PulsePoints

The Congressional  “supercommittee” made up of Democrats and Republicans has been unable to come up with a budget savings solution of $1.5 trillion over the span of ten years. If no agreement is reached this week,  $1.2 trillion in spending cuts will be automatically enacted on hundreds of programs, beginning in 2013. A few programs have been exempted from the automatic cuts, such as Social Security, the Medicaid health program for the poor, Medicare health benefits for the elderly, veterans’ pensions and many programs for people with low income.

These unexpected budget cuts result in an unpredictable savings plan for both nursing homes and assisted living facilities. Even though Medicaid will be exempt from the automatic cuts if an agreement is not reached, Medicare will experience a 2% cut in payments to nursing homes and other health care providers. Although 2% does not seem like very much, this will cost each nursing home an average of $50,000, which is the equivalent of two direct-care workers. Since the automatic cuts won’t be enforced until 2013, lawmakers still have the ability to pass legislation decreasing the reductions in 2012, so this is a worst-case scenario, but the cuts remain a possibility if Congress cannot devise an alternative solution.

While it has been difficult for lenders to provide funding for new construction, refinancing existing facilities has proven to be quite beneficial for borrowers in the senior housing industry, due to historically low interest rates and government service entity funding options such as HUD, which provide very favorable terms to qualified borrowers.

Since experience varies between senior housing operators, knowing the basic steps Cambridge takes to close a deal can be very helpful. We ask that our clients provide us with some necessary information to determine whether or not we can proceed with a transaction.  On our website, clients can utilize our InfoCenter to find Information Request Forms and Checklists tailored specifically to the programs we offer.

Once submitted, the information is analyzed, and we underwrite the transaction. After determining if the transaction can support the requested loan amount, a Letter Of Intent is issued. Upon execution of our Letter of Intent, we will issue a quote; if the client accepts the quote, the application materials are then compiled and the transaction, whether HUD or conventional, begins to move forward on the path to closing.

At Cambridge, we understand that every client is unique, so our approach is anything but generic. We offer a variety of financing solutions and tailor them to meet the specific needs of each borrower. One particular program that many senior housing owners/operators have found appealing in recent years has been our sale-leaseback program.

With the economy in “recovery mode,” many senior housing operators have discovered the advantages of leasebacks. For senior housing facilities in need of stimulating cash flow and preserving business, finding a buyer to purchase a property and lease it back for a designated amount of time is just the right move. Operators can remain with their senior facility and continue to manage it while equity is withdrawn from the real estate, making money available for rehabilitation, expansion, or re-investment. In addition, sale-leaseback programs also benefit the investor by providing cash flow through a lease agreement and reducing management hassle.

Both single properties and entire portfolios can opt for a sale-leaseback option. Some owners can utilize this program as an exit strategy while others can rely on it to better their existing facilities in hopes of regaining them in the future. Lessees may have a put option to reacquire the real estate at a later time during the leasehold.  Our knowledge of the senior housing industry puts owners/operators in good hands, so that they can focus on operating their facilities at the optimal level.

More than a catchy marketing gimmick, in recent years “going green” has become the thing to do, so it’s no surprise that even the senior housing sector is moving towards green living, since its benefits extend to the environment, residents, and operators.

Green facilities consume less water and energy, use solar power, improve air quality and utilize recyclable material. This is accomplished through building designs that allow more natural light to enter, installing solar panels, using low-flow toilets/shower heads,  recycling programs, and various other “green” techniques. Owners can also count on future savings since their facilities will be using less energy. In addition, once complete, facilities can receive Leadership in Energy and Environmental Design (LEED) Certification, legitimizing their eco-friendliness and making them that much more appealing to the new generation of seniors.

Owners and operators may need some help to fund their green-living turnaround, since it may be more costly then conventional construction/rehabilitation. And that’s where Cambridge comes in; we can help you find the right financing solution to help you and your facility save some green – cash – in the long run!

On view throughout the city of Chicago are a number of public safety ad campaigns to remind us that many factors work together to create a safe environment.  One in particular that stood out for us was an ad featuring a young boy and his mother at a pool. The ad shows the mother discussing the importance of taking multiple safety precautions. 

When Jake almost drowned last month, I didn’t think about all the steps we’d taken to protect him.

 Just the one that saved him.

 It could have been the fence.  Or the pool safety cover.  But that day, what saved him was the door alarm I installed on the back door to the pool.

You can never know which safety step will save a life – until it does.  Adding multiple safety steps can mean the difference between a close call and a call to 911. 

Simple steps save lives.

This point stresses that no one can anticipate exactly what element will be required at a given time, so it is best to acknowledge the dependency on all factors and to include them all in any strategy. 

We also use this mindset in a business setting.  We understand the importance of this mentality and how it leads to sales and occupancy increases within senior housing by utilizing a “360-marketing” approach.  Similar to the scenario with pool safety, a 360- marketing plan must encompass all factors that affect the business and operations. 

In terms of senior housing, enticing potential new tenants can include a variety of factors; it’s not solely the accomplished new marketing director or the ad campaign that persuades the new tenant to choose a facility.  The entire marketing plan, executed consistently, can get that move-in. Ensuring that every aspect is taken into account has proven to be the deal-maker for boosting occupancy.

To achieve a successful outcome, senior housing/healthcare borrowers may need to be more responsive as their loan winds its way through the application process.

