Finding funding in 2000.

Government, private capital is still available

THE LIQUIDITY SQUEEZE THA REARED ITS HEAD IN RECENT years will remain a serious obstacle for the publicly traded companies whose market value has plummeted over the past 12 months. Many investors in these companies have been distressed by the huge write-downs nursing home companies have been forced to take as a result of PPS and the need of some assisted living companies to restate earnings due to absorption rates that have been slower and rents lower, than originally projected.

But while the travails of the public companies continue, strong regional and local operators of nursing homes and assisted living facilities still having funding options. These range from small-scale conventional lending programs to government insured programs such as HUD, Fannie Mae, and Freddie Mac. Other options include, for smaller transactions, tapping Wall Street's for smaller transactions, tapping Wall Street's conduit financiers and, for larger ones, using third-party insurance company credit enhancers or private capital.

* HUD loans. In the past, HUD's primary emphasis in the senior housing and health care market was funding single properties. However, given the current credit crunch, HUD programs are being adapted to meet the needs of borrowers with larger portfolios. As a result, more providers can participate in what has become the industry's most viable borrowing option.

HUD loans now offer better-than-market terms and the agency has adopted a more businesslike, less bureaucratic approach. Deals typically have a 40-year term and amortization for new construction or major rehab/expansion, and a 35-year term and amortization for existing refinancing. The loan-to-value ratio is 90 percent for new construction and 85 percent for typical refinancing at fixed rates. The loans are nonrecourse and prepayable with minimum penalties.

* Quasi-government agencies such as the Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal National Mortgage Association (Fannie Mac) have multimillion dollar senior housing lending programs that are growing. They figure to play an expanded role in funding assisted living, congregate care, and possibly some of other senior housing sectors as the result of a greater understanding of the industry and more favorable lending terms. But they are not actively courting nursing homes because of their dissimilarity to multifamily apartment housing and their reliance on public pay programs.

* Investment/hedge funds, which make riskier investments to procure above-market returns, will provide equity capital for start-up companies, albeit at very expensive rates. The expectation is that funds from this source will continue to be available for senior housing and, on a limited basis, for nursing home properties. These firms generally look for highly experienced operators and are uniquely positioned for funding management buyouts.

* Commercial banks have been an active source of funding for senior housing and health care facilities in the past, traditionally focusing on management experience as the most important underwriting component. In recent months, however, many have pulled back on new projects and shown little interest in portfolio refinancing. But smaller regional and commercial banks have maintained their interest.

* Real estate investment trust also had been very active in funding senior housing but have lost significant shareholder value in the last 12 months. Consequently, REITs are interested in maintaining but not increasing the level of their investments. Their preferred mode of investment is sale-leaseback, which gives them ownership rather than just a mortgage. But they're not even doing much of that.

* Conduit and debt securitization programs were initiated in the early '90s to meet demand for senior housing and health care capital. But by the decade's close, real estate mortgage investment conduits (REMICs) had become cool to senior housing and health care properties. Their current focus is on individual long term care properties or smaller portfolios. Generally, the conduits seek investment in the $5 million-or-less range, which severely limits the potential of properties to be financed. However, they remain a good source of capital for mom-and-pops or single-purpose properties with fewer than a hundred units.

* Insurance companies were active in the industry in the past, but problems with other real estate-related loans caused funds this source to dry up in the early '90s. It's unlikely that we'll see insurance companies become active in senior housing/health care lenders anytime soon.

* Private capital from boutique investment firms specializing in health care is available at higher interest rates than the vehicles described above. Their terms are much shorter, but they're also much more flexible. Unlike investment/hedge funds, which are interested in equity-level investments, private capital is looking at property finance, a more liquid investment. They are also more long-term in their thinking because they're not looking at annual returns.

Jeffrey A. Davis is chairman of Chicago-based Cambridge Realty Capital Companies, a HUD 232 lender for assisted living facilities and nursing homes.