As a lender who provides short-term financing solutions, I can tell you that there are several aspects that lenders will examine when owners and operators are seeking capital. The requests can run the gamut, but recently, because of shifting market dynamics, two types of requesters are more prevalent: those who are seeking a buyout, and those who are seeking a bailout.

When capital is used strategically after you’ve performed or executed the business plan, that is considered a buyout. When a property is struggling and seeking additional capital to keep the project moving forward, that is considered a bailout.

An example of a buyout scenario could involve a stabilized facility with equity capital now seeking a realization event — reaping some of the capital and the gain out of the facility, or considering longer-term financing, such as from the US Department of Housing and Urban Development or agency financing. Under HUD’s current criteria, it is difficult to pull equity out of a facility, but a two-step transaction using a bridge loan to release some of the equity in the property before obtaining the HUD loan may be a viable solution. 

Buyer’s considerations

If you are on the buying end of a buyout or transaction, there are several factors to consider when assessing a facility’s worthiness:

• Location, location, location. Geographic location plays a crucial role in how successful a community/facility is. Is it close to high-quality healthcare services? How accessible is it to public transportation (not only for residents and families, but for employees, too)? Is the property located within a desirable neighborhood? If the answers are a resounding yes, then that location can enhance occupancy rates and continually attract residents.

• Your market. Understanding the local market is imperative for the due diligence process. Become well-versed with the area demographics and aging population, as well as with your competition. Evaluate the competitive landscape and market trends to determine whether the facility can adapt and remain competitive in the evolving senior living industry. Doing so can help you gauge the feasibility and profitability of your investment.

• The facility footprint. Consider the facility layout, the number of units, the common areas and the current amenities available. Explore whether the property can accommodate multiple levels of care and services or if it is strictly licensed, for instance, as an assisted living community. When flexibility exists in the layout, or there can be creative repurposing of layouts, you can cater to a broad range of resident needs with multiple revenue streams.

• Regulatory requirements. Is the community/facility in compliance with state, local and federal regulations? Review all Centers for Medicaid & Medicare Services reports, annual surveys and findings, as applicable. Conduct thorough due diligence to avoid any potential compliance snags that could affect future growth.

• Financial considerations. Assess the financial performance of the property, including historical occupancy rates, revenue growth and profitability. Consider working with financial advisers or consultants to conduct a comprehensive financial analysis. Garner an understanding of the purchase price, operating costs and potential revenue.

• Human capital considerations. What is the current staffing structure and structure of the existing management team? How do staff members interact with residents? Evaluate management’s expertise, track record, and ability to handle day-to-day operations effectively as well as weather any potential crises or storms.  

• Physical condition. Thoroughly inspect the property’s physical condition, assessing its age, infrastructure, equipment and safety features. Determine whether any renovations or upgrades may be required as well as what the associated costs would be.

• Resident services. Review the array of services and amenities offered to residents while also considering the quality of care, recreational activities, dining options and social engagement. Are onsite medical services or clinics present? Does the community have an ongoing partnership with a local hospital system or physicians’ group?

• Reputation management. When you research the community, what do you find in online reviews? Are they positive, glowing reviews, or are the reviews littered with complaints and negative feedback? Does the organization have any pending lawsuits or judgments? Positive word-of-mouth is imperative for attracting new residents and maintaining high occupancy rates and community goodwill.

Two sides to the coin

There are two sides to every coin, and if the focus is not on a buyout that already has been stabilized, then a bailout often is the next circumstance that comes to fruition.

A bailout scenario might be a property that is struggling and not yet stabilized, and the partners want their money off the table.

Let’s assume an investor group acquired a newer assisted living community in 2019 when demand and competition for assets was fierce and capital was cheap and abundant. They paid a premium for the property based on the projected returns and valuation upon stabilization.

Despite aggressive stabilization timelines, it still was considered financially feasible. Then COVID hit. After months of lost operational and economic ground, fast forward to 2023 and the facility is struggling with occupancy, retention and recruitment, regulatory burdens, and a $50,000 per month operating deficit.

