One-on-one with Thomas B. Gale

Thomas Gale has more than a few words to share about getting creative today. Gale, a healthcare lending veteran and vice president with securities firm Lancaster Pollard, authored last year’s popular Long-Term Living article, “Alternative senior housing funding options,” which detailed nontraditional methods of accessing capital in 2011 and 2012. In this interview with Editor Kevin Kolus, Gale elaborates on the current behavior of borrowers as well as his suggestions for the remaining year.

Looking toward 2012, does the focus on creative methods of accessing capital still stand?

The capital markets have improved slightly. It’s all relative. If we were comparing 2006 to this year you would say it’s extremely tight. Banks have gotten through most of the expiring letters of credit, and 2012 is probably the last year with a lot of renewals. They’re also sitting on a lot of cash, too. And borrowers have become used to the tighter requirements from banks.

What a lot of borrowers are doing now because of what happened through the “meltdown” years is they’re exploring different options instead of just deciding, “Let’s go to our local bank and see what they can do.” So I do stress—and a lot of borrowers are—looking at creative options to see if the cost of capital is less and if it fits into their overall plans. But thankfully, you’re starting to see some loosening on the bank side.

Can you expand on the current behavior of borrowers?

I’ve talked to a number of large providers—they say they would put out a [request for proposal] to the banks and then end up being shocked at what they were getting back as far as cash requirements, equity requirements, personal guarantees and pricing. But as they’ve gotten used to that, I guess today the sticker shock isn’t there as much as it was right after the meltdown, coming off a period when there was a lot of credit, a lot of excess capacity in the banks and the terms they were getting were very favorable. Most borrowers are used to tougher requirements now, and they expect it, but they’re always looking for the best alternative in the end.

For example, let’s just talk about for-profits for a second—a lot of owners don’t want their guarantees on the debt forever, so they’re looking at creative ways to get the banks to finance their needs on the short term. But maybe the long-term option is a Federal Housing Administration [FHA] product, something they hadn’t looked at before.

How are the nonprofits behaving?

The non-profits are coming back out. The gestation period on their projects has extended greatly. I’ve been working with a couple of nonprofits for a few years now on right-sizing their projects.

What’s important for a nonprofit is that they set their organization up for when they go to the capital markets. If they’re a little weak on cash, then they should start tightening their belt so the balance sheet looks better when they go to market.

On the whole, nonprofits are poking their heads out, but it’s certainly not anything like it was in the mid 2000s. Most of them are securing their balance sheets, securing their income. They’re still dealing with a lot of occupancy issues, but that’s coming around.

Should non-profits be more aggressive?

If we’re talking nonprofit communities, you look at the competitive nature around the market in which they deal. There aren’t a lot of new units coming online, so they’re not having to deal with competitive pressures that way. And most of their competition is dealing with the same occupancy issues and have not been working on big capital projects to become more attractive.

Eventually, these communities have to do larger capital projects to keep themselves up to date and fresh. I always say the next 3-5 years is where you’re going to see a lot of that come back. They can only stay down so long, and then they will need to do some capital projects to replace or renovate aging facilities.

Where should for-profits look for capital in 2012?

FHA is a great source, especially if it gets rid of this queue issue that it's had. Strong demand since 2009 led to a processing backlog, which was a byproduct of what happened in the market and not caused by the Department of Housing and Urban Development [HUD]. If HUD can get rid of the queue by this summer as projected, you’re going to have a very competitive landscape between an FHA product and the banks.

That competition is going to play well with the for-profits and even the nonprofits, but especially the for-profits because if you can go through the HUD LEAN program in a way that they designed it—kind of that conventional 90- to 120-day close—then you’re going to have some options. “Do I want to do a non-recourse fixed rate product? Or do I want to go with the banks and have a five-year renewal and floating rate debt?” Once that queue is eliminated, it becomes a viable and timely option, and it’ll come down to how the borrower wants to structure their debt.

Is HUD LEAN worth the effort right now?

It is. You’re seeing rates sub-4 percent including 50 basis point mortgage insurance premiums, 30-year fixed, non-recourse, no covenants—it has really picked up steam. I recently submitted a few transactions to HUD where I anticipate them to be out of the queue and into underwriting within 90 days, which was unheard of last year. If you like sub-4 percent fixed rate money for 30 years or more, it’s a great product to go after.

Any last-minute advice for borrowers?

I want to emphasize that it takes more time nowadays. You have to get either your bank or your financial advisor in early, especially for nonprofits or the smaller for-profits that aren’t used to refinancing in a tight market or exploring alternative capital sources. Make sure you’re prepared in plenty of time to present yourself in the best light possible when you go out to the markets.

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