It’s not unusual for senior housing/healthcare borrowers to come away with the impression that the lender underwriting their loan has created a complex and perplexing series of hoops through which they must jump in order to receive the funding they desire.
“Problem is, when it’s time to refinance or acquire a new property, borrowers must demonstrate their credit-worthiness time and again,” says Cambridge Realty Capital Companies Vice President Zach Scardina.
Cambridge is one of the nation’s leading senior housing/healthcare lenders, with more than 550 closed transactions. Mr. Scardina works in the company’s originations and underwriting area.
“Unlike the giant corporations that have their credibility and credit-worthiness established by large rating companies, the typical senior housing/healthcare business is on the outside looking in. It’s up to the lender to put healthcare borrowers through a similar credit rating process,” he explains.
“The job isn’t getting any easier,” he observes.
Mr. Scardina says underwriting for healthcare properties has always been more complicated than underwriting commercial real estate loans. In addition to brick and mortar, healthcare loans are based on an analysis of the borrower’s ability to pay the debt service and support the requested loan amount.
“To analyze the borrower’s credit-worthiness, the lender must thoroughly understand the borrower’s business. It’s the borrower’s job to provide accurate information and data, which is where the hoops come in,” he said.
When structuring loans for healthcare borrowers, lenders are typically constrained by loan-to-value (LTV) and debt service coverage (DSCR) ratios. Mr. Scardina says these ratios are two of the key risk factors lenders mull when qualifying borrowers.
He points out that a glossary of terms posted on the Cambridge website defines the LTV ratio as the amount of money a lender will loan on property divided by the property’s appraised value. HUD is willing to finance up to 80 percent on loans for profit businesses and 85 percent on loans for not-for-profit businesses.
To determine the debt service coverage ratio (DSCR), net operating income is divided by the annual principal and interest payment plus any applicable servicing fees.
“In today’s market, conventional lenders typically require a 1.35 DSCR, which means operators must cover the principal and interest payments for a conventional loan at least 1.35 times. For HUD loans the DSCR is 1.18.”
Once the LTV/DSCR parameters have been established, it’s possible to establish the borrower’s equity or ownership position. But at some point underwriters may want to consider other things as well. For example, various timing requirements or restraints may need to be worked out prior to starting the underwriting process.
With new construction, a feasibility/need analysis study will be needed to determine if a project can be justified economically. For many short-term loans, exit strategies will need to be anticipated in advance. For example, is it possible to exit the project within a given time frame under a desirable set of circumstances?
In the final analysis, for the senior housing/healthcare borrower, the outcome ultimately rides on the lender’s ability to determine credit-worthiness based on a careful and thorough analysis of the borrower’s track record, Mr. Scardina said.