The road to stabilization

Several factors go into stabilization and whether a particular community or facility ultimately can turn the tide to reach those goals. Every circumstance is unique, but working toward stabilization benefits all parties involved. The road to stabilization requires patience, tenacity and flexibility.

It is possible that one management team simply is not able to achieve stabilization, yet another team with a fresh vision can. Sometimes, external circumstances such as a pandemic or even catastrophic weather events could significantly alter a stabilization timeline.

In today’s economic climate, this endeavor is not for the faint of heart. Evaluating systemic risk versus nonsystemic risk can help inform the quest for stabilization and what risks or challenges may lie ahead.

Systemic risks may include political, social or economic factors that affect the business from an external standpoint (for instance, rising interest rates, inflation, COVID-19, etc.). Nonsystemic risks are factors that exist within a company/organization (for example, poor management resulting in poor resident care and lawsuits; unionization efforts; botched deployment of a particular service line, etc.).  This risk-reward evaluation is key to understanding whether it is time to turn over the reins or give it another go.   

As both buyout and bailout scenarios become increasingly common, every owner and operator should consider his or her unique circumstances to evaluate the best path forward. Possible financial solutions to explore:

• Traditional capital: Traditional loan providers often are the first step for debt financing, including banks, HUD, the Small Business Administration, Fannie Mae and Freddie Mac, among others. Traditional loans are lower cost and longer term than other loan alternatives, but they often take much longer to close. Some traditional lenders also have a “bridge loan clone” product, which may be shorter-term but more flexible than their long-term financing. It has become increasingly more difficult, however, to garner traditional approvals due to credit restrictions and a tighter regulatory environment.   

• Bridge capital: Nontraditional, nonbank providers of bridge capital deliver loan solutions that generally are faster and more flexible than traditional capital providers (an average of 30 to 45 days to close), with loan structures and terms tailored to the request’s specific criteria and circumstances. Drawbacks can include the higher cost and lower advance rates (or loan-to-values) as compared with traditional lenders, as well as the unique lending criteria across nontraditional providers.

• Partner capital: Depending on a variety of factors particular to the facility’s performance and management’s abilities, raising additional capital through sponsors and existing equity holders may be a viable option. If the existing equity holders are not willing to put additional capital at risk, then raising new or fresh equity may be an alternative. Challenges include raising the additional capital and the dilution that occurs from a new capital infusion. If additional capital is obtained, then the sponsor may have a higher probability of delivering on the plan and later providing a liquidity event for the investors through the sale or refinance of the property. 

• Combination approach: A combination of new debt and equity capital may provide the solution required to satisfy the requirements of both the debt and equity holders, striking a balance to offset the lower loan-to-value of the new bridge debt while delivering sufficient capital to complete the plan. When equity holders put additional capital into the facility (that is, a cash-in refinance), lenders view that as a positive commitment, and the equity holders may experience less dilution and risk than if they had funded all of the capital through equity.

• Strategic alternatives: Strategic alternatives could include restructuring management, creating a strategic partnership or joint venture, and/or selling the facility.

Although these approaches are not all-encompassing, this list provides some insight into how lenders view the buyout versus bailout requests within senior living, as well as prudent options to consider. Owners and operators should explore all financing solutions at their disposal while remaining cognizant of how lenders may view their scenarios, to produce the best possible outcomes for their community, residents and investors.  

Don Pelgrim is the CEO of Wilshire Finance Partners, a real estate finance and investment company specializing in bridge loans and capital solutions for senior living and healthcare real estate from $1 million to $10 million nationwide. Before joining Wilshire, he was a practicing attorney and held several executive positions in the banking and financial services industry. Pelgrim has a juris doctorate from Loyola Law School of Los Angeles and an undergraduate degree in business administration from Hofstra University.

The opinions expressed in each McKnight’s Senior Living marketplace column are those of the author and are not necessarily those of McKnight’s Senior Living.

Have a column idea? See our submission guidelines here.

Mergers and acquisitions are nothing new, but an increase in merger and acquisition activity has begun.

No industry is immune to the pressures of economic uncertainty and rising inflation costs, including senior living. The post-pandemic landscape is marred with casualties, coupled with workforce shortages, burned out employees and less-than-ideal occupancy, set amid the backdrop of a possible recession. Yet with the right perspective, those same challenges and constraints represent tremendous opportunities for those who know where to look.

