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Three strategies to get the loans you need

August 3, 2010
by Brian S. Beckwith
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When it comes to financing, luck favors the prepared

Assisted living and skilled nursing facilities are among the few bright spots for lenders when it comes to real estate. Driven by demographics, the long-term care industry is poised for significant growth.

In a recent survey of healthcare executives about their industry, 19% said they expected to see the most growth in assisted living/skilled nursing. That was second only to healthcare information technology, according to GE Capital, Healthcare Financial Services, which administered the survey.

Skilled nursing and assisted living facilities are attractive investments. The supply is limited, with little new construction having taken place over the past few years. At the same time, demand has remained relatively steady in spite of the recession and is sure to accelerate. By 2030, there will be twice as many people aged 65 or older—a total of 71 million—as there were in 2000. In just 20 years, nearly one in five Americans will be 80 or older, according to the U.S. Census Bureau.

Aside from the industry’s favorable demographics, strong performance during the recent economic downturn is also making senior living more attractive to the financing community. Furthermore, assisted living facilities that didn’t “chase occupancy” by lowering rates during the downturn have an advantage: occupancy is expected to rebound faster than rates.

With occupancy growing and rates rising again, owners and operators of these assisted living facilities are in a position to execute on their long-term plans. Whether that means new construction, renovation, or refinancing, now is a good time to move ahead.

Despite all of the good news, lenders will continue to be cautious. Nevertheless, some are actively seeking opportunities to deploy capital. By focusing on economic and demographic forces, the importance of quality, and mastery of the supply-demand equation, borrowers can substantially increase the likelihood of getting the financing they need. Below are three strategies to guide fiscally healthy providers as they consider seeking financing.

1. Understand your financial environment

While the overall prospects for long-term care facilities are positive, there is also uncertainty. Medicare and Medicaid reimbursement will continue to face pressure as budgetary concerns are addressed at the state and federal level. Additionally, the impact of the federal healthcare overhaul is hard to gauge.

More than a third (37%) of executives surveyed said healthcare reform “keeps them up at night,” followed by 26% who are anxious about Medicare/Medicaid reimbursements, according to the GE survey.

As a result of the uncertainty, lenders are looking for facilities that have a proven record of managing and reducing variable costs. Those that can meet their obligations if reimbursements dip or interest rates rise will be the most stable. Lenders expect that facilities will be able to operate successfully even in challenging times without sacrificing quality.

2. Study your market, plan accordingly

Owners and operators must understand the demographic trends of their communities, as well as the expectations of future residents. A borrower that thoroughly researches current and future market demands and plans accordingly can make a much more compelling case to its lenders.

Although it’s difficult to project 10, 20, and 30 years ahead, we know that longer life spans are often accompanied by more complex medical, physical, and social needs. Many successful owners and operators have demonstrated the ability to flex their product offerings to meet market demands with Alzheimer’s care and/or additional skilled or assisted units. Combining a strategic product mix with the level of service and building quality that matches a particular market is the hallmark of a successful operator.

3. Focus on quality

The performance of skilled nursing and assisted living facilities is typically well documented internally and by government agencies. Right now, there is also a strong trend toward more aggressive oversight by state and federal authorities. With this demand for a higher level of transparency, falling short of patient care, safety standards, and other requirements can severely impact a facility’s creditworthiness and competitiveness in the best case. In the worst case, it can lead to significant liabilities or patient harm.

It’s typically difficult to get a loan without a solid operating record. While true for most service-oriented, “high-touch” businesses, a track record is particularly important in a regulated industry such as healthcare. Still, survey results and the trends that can be seen in these results are just the beginning of a lender’s evaluation.

For all of these reasons, lenders make at least one and often several site visits. Many lenders work with nurses and other medical professionals, carefully scrutinizing records, surveys, operations, and procedures. Seeing evidence of a strong record of patient care is the minimum standard for many lenders prior to the important reviews of historical financial performance and management team capabilities.