The outlook for private financing

Nursing Homes, Feb, 1999 by Brian Dowd

From a lender's perspective, the strengths of a successful nursing home can mitigate many of these risks. There are barriers to entry that will preclude exponential growth such as we have seen in certain markets with assisted living facilities. Nursing homes operate with a high degree of government regulation and require top management, administrators and nursing staffs with high levels of expertise and experience to prosper.

The trend toward shifting lower-acuity patients from nursing homes to ALFs is one of the factors driving the explosive growth in ALFs. However, this may be tempered by a near-term correction. Many facilities are being built based on an assumption of a large, affluent and aging population. While we are all aging, not everyone will be able to afford the high rates that many facilities will require to meet pro forma. Further, given the lower levels of acuity, ALF residents will tend to be more transient. A more affluent population will likely be more demanding of quality services and activities. Operators will need to excel in providing services and activities, as well as in marketing, to maintain occupancy. The right combination of location, demographics and operator experience will be necessary to maintain high occupancy rates.

The outlook for financing long-term care facilities is positive. Lenders experienced in financing senior housing understand the challenges facing operators, but they also realize and appreciate that the industry has been around for many years and has survived many regulatory initiatives. The changes to the industry will test operators to more closely monitor costs relative to patient acuity levels. Lenders will look not only to an operator's caregiving expertise, but also at their level of sophistication with respect to cost management and operating efficiency.

CMBSs as a source of financing for long-term facilities are here to stay. The CMBS industry has gone from a total cumulative issuance of approximately $25 billion by 1991 to over $200 billion today. The brief period of volatility last summer has provided the industry with a correction that, in hindsight, is a natural part of any evolving industry. The CMBS industry will stabilize at some level that will result in an acceptable return for both lenders and investors.

At the same time, the CMBS industry will continue to be the primary source for competitive long-term fixed rate mortgages. In and of itself, the CMBS industry has become a major source of capital and has indirectly increased the volume from other sources by stimulating greater competition among all lenders.

Brian Dowd Is a director at Parallel Capital, based in New York City. He has more then 10 years' experience with commercial and multifamily real estate, including commercial loan origination and portfolio management. For further Information, phone (212) 972-7600; fax (212) 9722773; or visit the Web site at: www.parallelcapital.com.