Here are three specific areas to keep your eye on in the days ahead.

Offloading portfolio properties

Larger companies that have portfolios brimming with properties intensely have felt the challenges of operating through COVID-19, coupled with ongoing economic pressures. Whether you’re a regional provider with a mid-size footprint (6 to 10 properties) or a large real estate investment trust with more than 20 properties, sometimes offloading underperformers in the portfolio is the fiscally responsible thing to do. It can be a tough decision, but right-sizing portfolios and selling off certain assets restores balance sheets and simultaneously creates other marketplace opportunities.

Those deals often are discreet and not widely publicized. Many transactions we’ve vetted and pursued have been the result of large REITs offloading portfolio properties. In those deals, we’re providing short-term capital for clients who have the vision and know-how needed to acquire those communities and make them successful again. Those transactions frequently are comprised of stand-alone assisted living buildings or stand-alone assisted living/memory care buildings.

Beyond one-off assisted living or memory care communities, large companies and REITs also are offloading several properties within a portfolio at once, equating to mini pools of properties for purchase. In financial terms, mini pools are clusters of assets sold together, rather than individually or one-off deals. Those transactions are desirable to many types of investors, but particularly operators who specialize in turnarounds or regional owners/operators who want to expand their footprint in their own backyard.

Although those mini pools of properties weren’t working for the previous owner, new owners with regional expertise are poised to make those communities thrive again, specifically because of their local market knowledge and built-in referral networks. In some cases, those properties fell outside either the expertise or geographic regions of the larger portfolios they were a part of, and that played a significant role in their demise.

Regional owner/operator retiring

The pandemic caused all of us to reassess what we wanted out of work and life, including employers and employees. Although some of those realizations have fueled what experts coined the Great Resignation, the movement has also morphed into the Great Realignment.

This realignment was acutely felt by the regional owners and operators who were on the cusp of retirement at the beginning of 2020. Many postponed their retirement date to ensure stability for employees and residents during the worst of the pandemic; others quickly realized that although they once thought retirement was a far-off goal, the stress of the pandemic accelerated that timeline and succession planning was rapidly prioritized.

Now, those owners and operators are ready to relinquish the reins to a successor. For some, it is a welcome sense of relief; for many others, it understandably carries mixed emotions.

Opportunities such as these create the necessary sequence of events for the owner or operator to retire off into the sunset while opening the door to another individual or company with a fresh vision for what that senior living community can become. The possibilities are endless, but this is especially true for someone who currently is an experienced administrator or executive director that always has dreamed of owning and operating his or her own facility or retirement community.

Those types of transactions will usher in a new wave of management, uniquely shaping the future of senior living.

Stalled construction sell-offs

Blue-sky and new build construction has come to halt for many, and although some developers are on the cusp of finishing the property itself, there isn’t a pipeline to fill it. Recently, we’ve seen numerous deals come to market where a multifamily developer decided to expand into senior housing without any expertise or knowledge of the industry (other than that the person thought he or she could make some fast cash because of boomers flooding the market) and as a result couldn’t sell or fill the units.

Stalled construction projects quickly are becoming sell-off assets, creating prime opportunities for savvy operators to acquire a brand-new property and fill units from their existing pipeline. In some cases, the construction is stalled before completion and offers smart buyers an even lower basis in the facility.

Naturally, those kinds of transactions aren’t for everyone, especially ones that involve unfinished construction, but every challenge creates an opportunity. This is like Newton’s Law, simply adjusted for finance: For every challenge there is an equal and opposite opportunity.

Each of those three scenarios will only continue to accelerate in this current economic climate, creating additional M&A activity along with ushering in a new era of senior living owners and operators. Timing is everything, and for those who know where to look, marketplace opportunities will continue to abound.

Don Pelgrim is the CEO of Wilshire Finance Partners, a real estate finance and investment company specializing in bridge loans and capital solutions for senior living and healthcare from $1 million to $10 million nationwide. Before joining Wilshire, he was a practicing attorney and held several executive positions in the banking and financial services industry. He has a juris doctorate from Loyola Law School of Los Angeles and an undergraduate degree in business administration from Hofstra University.

