Investment in real estate for elderly favorable.
Of course, the key development in health care and elderly demographics is that more Americans are living - and will live - to old age. Not all can or want to remain in their own homes and apartments. Many will need specialized care in specialized buildings.
Demographics that I believe are creating the need for more elderly health-care real estate investments include the following:
* In 1985, 22.5 million Americans were 65 and over. By 1990, that portion of the population expanded to 32.5 million.
* Forecasts that the number of people 65 and over will grow at a rate of half million a year for 20 years.
* The number of Americans aged 85 and over will double in the next two decades and the longer we live, the more likely it is that more of us will be afflicted with the ills associated with aging. We will look for facilities that will provide care and make us more comfortable.
One of the questions about health and elderly care is how do we pay for these programs? Government plays the major role in financing health care property, but the private financial sector is active in it, too. These private, investment institutions range from U.S. banks to Wall Street and off-shore lenders, and each may offer a different type of loan structure.
A typical nursing home loan today by a bank would consist of a five-year, renewable mortgage with an amortization of 15-25 years priced at 300 to 350 basis points above corresponding Treasuries.
Many off-shore lending institutions are competitive on nursing home loans, as their interest rate is often based on LIBOR-plus. These loans are written with an interest cap and 15-20 year amortization.
Generally, real estate investment trusts have been asking for 10 percent to 11 percent interest plus a participation. In return, they will offer various loan structures, such as sale-lease-banks and provide 100 percent financing, enabling an investor to own a zero-equity investment.
Securitization as a way of financing pools of nursing home properties is relatively new. Often, these programs are based on a fixed-rate, 70 percent loan-to-value loan with a 10 or 20 year term, and a 20-year amortization schedule. This type of financing would require a 1:50 debt service coverage, and average pricing has been 400 basis points over the rate of a 10-year Treasury.
The construction of most new nursing homes and hospitals today is financed through government bond issues and government insured loans. My own company is an affiliate correspondent for the U.S. Department of Housing and Urban Development (HUD), and we are active participants in this kind of financing. The government loan program through HUD uses the FHA insurance program for construction and permanent loans. The loans then are sold to investors.
The government's ability to influence the development of certain health-care systems in the U.S. is almost overriding because it is such an important factor in the reimbursement of health care costs. The federal government maintains Medicare, which represents about 8 percent of the total income of the nursing home property industry.
The states administer Medicaid for the indigent. This program is partially financed by the federal government. It is the primary health and long-term care vehicle for the poor, and 43 percent of all nursing home property revenues come from Medicaid.
Some 1 percent of nursing home income is from private insurance, but the number of elderly people who have long-term care insurance has increased 81 percent since 1988, rising to 2.1 million from 1.2 million.
Health care services encompass many types of property. There are, for example:
* Assisted-living properties which usually provide apartment units for active older people who need little care. Rent and services are paid for by the residents.
* Nursing homes, which offer custodial care, both skilled- and intermediate-care services, and also supplement hospital care. Patient payments come from Medicaid, Medicare and veterans' programs, and from savings and private insurance.
As a group, health-care real estate facilities are relatively secure investments. Historically, cash flows have been stable; debt service coverage ratios have been low; and loan-to-value ratios have been high. As a result of these strong financials, they are attracting private institutional mortgage financing, especially from commercial banks and savings banks that have departments and/or officers who understand geriatric demographics.
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|Title Annotation:||Annual Review & Forecast, Section IV; health care and elderly care facilities|
|Author:||Berger, Albert I.|
|Publication:||Real Estate Weekly|
|Date:||Jan 26, 1994|
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