Understanding Senior Housing Construction Financing in California
The senior housing market is flourishing and many senior housing owners are thinking about expanding. You might want to enlarge your existing operation, or build an upgraded or specialized facility. In any case, you are likely to need financing. Applying for that financing is not hard, but choosing the right type for financing for your needs requires some research.
The California Senior Housing Market
California is an attractive region for new senior housing. The state is home to 11 of the 99 largest senior housing markets in the United States, and three of the top five markets (Bakersfield, Fresno and Los Angeles). In Q3 2017, eight of those 11 markets had a penetration level (the amount of sales compared to the potential market) lower than national average of 10.9%, indicating relatively lower competition. The occupancy rate in California senior housing was 90.7%, compared with the national average of 89.7%. The market is heavily regulated, making it harder to enter than many markets, and so favoring business owners who are already established.
This market is set to grow radically. According to a report prepared by the state in early 2017, the population of California will increase by 6.7 million between 2010 and 2030, and 4.3 million of those people will be over 65. That will nearly double the number of seniors in the state. The sharpest increases will be in the mature senior (ages 70-79, up 104%) and eldest senior (ages 80+, up 111%) segments. Nearly a third of California seniors have some form of disability. While seniors generally have lower incomes than their younger neighbors, 73.4% of California seniors own their homes, which represent an important reserve asset for them.
Financing Senior Housing Construction
Due to the robust market, you will find a number of potential financing options available, if you have a few years of management experience and a good credit record. Besides commercial banks and online lenders, there are a large number of investment firms that finance senior housing and brokerage firms active in the field. The lenders’ job is made easier by the variety of governmental and government-supported programs to encourage senior housing construction. The government-backed mortgage giants Fannie Mae and Freddie Mac both have senior housing programs that they offer through approved lenders. HUD and the USDA have programs as well.
While the scope of choices is encouraging, each one has to be judged individually, and their drawbacks carefully considered. Online lenders are likely to have the least favorable rates, for example, while traditional construction loans from a conventional lender are the most difficult to obtain, and have high down payments and balloon payments at the end of the loan. Fannie Mae loans are not available for all types of senior housing. Neither Fannie Mae nor Freddie Mac will issue loans for facilities that engage exclusively in skilled nursing care, although that type of facility is the most common form of senior care, making up 43.9% of all senior housing. HUD loans also have numerous restrictions that limit their applicability, and USDA loans are available in a limited number of areas.
Small Business Administration (SBA) 504 and 7(a) loans can be used to finance senior housing construction. These two loans differ in many aspects. One important difference is that the 7(a) loan has a $5 million maximum, while there is no limit on the total financing that can be obtained with a 504 loan.
The SBA 504 Loan for Senior Housing Construction
The SBA 504 loan is administered by a nonprofit Certified Development Company (CDC), such as TMC Financing. A 504 loan can be used to:
- purchase land or buildings
- construct buildings
- purchase equipment with a service life of ten years or more
- improve, upgrade or renovate buildings
- refinance conventional debt
A 504 loan is part of a financing package that has three parts:
- The first is a loan from a conventional lender, such as a bank or credit union, for at least 50% of the total amount. If you do not have a conventional lender, TMC can help you find one. You and that lender determine the amount and conditions of that loan, which becomes your first mortgage.
- Your CDC facilitates a separate SBA loan of 35% of the total, up to $5 million, at a fixed, below-market rate. You can receive up to $5.5 million for projects eligible for the SBA’s Green Energy Program. This will be your second mortgage.
- Then you, the borrower, will contribute 15% to the loan as down payment. This amount reflects the status of senior housing as a single-purpose property. The down payment for a 504 loan is generally 10%.
With a 504 loan, the conventional lender has lower risk, thanks to its first lien position, and so is more inclined to issue a loan, and at a better rate. You get a large chunk of your loan at a below-market rate and with no balloon payment.
Senior housing is a good candidate for the Green Energy Program. Your project can qualify for the program if you
- buy or construct a building that consumes 10% less energy than your current location
- buy the building you now lease and make upgrades to consume 10% less energy
- buy or construct a building that produces 10% of the energy it consumes or produces fuel to reduce fossil fuel consumption, using equipment financed through the loan
The Green Energy Program raises your 504 loan eligibility to $5.5 million per project and allows you to exceed the traditional project limit. It also saves you money, since the energy savings from these measures reduces your utility bills.
You can find out more about financing your senior housing construction from one of TMC Financing’s 504 loan experts. TMC is an SBA Premier Certified Lender and a high-volume loan provider. With over 35 years of experience, TMC can help you find the financing that is best for you and guide you through the 504 loan process. Contact TMC Financing today.
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