The opinions expressed in each McKnight’s Senior Living marketplace column are those of the author and are not necessarily those of McKnight’s Senior Living.

Have a column idea? See our submission guidelines here.

Senior living owners and operators always should ask the question: “What is the best financing for my type of transaction?”

Based on the specific situation and the opportunity, it is important to weigh the merits of traditional lending (bank) and alternative lending (bridge loan). Although a traditional loan always will be cheaper capital, it may not provide the most flexibility. Certain situations and marketplace circumstances can drive the direction of which financing option makes the most sense.

Although a bridge loan isn’t a tool you will use daily, it is an important to tool to use when the time is right. Doing a deal with a bank an agency or the Department of Housing and Urban Development always will be cheaper money, but when circumstances change, you may need to explore other alternatives. (For the purposes of this article, we will refer to bank, agency, HUD and traditional financing as bank financing, a bank loan or traditional financing.)

On the other hand, a bridge lender may be willing to offer more flexibility than a traditional sources. Understanding how lenders view potential transactions also is helpful in deciding the best financing options.  

All lenders will look at deals differently, but it is relevant to view a bank loan as a long-term transaction, whereas a bridge loan is short-term, bridging the gap to your next step. Banks are scrutinizing deals based on their regulatory requirements and internal lending parameters, because of this, banks tend to be more rigid in their permissible lending criteria.

By comparison, bridge lenders aren’t beholden to the same regulatory requirements, allowing bridge lenders to potentially have more flexibility and creativity when underwriting a deal. Within that flexibility, bridge lenders often focus on the alignment of a transaction, specifically alignment between the lender, owner and operator. Lenders want to know that the owner and operator are invested in the process and outcomes.

Why alignment matters

In any potential transaction, lenders are evaluating several criteria. Although the financials must make sense, the viability of the operational strategy driving the financials also must make sense. The facility’s management team charged with executing the strategy is crucial in making that happen.

A bridge lender may be more willing to provide flexibility if there is alignment with the owner and operator. That alignment is crucial because it often determines the viability and potential success of the project. Therefore, the lending process becomes more than just a monetary transaction.

Specifically, the value of an assisted living community is not in the building itself, but in the people and the operations. The business plan and how the team executes on that plan is what creates value.

Bridge lenders want to understand how the owner or operator intends to execute on the proposed plans and whether the team has the industry and in-market experience, knowledge and contacts to back it up. This underscores the importance of alignment. Think of it like betting on the jockey, not the horse. If the owner, operator and on-site management team isn’t aligned, then that will create problems and red flags within a deal.

Lenders also want to see owners and operators put at-risk capital into the deal. The specific amount of capital will vary by the facts, circumstances and structure of a particular deal, but the prevailing thought is that the person who has something invested in the transaction always will be more motivated to ensure they execute.

Bridge lenders want to see owners and operators with “skin in the game,” because that capital contribution proves they personally believe in the investment. Lenders will ask, “What does the money in this transaction represent to that particular individual?” Placing one’s own at-risk capital into a deal reinforces the commitment to a mutually desirable outcome.

Bridge lenders also are exploring whether all parties in the deal are in alignment. Does the owner want something different than the operator? Are there other parties in the deal, and if so, how do they factor into the equation? Are they also aligned with the business plan and owner/operator? Those questions are crucial to ensuring a successful financial solution.

Different circumstances and market environments affect which type of lender is the right fit. Understanding how varying types of lenders operate and view transactions helps determine which financial options fit your unique scenario. In certain instances, a bank loan will be your best bet. In others, a bridge loan may be the best solution for advancing business goals.

Don Pelgrim is the CEO of Wilshire Finance Partners, a real estate finance and investment company specializing in bridge loans and capital solutions for senior living and healthcare from $1 million to $10 million nationwide. Prior to joining Wilshire, he was a practicing attorney and held several executive positions in the banking and financial services industry. Pelgrim has a juris doctorate from Loyola Law School of Los Angeles and an undergraduate degree in business administration from Hofstra University.