Timing issues are critical: When a lender requests updated numbers or additional data, the expectation is that this information will be delivered promptly. Borrowers should have at least three years of historical data copied and ready to present, and five years of data may be even better.

Amount of information: It’s important to compile enough information to enable the lender to be sufficiently knowledgeable about the context of a loan application.

Type of Information: The specific data needed to meet the lender’s due diligence requirements will vary depending upon the type of transaction it is. But there is nothing mysterious about the types of information lenders need to process a loan: a description of the property and financial statements are just two of the items on any due diligence list.

To help our borrowers organize this activity, Cambridge has posted detailed information forms and checklists on our web site.

A friend of mine who operates a nursing home was trying to decide whether making an improvement to his property justified the additional expense for the improvement.  He asked me for advice, and one result of our discussion was a series of insightful questions that I felt could be helpful to others who are considering the merits of a capital improvement.

Ask yourself: 

Are there occupancy or business benefits from the improvement/repair?

1. What is a conservative estimate of increased income    from the improvements?  Call this estimate $XXXXX.

2. What long-term benefit is there? Multiply $XXXXX by less than 10 years.  This figure establishes a maximum expenditure not to exceed its overall value.

For improvements/repairs with no new income benefit:

1. Is there a way to market the improvement to potential customers?  Can it reduce costs?  If so, calculate the value above.
2. If it concerns existing resident satisfaction:
   1. Are there vacant units that fulfill the resident’s need?
   2. Could a gift to the resident overcome the situation?  (A blanket, a rug, a wall-hanging?)
3. Can maintenance staff complete the work?
4. Talk to at least 3 contractors.  Do they each propose resolving the problem in the same way?
5. What would an apartment building do?
6. Are there any maintenance contracts or warranties outstanding that could include this in their scope?
7. Do you need to solve the cause, or lessen the effect?  (e.g., a leaking eave spout is the cause, but the noise of the leak is the problem.  Placing a rock under the leak will eliminate the noise.)
8. Are there annual inspections that should have identified this problem beforehand?  If so, the inspection firm may be happy to make the repair to avoid a lawsuit.
9. If it’s a large expense, does insurance cover it?
10. Can the capital budget cover the need and meet the rest of the other budgeted needs for the year?
    1. If not, are there payment plans available?
    2. What would the situation look like one year from now, if nothing is done?
    3. Only do the portion of repairs most required.  Plan for the remainder to be done in future years.
    4. What is the minimum to meet regulatory requirements?

Today’s low interest rates offer senior housing/healthcare borrowers an excellent opportunity to refinance their mortgages, and for those borrowers who have an existing HUD-insured loan, there’s even better news – a “Green Lane” which allows qualified applications to move through the process at a faster pace.

A project qualifies for expedited processing in the HUD LEAN 223(a)(7) Green Lane if all of the following qualifications are met:

-The loan term is not being extended.

-There is no transfer of physical assets (TPA).

-There is no change in operator or agent.

-There is no accounts receivable financing in place, or it will be terminated prior to closing.

 The faster your 223(a)(7) application gets processed, the closer you are to closing your loan and lowering your current interest rate, so Cambridge is focused on helping you get your application ready to travel in the Green Lane queue.

When a property seems to be operating at its peak, many people decide to start looking at new opportunities to make money.  I say, consider the bird in the hand.  Unless you’re at 100% occupancy and at the markets’ highest rent level, with a controlled expense ratio, the most profitability available is in the present property.  Compared to a new business venture, operating improvements to your current facility are much more lucrative, as they generally cost much less, possess solid upside potential, and are a reinvestment in your existing business that lowers your existing risk.  More likely than not, focusing on your present property will be more rewarding than taking on the unknown challenges of a new property.  Moreover, any improvement in your senior housing business’s ability to make a steady income will improve its value nearly tenfold (based on property valuations per $ of income).

Empty units are goldmines of profitability!  Adding some new excitement and energy to the things that seem mundane about your business by re-training staff, marketing, and making cosmetic improvements will be the map that leads you to the pot of gold.

In Cambridge Investment & Finance Company’s 8 years of active investment in senior housing and healthcare properties, we have learned that there are many things to consider in order to achieve success and manage the risks of healthcare property ownership.  From insurance to marketing budgets to quarterly returns and sprinkler requirements, how does one keep ahead of it all?

The simple answer is this:  Clinical operations must be the first item of concern on every agenda.  A property cannot be successful for more than a very short period of time without astute attention to the healthcare needs of the residents.  Once a property has stabilized clinical operations that exceed regulatory requirements, success is possible.  Otherwise, struggles with regulators and occupancy take all attention away from the aspects that make for financial growth and community respect. 

Fortunately, the government’s survey process provides regular signs and guidance to alert owners and operators of clinical and physical plant areas that are problematic.  Once all government concerns are met, owners and operators can turn their attention to other needs such as marketing, occupancy, and other areas of clinical operations and service that require change in order to provide residents with a vibrant long-term care setting.

All of the other aspects of business can then be successful, because residents are receiving great care and people who seek out that care will be attracted to the facility.

20-inch blizzards and below-zero wind chills have us looking forward to the 2011 NIC Regional Symposium and National Skilled Nursing Investment Forum, taking place in warmer! Los Angeles from March 7 – 10.  Several senior Cambridge executives will be on hand to discuss our HUD and conventional lending programs, as well as joint venture opportunities.  If you’re attending, please contact us to schedule a meeting so we can catch up!