Financing affordable assisted living

There are two simple truths about the impending silver tsunami of seniors entering retirement: 1) there will be many more of them than ever before, and 2) on average, their fiscal outlook will be woefully inadequate.

By 2030, the population of seniors is expected to reach 74 million, nearly doubling in two decades.[1] The fiscal outlook for many in that group is dire. Nearly 30 percent of households aged 55 and older have no retirement account or pension. For the 70 percent of households that do have some savings, the median total account balance is $104,000, not nearly enough for multiple decades of housing and care. When looked at per capita, the numbers are even worse—median retirement assets for individuals aged 62 to 69 was only $32,000 in 2015. Those in the 75th percentile have only around $130,000, still far from sufficient.[2]

For those in the lower-income levels, affordable age-restricted housing for the elderly who do not yet require assistance with activities of daily living (ADLs) exists for many of our seniors. Conversely, for those that demand more acute care such as the kind offered in a skilled nursing facility (SNF), these services are frequently subsidized by the government. However, a gap exists for the growing class of lower- to middle-income seniors who can no longer live on their own but are not so frail that they need to be in a SNF.

Assisted living (AL) facilities are a great solution for those who can afford them. Affordable assisted living (AAL) facilities, however, are the exception, not the norm. Although several states are working on a variety of solutions to better serve this group of seniors, there remains plenty of work to be done.

As the massive wave of boomers swells, it is becoming abundantly clear that there is a gap in the continuum of care for lower- to middle-income seniors who earn too much to qualify for affordable housing but not enough to afford a private-pay AL facility. More AAL options are desperately needed.


Financing the development of an AAL facility often requires a patchwork of funding sources in order to create a financially feasible project. A viable capital stack will typically include not just traditional equity and debt, but may also necessitate additional gap financing. But, the equity and debt used in developing AAL facilities is usually anything but “traditional.”

As with low-income multifamily housing projects, certain AAL facilities can use low-income housing tax credits (LIHTCs) as a source of equity. Using LIHTCs requires a substantial outlay of time and additional costs, but the source of equity ultimately can be worth the extra resources. Partnering with an experienced tax credit developer is crucial for success when employing LIHTCs as an equity source.

Debt can come from a variety of traditional and non-traditional sources including banks, specialty finance companies, real estate investment trusts (REITs), the U.S. Department of Housing and Urban Development (HUD)/Federal Housing Administration (FHA), government sponsored entities (GSEs) such as Fannie Mae, as well as state housing authorities. New developments aren’t the only projects that require debt; so do existing projects looking to recapitalize.

Some seniors housing and care operators have had success refinancing AAL facilities using the FHA Sec. 232/223(f) program. For example, Braemar Living at Medford, a 200-bed AAL facility in New York, recently obtained a $26.3 million loan pursuant to the 232/223(f) program to refinance its existing debt. The facility was developed using LIHTC equity and private activity bonds, which were refunded as part of the transaction. In addition to generating over $450,000 in annual cash flow savings, the new loan offers a safer and more permanent debt structure.

One potential benefit of coupling FHA financing with LIHTCs or tax-exempt bonds is the fact that the FHA program allows for a market valuation in this scenario. This means value for debt sizing can be based on market-rate rents and expenses as if unencumbered by use restrictions. Use of this higher unrestricted value allows for loan-to-value (LTV) to be based on a true market valuation. In this scenario, debt may be limited by debt service coverage as opposed to a low restricted valuation.

Because of equity and debt limitations and potential higher costs due to the use of LIHTCs, these sources are not always sufficient to fully cover the development costs of AAL projects. As a result, owners and developers often must employ additional financing sources. These funds will likely come in the form of grants or other state and local programs. Clearly, the more grant funding that can be acquired the better, as it will allow the project to minimize debt service and alleviate strain on operating cash flow.

Case in point

Gardant Management Solutions, the largest provider of assisted living (AL) in Illinois and the 14th largest in the nation, manages more than 3,700 senior living, AL and memory care (MC) units. Gardant is committed to providing affordable AL and spearheaded the first national summit on the topic in 2015.

One of the affordable AL models Gardant helped create is the supportive living facility (SLF), which combines apartment-style housing with personal care and other services so residents can live independently. In the SLF senior housing model, a Medicaid waiver obtained by the Illinois Department of Healthcare and Family Services pays for services that are not routinely covered, such as personal care, homemaking, laundry, medication supervision, social activities, recreation, and 24-hour staff to meet the residents’ needs.

Recently, Gardant partnered with a group of Illinois-based equity investors to construct a new SLF in Minooka, Illinois, to be named Heritage Woods of Minooka. It will be the 40th SLF in Illinois to be managed by Gardant and one of the last facilities to be granted SLF certification in the state.

Lancaster Pollard and Gardant worked together to pursue funding for the new construction project. Initially, 4% low-income housing tax credits (LIHTCs) were considered, as they are often an option to fund the equity associated with SLF project development. In this case, however, the ownership group opted for a more traditional equity stack in order to avoid some of the LIHTC-related requirements like funding a Medicaid delayed payment reserve.

Ultimately, the FHA Sec. 232 program was selected to provide debt financing for the new construction project, as it was the ideal choice for long-term, non-recourse financing. At the time of submission, Lancaster Pollard sought an alternative to waiting in the queue and stalling progress on the new construction project. Relying on the credit worthiness of the project and Gardant’s impressive resume, Lancaster Pollard worked with HUD to facilitate an early commencement approval. This allowed Gardant to begin construction prior to HUD issuing a firm commitment.

The result was a $13.4 million loan insured by the FHA Sec. 232 program to fund the construction of Heritage Woods of Minooka. The FHA loan covered the majority of construction costs and the balance was funded by equity from the ownership group. Utilizing the early commencement process allowed Gardant to benefit from projected savings on construction costs and interest payments. The 102-unit SLF is expected to be completely built and ready for residents in the spring of 2017.

Considering the demographics of the aging population, there is no doubt that the already tremendous demand for AAL will only increase in the coming decades.

Despite the challenges in financing and funding the operations of such facilities, there are numerous positive examples such as Heritage Woods of Minooka that can be viewed as a model for success. Accordingly, the asset class is expected to grow significantly within the overall marketplace. Working with experienced developers, financiers, and government partners such as HUD will be crucial in effectively closing this gap in the continuum of care.

Steve Kennedy is Senior Managing Director at Lancaster Pollard, a senior living finance advisory firm.

[1] U.S. Census Bureau.

[2] The Bipartisan Policy Center, “Healthy Aging Begins at Home,” May 2016.


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