The opinions expressed in each McKnight’s Senior Living marketplace column are those of the author and are not necessarily those of McKnight’s Senior Living.

Have a column idea? See our submission guidelines here.

Although traditional bank and agency lending tends to dominate the financing discussion in senior living, short-term financing, or bridge lending, is a tool that every owner and operator should know about and have in the toolkit, especially in an environment of rising interest rates and credit restrictions.

A bridge loan is a unique tool. Think of it like a pipe wrench. You’re not going to use it every day, but when you have a leaky faucet, you need that special tool.

The right tools for the job make all the difference in the world, and ensuring that you have a diversified financial toolkit with resources at the ready is crucial to capitalizing on strategic business objectives. As counterintuitive as it may sound, permanent financing is not always the best tool for the job.

What is a bridge loan?

Bridge lending is short-term or interim financing that generally is used by a borrower until the borrower secures permanent financing or sells the underlying real estate. Bridge loans use a collateral-based lending approach, placing the greatest emphasis and weight on the cash flow and collateral value of the real property (such as an assisted living or continuing care retirement community). In contrast, traditional lenders will place the greatest emphasis on credit history and other factors. As the name implies, a bridge loan bridges you from point A to point B, spanning a gap in time or financing and creating a firmer foundation to receive traditional, long-term financing post-stabilization.

Loan benefits

Bridge lenders generally are not regulated the same way banks are, and as a result, are not subject to the market effects and underwriting restrictions that banks have. It also is important to note that the rules and regulations for banks ebb and flow with the economic tide. During an environment of economic uncertainty and anxiety about an impending recession, private, short-term capital sources fill the gaps that traditional lenders cannot. Further, those same economic conditions can affect how loans are funded on Wall Street. For example, when the Fed raises interest rates to stave off a recession, pricing a new mortgage-backed issuance is difficult and can put bond sales in limbo. Simultaneously, inflation may affect operating costs and capitalized rates. All of those factors affect the availability of capital and how easy or difficult it is to access.

On average, it takes a bank 120 days to close a transaction; bridge lenders make transactions happen in approximately 30 to 45 days. Although there is a premium for that speed, in the form of a higher interest rate, you gain a competitive advantage by using the flexibility of a bridge loan during a market where traditional capital is increasingly difficult to come by — and increasingly regulated.

What happens when you don’t fit traditional lending’s credit criteria? Or what happens when your transaction cannot afford to wait 120 days? Time is on your side with bridge loans.

Common ways to use bridge loans

Bridge loans are helpful in a variety of circumstances, including opportunistic and value-add acquisitions of nearby properties or complementary facilities (for instance, a stand-alone assisted living community acquires a neighboring facility). Likewise, an owner may be ready to retire and turn the operational reins over to someone else, requiring a cash-out refinance or locating a new owner.

In other circumstances, an operator of a longstanding community with minor wear and tear may choose to refresh and rebrand to regain a competitive edge in a marketplace saturated with competition and newer amenities. Another common example is the owner of an assisted living community who wants to tweak the building’s footprint to increase the number of memory care units.

Although the list of scenarios could go on, this is a sampling of ways in which senior living can leverage bridge loans to bolster occupancy, enhance amenities for residents and drive revenue.

Bridge loans aren’t the answer to every scenario, but neither is traditional bank financing. In scrutinizing an array of financial possibilities alongside existing market conditions, all owners and operators should assemble a diversified financial toolkit that features specialized and reliable options for pursuing short-term financing.

Don Pelgrim is the CEO of Wilshire Finance Partners, a real estate finance and investment company specializing in bridge loans and capital solutions for senior living and healthcare from $1 million to $10 million nationwide. Prior to joining Wilshire, he was a practicing attorney and held several executive positions in the banking and financial services industry. He has a juris doctorate from Loyola Law School of Los Angeles and an undergraduate degree in business administration from Hofstra University.

The opinions expressed in each McKnight’s Senior Living marketplace column are those of the author and are not necessarily those of McKnight’s Senior Living.

Have a column idea? See our submission guidelines here.

Just when it looked like the forecast called for sunny skies ahead after the pandemic, inflation costs and whispers of a recession have rolled in like threatening thunderstorms.

