SBA financing activity increases for assisted living facilities

By Kurt Chambliss & Anna O’Brien
Originally published in Western Real Estate Business.

Twin trends of an aging population and advances in medical care are influencing the increase TMC Financing is seeing in SBA 504 financing for assisted living facilities. In the past 12 months, we’ve had more assisted living loans authorized, for projects totaling nearly $27 million, than in the past three years combined.

Kurt Chambliss on assisted living
Kurt Chambliss

Like hospitality, the assisted living industry dipped during the Recession. Now, just as the hotel industry is booming, we’re seeing an increase in SBA loan applications from businesses in the residential care space.

One of the reasons these projects are going with SBA financing is that many banks are not eager to lend to special purpose properties like residential care facilities.

Anna OBrien on assisted living
Anna O’Brien

The SBA 504 program allows banks to share the risk and have another underwriting team looking at the business. Think about it: if an assisted living facility loan has to be foreclosed, what happens to the residents? That’s a nightmare scenario no one wants. With an SBA 504 loan for this type of property, the typical structure is at least 15 percent down from the operating company, up to 35 percent from the SBA 504 lender and up to 50 percent from the conventional lender, so banks are able to keep the relationship but reduce the risk.

In California right now, assisted living is an extremely relevant industry. The Stanford Center for Longevity predicts the state’s population to age faster than that of the rest of the nation. By 2030, California’s population aged 65 or older is expected to double.

At TMC, we’re seeing the market respond. Half of our recent projects are new construction, and the facilities are definitely not your grandfather’s nursing home. The trend is to create an integrated community with higher-end, value-added amenities, a lot like boutique hotels. In fact, some of our clients are hoteliers who have partnered with doctors or nurses to deliver a whole new type of facility.

One $4.1 million project currently under construction near Sacramento is a family-run business. The daughter is a nurse; the father has owned hotels for more than 40 years and the son handles the finances. They specialize in providing dementia and Alzheimer’s care, targeting private pay patients seeking more personalized care than can be provided in larger institutions, and this is their second facility.

Many of our SBA borrowers own more than one facility. Like independent hotels, there are economies of scale with multiple properties, as well as in turning around non-performing assets. For example, we have a client that bought an underutilized senior residential home in Vallejo, Calif. They renovated the facility and revamped the program, adding services and growing from eight residents to 23. Now they are expanding with the purchase of a facility in nearby Concord and another under-performing 37-room care center in Antioch. They see an opportunity for a return on their investments in value-added upgrades.

Going green is also an area that’s gaining attention from assisted living facility owners (again, a lot like the hotel industry). This makes SBA 504 financing particularly attractive because including energy efficiencies unlocks additional SBA financing and allows multiple projects to be financed. Even on older structures, upgrading lighting and appliances, or adding solar panels can qualify and pay off in savings and brand perception.

Another trend we’re seeing is in response to the desire to age in place: home health care businesses and adult day care centers. One loan we’re currently working on is for office space for a woman who started as a home health care franchisee 20 years ago. She now owns four locations and needs space to house administrative services.

For 2016 and beyond, we believe we’re in for significant growth in assisted living/residential care real estate.