Inside Successfully Obtaining Loans for Nursing Home Projects Amid Harsh Financing Environment

A large influx of new patients expected in less than a decade means that nursing home operators must start thinking about bolstering infrastructure along with improving the workforce. And yet, nursing home loans are often the most difficult to obtain across the health care continuum.

Knowing how community ties can help providers obtain capital, and what type of loan is most industry-friendly can be successful steps towards garnering capital for senior care projects. Taking steps to minimize risk for the lender is another huge factor in attracting capital, according to experienced lenders and those involved in nursing home projects said during a recent webinar hosted by the Green House Project.

Chris Perlitz, investment banker with Municipal Capital Markets Group, discussed the unique challenges in financing innovative senior care projects through government departments such as Housing and Urban Development (HUD) and U.S. Department of Agriculture (USDA) as well as other lenders. Perlitz was joined by David McDonough, president and CEO of Navigator Homes and Patricia Moore, founding member of Healthy Aging Martha’s Vineyard.


The key piece to obtaining capital for any nursing home construction or retrofitting project, from federal programs to private options, is to have a good partnership with the community, said Perlitz. It’s important to have strong relationships in place to obtain permits and secure credit in a timely manner.

USDA loans, for one, are obtainable for both nonprofit and for profit providers but community support is more common with nonprofit operators, he said.

“You’re not trying to pad the pockets for investors, you’re doing it to benefit the community. That helps get community support and also helps your partnerships with the hospital, the county, the town to agree to work with you to get this done,” said Perlitz.


Community ties may help with a public-private partnership too, something many operators are familiar with, in the form of an implemental or sales tax, or general obligation from local municipalities.

“Whether you are for-profit or nonprofit, that will direct your trajectory,” Perlitz said of obtaining credit. Operators that switch from a for profit business to nonprofit may find it’s easier to get a construction project off the ground. It will generate more buy-in from the community, the economics are better, and the provider can tie into different types of programs, from a capital perspective, he noted.

From a lender perspective, they are looking at two things before approval, fellow panelist McDonough said: Whether or not the operator can make the monthly debt service payments, and in the event they can’t, will the lender be able to get the property back and be repaid.

“Those two metrics really drive the whole financing structure,” said McDonough.

One of the most difficult credits out there

This is all understood within the context of nursing home capital being notoriously hard to obtain, Perlitz said.

“Senior care is one of the most difficult credits out there, as everyone in this field probably knows. In fact, it’s actually one of the highest default rates within the capital markets from a bond perspective,” said Perlitz.

There are a lot of undertones of risk in the space, he said, pending the type of project in mind. Generally speaking, the goal is to find the cheapest cost of capital and have it as leveraged as possible with attention toward future cash flows, experts said.

And commissioning a market study can be useful in understanding risk. Such studies help both the operator and lender see where the market is and where the rents are, and identify comparable properties in the area before really heading down a certain path for a project.

“Lenders see very quickly through people who are basically promoters. They’re trying to sell you something not based in fact. And so when we think about real developers, you’re thinking about people that are dealing with real facts,” said McDonough, when discussing the importance of a market study.

For Navigator Homes, garnering public education was crucial for getting the Navigator project off the ground, Moore added, in addition to the market study.

“We did outreach through almost every organization that touched the lives of any elder on [Martha’s Vineyard] the island. We did it through radio shows and newspaper articles; we made presentations to anyone who would listen from any of the churches … the Council on Aging, all of the service agencies,” said Moore. “We gradually build community support around this healthy aging.”

In working with Navigator, Perlitz opted for the federal government’s loan program through USDA’s rural development programs because even today, leveraging federal programs will yield the cheapest cost of capital at 3.5% to 3.75% fixed for 30 to 40 years, he said.

“No one can touch that in the general market. Banks can’t touch that,” Perlitz said of the rural program interest rate. “There’s no cost of issuance to that capital.”

Government loans do have strict requirements, which take into account the size of the community as well as checks and balances that ensure the project sits within building size parameters. This particular program’s limits exceeded $100 million, he said.

Support for rural development

And while rural development projects do have the cheapest interest rates, Perlitz said, they require certain contingencies like an equity contribution of about 20%. Support from an equity perspective could be in the form of land, a cash contribution, or collateral assets.

“When we leverage that contribution component from the borrower, we can seek more direct loans from the Department of Agriculture,” said Perlitz.

In the case of Navigator, this was still a heavy lift. The operator didn’t have a lot of collateral, very little cash, and there were some contributions from investors but not enough to reach that 20%.

In the end, what helped was converting a land lease and having positive partnerships with the nearby hospital – and understanding that the federal loan program was able to step in and provide support.

Other factors that make obtaining capital easier, he said, at least for a USDA loan, is EBITA cash flow, and having enough cash to float during the construction phase.

Outside of USDA loans, lenders are looking at tax and bond markets, the availability of grants and subsidized credits, and tax exempt high rated, high yield investments, he said.

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