A June survey from MagnifyMoney noted that 70% of Americans believe a recession is coming. Pundits and financial analysts are sounding the alarm bells, fixating on early 2023 as the possible start of a recession. Although not everyone is convinced that a recession is imminent, senior living providers already are juggling numerous burdens, from staffing shortages and lower occupancy to inflationary cost increases.

In an environment of economic uncertainty, short-term capital, or bridge lending, can prove invaluable in meeting business goals. Here are five reasons successful senior living providers leverage bridge loans to meet their strategic objectives.

1. The bank says no

Sometimes, even the best of business strategies won’t get funded by a traditional financing institution. Perhaps the bank isn’t interested in financing the transaction, or the timing is incompatible. In today’s climate, more operators experience bank-backed deals falling through, which is attributable to new restrictions on lending parameters. Bridge lenders often are on the receiving end of panicked calls from owners and operators whose transaction quickly evaporated. Economic pressures have ripple effects, and traditional financial institutions such as banks are not immune to those pressures. As a result, banks tighten their credit boxes, and that affects the existing pipeline of deals and future transactions.

2. Time is of the essence

Although real estate often is associated with the phrase “location, location, location,” bridge lending always is about “timing, timing, timing.” When time is of the essence and a transaction needs to happen in an expedited fashion, such as 45 days or less, short-term lending always will have the upper hand. When circumstances dictate fast and flexible financing, short-term lenders can perform extraordinarily well. Timing constraints within a transaction can happen for a variety of reasons, but it is precisely for those reasons that bridge loans are uniquely positioned to support strategic goals.

3. Complex transactions

There are transactions, and then there are complex transactions. Bridge lending specializes in the latter. Complicated transactions often have many nuances influencing whether traditional lenders even will consider financing a deal. A traditional lender may not be willing to take on the added risk or is unfamiliar with senior living. If the loan request is outside a lender’s wheelhouse, then that lender isn’t likely to pursue it. Complexities are further added when a transaction involves a value-add or opportunistic acquisition. In those situations, a facility that is struggling with falling occupancy, reputational risk or regulatory citations may be enough to scare off traditional lenders. Those scenarios might make a deal complex but are a good fit for creative short-term financing.

4. Rates aren’t everything

Rates are just one part of the equation when examining the effective cost of capital. Just look at how mortgage interest rates have fluctuated over time. Although many are accustomed to interest rates around 5%, in the 1980s, rates skyrocketed to 16 to 18%. Although bridge loan interest rates are slightly higher than traditional lending rates, it would be unwise to discount the product solely on that premise. A bridge loan is a tool designed to provide fast and flexible financing with execution certainty. It often is more costly to lose a lucrative deal than if you proceed with a bridge loan at a higher rate. Once stabilization is reached, it becomes that much easier to obtain permanent, long-term financing. That results in a two-step transaction where the opportunity is captured with the bridge loan and financed results are maximized through permanent financing.

5. Payoff is paramount

The goal of any transaction is to enhance operations, occupancy, and revenue—whether that is looking to refresh and rebrand an existing community or create acuity-level transitions within an existing building’s footprint. In the search for post-pandemic profitability in an environment of economic uncertainty, access to short-term lending is an imperative tool in your financial toolkit that creates options for success.

Successful owners and operators build a bridge to profitability and sustainability by starting with seasoned strategies and a trusted short-term lender who can finance the business vision. As traditional lenders tighten their credit expectations and lending parameters, explore bridge financing as a smart strategy to achieve business objectives.

Don Pelgrim is the CEO of Wilshire Finance Partners, a real estate finance and investment company specializing in bridge loans and capital solutions for senior living and healthcare from $1 million to $10 million nationwide. Before joining Wilshire, he was a practicing attorney and held several executive positions in the banking and financial services industry. Pelgrim has a juris doctorate from Loyola Law School of Los Angeles and a bachelor’s degree in business administration from Hofstra University.

The opinions expressed in each McKnight’s Senior Living marketplace column are those of the author and are not necessarily those of McKnight’s Senior Living.

Have a column idea? See our submission guidelines here.