Here’s another way loan size matters. If you’re like most senior housing/healthcare business owners, your credibility and creditworthiness are not established by the large credit rating companies that track America’s giant corporations and institutions.
“When it’s time to refinance the mortgage or acquire a new property, senior housing/healthcare businesses are required to demonstrate their creditworthiness time and again,” says Cambridge Realty Capital Companies Director of Underwriting Jerry Huang.
“Effectively, lenders put borrowers through a similar credit rating process,” he said.
Cambridge is one of the nation’s leading senior housing/healthcare lenders, with more than $6.5 billion in closed transactions over the past 20 years. The company has consistently ranked among the top FHA-approved HUD lenders.
In addition to brick and mortar, Huang says healthcare loans are based on an analysis of the borrower’s ability to pay the debt and support the requested loan amount. For this reason, mortgage loans for senior housing/healthcare properties are more complicated than underwriting for other types of commercial real estate properties.
“To analyze the borrower’s creditworthiness the lender must thoroughly understand the borrower’s business. It’s the borrower’s job to provide accurate information so this process runs smoothly,” Mr. Huang said.
He says the key risk factors lenders consider are loan-to-value (LTV) and debt service coverage (DSCR) ratios. The LTV ratio is the amount of money a lender will loan on property divided by the property’s value. To determine the DSCR, net operating income is divided by the annual principal and interest payment plus any applicable servicing fees.
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, he noted.
For example, various timing requirements or constraints 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. Is it possible to exit the project within a given time frame under a desirable set of circumstances?
In the final analysis, Mr. Huang says everything ultimately rides on the lender’s ability to determine creditworthiness based on a careful and thorough analysis of the borrower’s track record.