From a financial underwriting perspective, the age-old question for senior housing is: Is it a business or is it real estate?

A 22-member delegation of officials from the General Office of the State Council of the People’s Republic of China tussled with this conundrum during a recent visit to America to meet with senior housing/healthcare funding experts.  At Chicago-based Cambridge Realty Capital, Chairman Jeffrey A. Davis suggested to the delegates that owners of senior housing properties in the U.S. have been known to want it both ways, depending on how the economic winds are blowing.

Mr.  Davis described differences and similarities between commercial real estate and senior housing properties during a special presentation for the visitors.

“In boom times, all senior housing owners want capital markets to perceive senior housing as commercial real estate because, historically, capital has been more readily available.   In tough times, when capital is less readily available, senior housing owners remind the capital markets that senior housing is a need-based business that is recession-resistant and totally independent from the rest of the economy,” he said.

Although the U.S. economy continues to improve, Mr. Davis said commercial real estate owners remain saddled with record amounts of debt taken on during the last boom period that ended in 2008.  Many loans negotiated during the boom years are coming due – and need to be refinanced – now, just as loans from commercial banks are drying up and underwriting standards for commercial real estate borrowers have tightened considerably.

“The problem for commercial borrowers is that there is less capital available at a time when the massive amounts of debt originated in recent years are coming due and must be refinanced using a different set of rules.  Underwriting standards for commercial real estate loans have tightened considerably and lower loan amounts are being approved,” he said.

According to the Cambridge chairman, senior housing/long-term care property owners face a different set of challenges.  Whereas the fortunes of the commercial real estate industry are based on jobs and the economy, heavily regulated senior housing/healthcare properties are a need and demand-based business that is dependent upon private pay, Medicaid and Medicare to generate revenues.

During the height of the economic boom, some commercial property owners were effectively financing 95 percent or more of their real estate projects.   In contrast, during this period, senior care owners approached the capital markets with hesitancy and did not over-capitalize their businesses.

Mr. Davis said the Chinese delegation was especially interested in learning about the various types of government financing programs available to senior care business owners.  He explained how HUD geared up to refinance senior care properties after commercial bank loans disappeared.

“Our visitors were very impressed by the complexities and sophistication of healthcare financing in the U.S.,” Mr. Davis said.

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