HUD loans are well known in the marketplace for providing competitive rates and favorable terms, and many senior living operators have taken advantage of these throughout Cambridge’s decades of involvement with HUD lending. In fact, HUD loans for existing facilities make up a significant portion of Cambridge’s total HUD lending. However, as Cambridge President Jeffrey Davis points out, HUD construction loans also offer notable benefits and a number of advantages over bank construction loans and “should not be overlooked when shopping for new construction financing.”
HUD construction loans have always had appealing and unique terms because HUD financing was created with a mission that remains the same to this day. Those terms include 30 to 40-year term and amortization without a balloon, self-amortizing and a fixed-rate of approximately 4.75% today, plus a minimum 90% loan to cost. Both a HUD construction loan and permanent loan have the same rate and terms, except that the construction loan is interest only and amortization does not begin until rolled into permanent loan. Both are non-recourse.
In contrast, a commercial bank new construction loan has a maximum loan to cost of 80% and more typically between 65% and 70%, with a loan term no more than 5 years and interest rates between 5.5% and 6.75%. With 100% personal recourse, the borrower assumes all the risk, and must also supply equity up to 30% to 35%. Typically, no take out is available.
Not only that, but banks are growing increasingly fickle about their involvement with senior housing financing altogether. A growing trend among banks is to jump in and pull out of the senior housing financing market with little notice or explanation to customers, depending on the current state of industry. “Relationships with commercial banks become disregarded as specific criteria for obtaining a new construction loan for a senior living facility,” Davis notes. “Banks that don’t pull out altogether may tighten up their underwriting on new construction loans, becoming much more conservative and defensive.”
Cambridge has no intention of ever abandoning HUD financing for senior living, whether for existing facilities or for new construction. Cambridge Realty Capital, says Davis, was originally founded as a commercial real estate lender and merchant banking firm, but made an intentional decision in the mid 1980s to shift its focus to the senior housing market. “Nothing has changed since that time,” Davis assures Cambridge’s clients. “Cambridge remains committed to senior housing operators and developers alike, regardless of the state of the market or any other factors.” This goes for both existing clients and new ones. “Cambridge has made a considerable investment of time, money and ongoing education throughout the decades to stay on top of the senior housing industry, whether skilled care or assisted living. We eat, sleep and breathe senior housing. It is a permanent part of our DNA.”
Davis cites The Views Marion in Cedar Rapids, IA as a current and classic example of excellent usage of HUD construction permanent financing. Cambridge committed $22,267,500 for a construction, permanent mortgage loan on The Views Marion, a 104-bed facility that features a mix of skilled nursing, memory care and assisted living. The total gross square footage of the project is 88,747, and the facility is being built on 8.127 acres.
Cedar Rapids is a thriving community of 131,00 with a robust economy. Approximately 13 percent of the city’s residents are aged 65 and older, so “the need for this type of facility in Cedar Rapids is great,” says Davis. “Its mixed-services model will allow for aging-in-place and the ability to access a range of services under one roof.”
Davis reports that construction is moving along as planned, with no major delays or disruptions to date. “This was a well-planned venture with considerable forethought and insightful anticipation of potential issues. It is an excellent example of what a new construction loan can look like when borrower and lender work together well.” The project is expected to be completed in the spring of 2019.