Getting help with your building loan.

Getting nursing home financing is never an easy matter. Here's how to avoid making it even tougher

Of all the administrative decisions you make, there's probably none more important than financing a nursing home - buying it, building it, renovating it, expanding it. How well you handle this particular arrangement may well determine whether your operation can be profitable, or ever will be. This means that the consultant you choose can go a long way toward making or breaking you.

Nursing home administrators, though, have a particular problem in that many financiers often have a difficult time understanding long-term care facilities. Are they real estate, like office buildings, shopping malls or apartment buildings? Not really. Are they, then, a service business, providing long-term care for the chronically ill and disabled? Yes, but the nature and design of the physical facility has a lot to do with how well that service is performed. In short, long-term care is neither simply real estate nor simply a business - it is both, tied together.

To the consultant/lender from the shopping mall/apartment building world, this mix of function and facility can be difficult to comprehend. Worse yet, so much nursing home financing is dependent on government programs, such as Medicaid and (maybe) Medicare - as if building codes weren't complicated enough! Also difficult, many of the people who work in nursing homes - specifically, nurses and physicians - often speak a language only they can translate. Nursing home administrators, as well, have their own jargon - how, Mr. Private Lender, do you tell the difference between a good private pay ratio and a bad private pay ratio?

Are you beginning to get the picture why a good consultant nowadays is hard to find, at least for nursing home financing?

This is why it is of primary importance that any consultant you wish to do business with in a nursing home deal have experience in the nursing home market, or at the very least with health care financing in general. I would recommend that you talk to no one who has made any fewer than 6 to 10 health care loans over the past five years. You find these, of course, by talking to others who have been involved in nursing home deals or who are well-informed about them.

Once you think you've identified someone with experience, how do you initiate the contact? To begin with, you have to be very clear in your own mind as to what it is you want to accomplish. This can have a direct bearing on the type of consultant you wish to work with. Are you looking to refinance the property to pay off a bank debt or an existing maturing loan? Are you looking to draw proceeds from the financing? Are your owners willing to personally guarantee the loan? Your answers to these will attract certain consultants, and turn away others.

For example, perhaps you've very nearly paid down a 20-year loan and now you want to refinance to get some extra cash to invest in program development. Some lenders simply can't relate to that; they don't want you to take cash out of the transaction. Also, you may find some lenders, being ultra-conservative, wanting to charge you a high interest rate no matter what your loan-to-value ratio may be; others may prove more willing to be flexible. You have to know what you want and who is most likely to be helpful in your getting it.

It is also important to know whether the person you are dealing with is a lender or a broker. A broker is working directly for you; a lender is working for his or her institution on your behalf. One is not necessarily better than another, but it is obviously important when formulating a deal to know who is working for whom.

Whomever you select, it is important to understand their language, just as it is important that they understand yours. So that you won't draw a blank when certain underwriting terms come flying at you, check the definitions box at right.

During your discussions, try to get some firm assurance that your would-be consultants can do what they say they'll do. "Why?" is always a good question in these situations. "Why do you say that you can wrap up this deal inside a month?" "Why do you say that you have special expertise with HUD 232 loans?" "Why do you say I'll probably |get a break' on the interest rate?" Why, why, why? Think of yourself as an attorney questioning someone on the witness stand. And listen as carefully as a good attorney does, too.

A final pointer: Under no circumstances pay your consultant up front. Some may get paid on an hourly basis, others may get a percentage of the loan, and there are many and varied other payment arrangements as well. Find the one that makes most financial sense to you. But never pay someone anything before the work is done - in this business, that's bad business.

Following these simple guidelines may save you from complications you never imagined (and, as a nursing home administrator, you have enough of those already). Furthermore, once you have formed a solid and productive working relationship with a consultant, you'll be amazed at the peace of mind you'll experience the next time financing becomes necessary.

Underwriting Terminology

Loan to Value he percentage of value a lender can loan Amortization The period of time the loan is being paid

back Term of the Loan May or may not be the same as the

amortization. For example, a five-year loan with a

20-year amortization - the shorter loan term will

result in a lower interest rate - will have to be refinanced

if the borrower decides to pay it back over

the added 15 years. Pre-Payment Penalty The amount a borrower must pay to

pay back a loan earlier than the agreed-upon term Personal Guarantee As additional collateral, most nursing

home lenders require personal guarantees from

owners Coverage Ratio A cushion for debt service. For instance, a

loan with a coverage ratio of 1.0 debt service coverage

would have net income, after all expenses, equal

to the cost of debt service. A loan having 1.4 debt

service coverage would cover the debt service 1.4

times - a cushion, as it were, for cash flow after

payment of debt service. Debt Service Monthly payments, including principal and

interest Loan Constant The total,amount paid each month in

principal and interest

Jeffrey A. Davis is President of Cambridge Realty Capital, Ltd., a Chicago-based financier for health care institutions nationwide. The company has financed some 15 nursing homes and retirement facilities throughout the United States in recent years.