Federal Enforcement Crackdowns Complicate Skilled Nursing Financing for Lenders, Operators

The recent federal enforcement pushes haven’t just brought new challenges to skilled nursing operators, who must now adjust to a world of warning icons and lists of struggling facilities now made public on a monthly basis.

The lenders that finance skilled nursing acquisitions and renovations have been forced to take a hard look at their vetting processes, and while it’s still certainly possible for operators to find cash to grow, the path isn’t nearly as easy as it was in years past.

“Skilled nursing lending is no longer a math problem,” Jim Thompson, director of senior housing investments at BOK Financial, said last week during a panel discussion at the National Investment Center for Seniors Housing & Care (NIC) spring investment summit in San Diego.


When Thompson first started originating financing for nursing homes, he said, appraisers would typically take for granted that an operator was competent, and instead focus primarily on historical cash flow when evaluating a property’s prospects.

But in a skilled nursing landscape defined by increased scrutiny from the Centers for Medicare & Medicaid Services (CMS) and the Department of Housing and Urban Development (HUD), lenders are beginning to take a more holistic approach when deciding whether to lay out money for nursing homes.

“The financing decision is more an art than a science,” Thompson said of the current market.


Joe Kiernan, chief strategy officer of the New Jersey-based skilled nursing and home health provider Ocean Healthcare, agreed.

“It’s not just a pro forma anymore that you can put on an Excel spreadsheet,” Kiernan said.

Over the last year, the federal government has made plain that nursing home enforcement is a top priority on multiple fronts. CMS, for instance, has embarked on a multi-pronged strategy to boost nursing home oversight, from increased inspection standardization across State Survey Agencies (SSAs) to a comprehensive overhaul of its Nursing Home Compare five-star rating system.

CMS also began releasing an erstwhile internal roster of facilities considered for inclusion on the government’s Special Focus Facility list of the nation’s most troubled nursing homes, a move that lenders haven’t ignored.

“Lenders can say: But it’s on the list,” Ari Dobkin, managing director at Meridian Capital, observed last month. “It becomes slightly more challenging.”

As for HUD — which backs more than $31.2 billion in active loans for nursing homes through its Section 232 program — the record-setting default of the troubled Rosewood portfolio in Illinois has prompted officials to adopt more stringent standards when evaluating potential deals.

“What Rosewood did, in HUD’s mind — it’s a 180. Anything that was a gray area, or not as heavily investigated — those days are long gone,” Joshua Rosen, senior vice president and managing director at HUD lender Walker & Dunlop, said at the eCap conference last month. “If you’re a one-star building, if you have survey issues, if the abuse tag is up — a bridge lender may not put the stop sign on you. [With HUD] I don’t want to say it’s a non-starter, but it’s a very difficult, comprehensive process to get those deals done today.”

At NIC, the regulatory conversation coalesced around two main areas of concern: the recently introduced CMS warning icon for skilled nursing facilities with a recent history of abuse or neglect violations, and operators’ overall willingness to embrace value-based payment models.

The warning symbol now appears on Nursing Home Compare next to the the name facilities that have received inspection-report citations for abuse that led to the harm of a resident within the past year — or abuse that could have potentially led to resident harm in each of the previous two years.

CMS’s decision to introduce the icon last fall set off widespread backlash from skilled nursing operators and industry advocates, who claimed that the image amounts to a “do not proceed” warning that could severely jeopardize a building’s standing among referral partners, residents, and the community at large — even if the operator has rectified the problems that led to the citations.

Kiernan echoed those fears during the NIC panel discussion.

“I don’t really want to even begin to think what happens to an operation that has that on the website,” Kiernan said of the icon. “Occupancy is going to decline significantly, admission volume is probably going to go down to nothing, and you’re going to be dropped out of any preferred provider network that you’re in.”

Despite the concerns, fewer than 5% of facilities nationwide received the icon, according to a 2019 analysis, and Thompson framed the warning as just one part of the larger calculus that lenders now face.

“When you take it in the context of everything else that’s impacting skilled nursing and senior housing, you really have to take more time and effort in understanding: How much volatility can the property take?” Thompson said. “How much volatility can your operator’s portfolio take? And do they have the capabilities to react?”

That said, Thompson and many other lenders understand that the conditions that lead to a warning icon or just a low star rating could take years to fix, and may not get solved in the relatively short due-diligence timeframe for a given loan.

That’s why honesty about past mistakes — and a clear plan looking forward — can go a long way.

“From an investor standpoint, we try to be proactive in educating them about what’s going on in our business,” Leigh Ann Barney, president and CEO of operator Trilogy Health Services, said. “We don’t take the approach that we’re going to hide anything. If we do have a survey or a regulatory issue, we’re very open with that.”

Such discussions should also indicate a true willingness to embrace new payment models and take on risk, Thompson noted, as well as a detailed demonstration of how the operator will add value to the property over the course of the loan.

But if the provider comes to Thompson with a model from 10 years ago, the outcome usually isn’t positive.

“The meeting’s cut short,” he said. “Thank you very much, very nice to meet you — I hope that I see you in five years.”

In Barney’s view, the newfound focus from the federal government simply marks the latest milepost on a long road of consistent scrutiny from both regulators and the general public.

The methods may have changed; Barney in particular pointed to Yelp and Google reviews as a new source of information for both consumers and regulators alike.

But the solution remains the same: Good communication with lenders and families, and a commitment to quickly rectify any problems that may arise.

“Increased regulatory focus has been something that we’ve seen in the last several years, but it’s not something that we haven’t dealt with continually as skilled nursing operators,” she said.

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