Bridging mortgage gaps
When considering refinancing or purchasing a senior care facility, the task can appear overwhelming at best, especially when the property may have a less-than-stellar financial performance because of a sluggish economy. Historical financials are key to securing exemplary rates and terms on any property. A wrong turn with one’s occupancy or credit can spell disaster at the bank’s closing table, often leaving operators feeling as though they have no available options.
For the majority of property owners, the most daunting task of property ownership is financing. Not only does one have to approach the local bank wearing their best clothes in the hopes of securing a decent set of terms, but it’s also clear that securing those terms has become less than straight forward in today’s market. Securing a mortgage can become an unwelcome challenge to even the best of property owners when faced with a turbulent market of banks all too ready to liquidate even the best of performing notes and overzealous federal regulators hungry to snap at the bank’s bottom line in an effort to clean up the balance sheet. Even perfectly performing loans are at risk of a haircut if the bank is no longer interested in that particular property type. Given the niche nature of senior care, it is often the first property type to go.
The key to closing any commercial loan is a consistent payment history. Unfortunately, today’s market has prompted some property owners to “rob Peter to pay Paul,” causing a skip in payments. While it may not seem a bad idea at the time (since the property owner has every intention of catching up on payments eventually), the bank almost certainly will ‘call’ the note for lack of performance, with little or any notice to the property owner. The bank can opt to foreclose, or ffLoan can come to the rescue and provide ample time to get the property performing again, usually within a one-to-three-year window. After that, the property’s occupancy and performance have usually shown marked improvement and can support a track record worthy of improved long-term financing rates with HUD or FHA 30-year solutions.
Bridge loans can provide not only the funds to pay off the existing outstanding liens, but also other business debt or working capital necessary to get the property performing at its peak debt service. There must be sufficient equity in the MAI appraised value to support these additional requests.
Bridge loans are often referred to as story loans in the lending sector as they are often approved because the property owner clearly identified a story behind the challenges with the property and the reason for its lackluster performance.
Sometimes a facility can have circumstances beyond its control such as state approved occupancy certification issues for newly built or renovated facilities which can hamper its ability to achieve a performing census. Another reason often reflected in the bottom line is lack of approvals on state or federal applications for new residents who are waiting for Medicaid assisted payments. Something as simple as room divider renovations for double rooms, zoning permits or sale of the current note to another lending institution can wreak havoc on the property’s ability to perform at peak debt service.
One of the most important things to keep in mind is to put yourself in the bank underwriter’s shoes. It could be a national lender or regional bank, but it’s still a person sitting at a desk who does not know you and can only judge your facility and credit worthiness based on the facts in front of them in black and white. The underwriter is looking for reasons to approve or decline a given loan. By putting out a correct loan package with sound financials, you are arming the underwriter with a stamp of approval for the file. Be sure your bottom line and the one reported to the IRS are in sync. The number of files submitted and turned down due to incorrect reporting is staggering and easily avoided with sound accounting procedures.
Even if your property does not have perfect performance and occupancy, always be truthful with the information submitted to the lender. Lenders have the authority to verify all submitted information and will find out if anything is not accurate. The 4506T form has become a necessary tool for banks to get the actual tax return copies directly from the IRS. It is a sad reality to note how many businesses use two sets of books and don’t count on the lender finding out the real bottom line. A less-than-perfect file can get an approval as long as the information was honestly submitted. It is not uncommon for lenders to uncover falsified tax returns, profit and loss statements and the like, but a strong letter of explanation as to why the property is presently not debt servicing can go a long way toward getting any loan approved, especially a bridge loan.
Most operators have contacted the local bank, credit union or mortgage company only to be turned down based on a less-than-perfect track record or not meeting the stringent guidelines set forth by a financial institution. This is precisely when a bridge loan can allow the operator a cushion of time to set the operation on a sound road to recovery. For the most part, banks turn down the majority of loans that other lenders gladly take on. Most operators are pleasantly surprised at the less stringent approach that a bridge loan presents, not to mention the speed with which it outpaces the closing of a conventional loan.
Bridge loans offer solutions for a 12- to 36-month timeframe. If a borrower takes on a 12-month bridge note but requires additional time at the end of the term, an extension of an additional 6-18 months often can be granted to complete the restructuring and go to permanent financing. An additional fee for the extension, normally 1-2 percent of the loan amount, is usual; however, it is well worth the nominal cost if it can save the facility from foreclosure.
Whether the facility offers skilled nursing, assisted living or memory care, there are options that provide a sure path to financial recovery and retained ownership.
Anita Huedepohl is Senior Loan Officer at Liberty Funding, Franklin, Tenn. She can be reached at 615-417-4710.
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