Today's financing state-of-the-art: interview with Jeffrey A. Davis, Chairman, Cambridge Realty Capital Ltd - includes related article - Interview

Nursing Homes, June, 1996

Interview with Jeffrey A. Davis, Chairman, Cambridge Realty Capital Ltd.

1995 was what Chicago-based merchant banking firm Cambridge Realty Capital Ltd. called a year of "many exciting developments" in financing for nursing homes, assisted living and health care real estate in general. Decreasing interest rates made previously non-financeable projects attractive financing opportunities, real estate investment trusts (REITs) strengthened and consolidated, HUD initiated the 232/223(f) program to refinance existing properties, new institutional lenders were drawn to senior housing, and commercial banks and other funding sources continued to expand their support of health care real estate financing and development.

So what does this mean to the would-be long-term care borrower this year? According to Cambridge chairman Jeffrey A. Davis, many of those "exciting developments" will continue to evolve - and that is, in general, good news for the LTC industry.

In a recent interview, Nursing Homes Managing Editor Laura Bruck asked Davis to share his views on the state of long-term care financing, as well as his advice to providers on navigating the often intimidating waters of the LTC lending stream.

Bruck: How would you describe the overall status of long-term care financing at present?

Davis: Things look very positive right now, due in large part to what lenders view as the excellent performance of LTC facilities over the last three to four years. There are many types of funding sources available to industry borrowers right now, ranging from banks, to Wall Street investors, to HUD - which is a very active player - to REITs, and even some credit company-type players.

Bruck: What are some of the driving forces behind these positive trends?

Davis: I think there are a few parts to the equation, one of them being increased knowledge and understanding of the LTC industry on the part of lenders and bankers. That increased awareness is coming from groups like the National Investment Conference (NIC), which puts on a lender/investor show every year in Washington, DC, and trade groups like the American Health Care Association, which have done a good job of educating lenders and investors.

Another driving force is the lack of other desirable investment opportunities, which causes lenders to view nursing home operations in a positive light. Also, because there haven't been a large number of new nursing homes built in the last ten years, lenders have a sense that they're dealing with a somewhat mature industry today, with experienced providers and a lot of government control and regulation.

Bruck: Where do interest rates fit into the picture?

Davis: As of April, fixed-rate financing is at about 8% for HUD-financed transactions. Conventional rates are at least a point or two higher. While rates change constantly, the attitudes of investors remain positive with respect to financing senior housing and health care properties. We've been encouraging all our clients not to wait for interest rates to go down, since we feel they're more likely to move upward over the coming months, although they'll remain relatively stable through the Presidential election. It's also an excellent time for multi-facility owners to lock up these low rates by "bundling" facilities in a single conventional loan package. Lenders are motivated to provide multi-facility financing programs to make larger loans and deal with a greater number of facilities simultaneously.

It's important to understand that, in addition to their intrinsic value, low interest rates also give borrowers the chance to improve all other terms and conditions of refinancing.

Bruck: How can borrowers best take advantage of those opportunities?

Davis: There are several issues, in addition to interest rates, that the borrower needs to consider. Amortization and loan constant is one of the most important, and one that nursing home owners often fail to fully consider. When given the option, you should always take the lower loan constant rather than the lower interest rate. For example, a 9-1/2% interest rate with a 15-year amortization has a loan constant of 12.53%, while a 10% interest rate with a 20-year amortization has a loan constant of 11.58% - almost 1% lower, reducing monthly payments by nearly $800.

Borrowers should also get the longest term possible. Locking up the longest term, especially when the business is doing well, is optimal considering the volatile nature of both the LTC business and interest rates. Also, longer terms can eliminate the costs of frequent refinancing - legal fees, appraisals, and loan points must be paid each time.

The amount of the loan is especially important when interest rates are low. Loan proceeds can increase while interest rates are low if coverage remains constant with higher interest rates. In short, you get more money with the lower interest rate.

It's also important to analyze your floating versus fixed-rate loan options. While floating interest rates may look attractive, they can move very quickly in response to the financial markets. Today's low interest rates should be applied long-term, rather than short-term, to take advantage of long-term rates, rather than what some have called short-term "fool's gold" rates.