitation Association s 2013 Annual Meeting Financing 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 Troeschel Love 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 Swiacki Lancaster 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 Sands Herbert 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)
Tax-exempt Bond Financing 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
Tax-exempt Bond Financing 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
Tax-exempt Bond Financing 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
Conventional Construction Debt Terms 70% LTC Recourse Strict underwriting of market and operator Activity has been focused on larger, national and regional players
Conventional Construction Debt 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 reentered 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. Wilson Merchant Capital, LLC Montgomery, AL
Current Market Update Historical Taxable Yields versus Tax-exempt Yields 9.00% 8.00% "AAA" GO Yield UST Yield Current 3.16 3.15 % time below current 1.0% 6.1% High 7.01 8.55 Low Average 3.06 5.01 2.45 5.47 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% Mar-91 Mar-94 Mar-97 Mar-00 30-Year "AAA" GO Yield Mar-03 Mar-06 Mar-09 Mar-12 30-Year US Treasury Yield Source: Bloomberg. Reflects market conditions as of February 24, 2013
Current Market Update Historical High Yield Spreads versus Average (basis points) 500 Credit spreads continue to compress as investors search for yield 450 400 350 300 250 200 150 100 50 0 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 High Yield Spread Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Average Spread Source: Bloomberg. Reflects market conditions as of February 24, 2013
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 Over the past few years, the Standard & Poor s financing program has gained momentum $250,000,000 1 $205,250,000 $200,000,000 $168,200,000 $173,205,000 $150,000,000 $100,000,000 $55,485,000 $50,000,000 $29,800,000 $0 2009 2010 2011 2012 2013E Source: Bloomberg. Reflects market conditions as of December 31, 2012 1 Estimate only
Case Study In June 2012, Merchant Capital served as sole manager on $9,360,000 of Residential Care Facilities for the Elderly Authority of Fulton County, Series 2012. Bond proceeds were used to finance the acquisition of an 125-unit senior apartment complex known as Hellenic Tower, located in Alpharetta, Georgia (the Project ). Sources and Uses of Funds Sources of Funds Par Amount 9,360,000 Original Issue Discount (270,300) Total 9,089,700 Uses of Funds Project Fund [1] 8,004,673 The Project will be owned and operated by Hellenic Tower, LLC, a 501(c)(3) organization. Debt Service Reserve Fund [2] The Project is operating under a Section 8 HAP contract and was underwritten with a 1.20 DSC constraint. Total The Series 2012 Bonds were rated A by Standard & Poor s and will be amortized over 30 years. The financing rate was 4.88%. 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 383,149 Operating & Maintenance Fund 100,000 Cost of Issuance [3] 601,878 9,089,700 Pricing Observations Maturity Par ($000) Coupon Yield Spread [5] 2024 1,890 4.000% 4.310% + 225 2032 2,365 4.625% 4.860% + 215 2042 4,580 5.100% 5.300% + 220 525 4.250% 4.570% + 390 9,360 4.710% 4.948% 2015 [4] Total / Ave
Tony Bertoldi City Real Estate Advisors Boston, MA
Performance of Senior LIHTC Properties Median Physical Occupancy 1.30 98.0% 97.5% 1.28 97.5% 96.6% 1.29 1.22 95.5% 1.20 $458 $440 1.24 96.0% Median Per Unit Cash Flow $460 1.26 97.0% 96.5% Median Debt Coverage Ratio 1.24 $420 $419 $400 Senior Overall Source: The Low Income Housing Tax Credit Program at Year 25: An Expanded Look at Its Performance, CohnReznick, December 2012