Financial institutions have grown increasingly wary of lending money to operators of skilled nursing facilities, according to Cambridge Realty Capital Companies’ Chairman Jeffrey Davis. However, “HUD loans still remain a viable option for these operators,” he notes.
Generally speaking, operating costs have reached a historic high for skilled nursing facilities. The rising cost of providing this type of care has caused traditional financial institutions like banks and credit companies to “red flag” these facilities as high risk loan applicants, making it more difficult than ever for operators of skilled nursing facilities to obtain loans to build, expand or improve facilities.
Keeping beds filled, especially short term-stay beds, is challenging at the best of times. So is maintaining appropriate staffing levels (skilled and unskilled) in the face of worker shortages (particularly skilled workers) in many places in the US. Issues like these contribute heavily to budget uncertainty and cash intake versus outflow imbalances.
This has led to operators scrambling to cut costs across a variety of areas. “Managed Medicaid has begun appearing in many states,” Davis points out, “and managed Medicare is becoming more and more popular.” Administrators of these programs are incentivized to reduce payouts to clients, and so they cost less.
To make up for losses in other areas as well as to generate extra profit, many skilled nursing facilities turn to enhanced and “value-added” services. Such facilities have found varying degrees of success at implementing physiotherapy, occupational therapy, speech therapy and on-site pharmacies.
While these efforts have been helpful to some degree, these measures aren’t always enough to significantly reduce operating costs or generate enough extra income to offset operating costs. “Red flagging” of skilled nursing facilities is increasingly common, and it is causing some operating companies to wean their portfolios of such facilities to increase profitability and/or to make it easier to obtain loans for less volatile properties and interests.
In spite of the growing financial difficulties facing skilled nursing facility operators, Davis asserts that HUD loans have been, and still are, a desirable form of financing for skilled nursing facility operators. “Through all of this talk and chaos, HUD has remained true to its mission to providing capital even in choppy markets or challenging environments,” he asserts.
Created with a mission to make home ownership possible for otherwise at-risk clients, HUD has since evolved to include a wide variety of housing options, including skilled care and senior care. Hundreds of skilled nursing facility operators have benefited from HUD funding in recent decades, allowing for millions of Americans to receive quality acute and long-term care.
In spite of HUD’s success, some skilled nursing facility operators have shied away from HUD funding. Stringent qualifications and a perceived onerous application process have been cited as major reasons for rejecting HUD funding.
However, Davis points out, this need not be the case. “The degree of ease and efficiency of the process is strongly dependent on the provider you work with.” A provider with extensive HUD experience has the ability to help applicants navigate the system, as well as to anticipate and solve problems quickly in a manner that doesn’t delay the application process.
Additionally, HUD funding has a number of advantages over conventional loans. For applicants, benefits include a lower credit score requirement, smaller down payment requirements and better interest rates. For investors, payback of the loan is guaranteed by the government. “It’s a win-win situation for every party,” says Davis.