Watershed year in healthcare financing predicted.

The year 1994 could prove to be a watershed period for healthcare financing, with the jelling of more positive lender attitudes that will benefit the industry for years to come.

This positive assessment of healthcare, a field that has been subject to many stresses and misinterpretations recently, comes from Jeffrey A. Davis, president of Cambridge Realty Capital Ltd., Chicago-based merchant banker.

"We see 1994 as a beginning of stability in healthcare real estate as it relates to the availability of capital. The money shortages of 1990-93 generally should be over," says Davis, whose firm in the Vast decade has closed some $2 billion in real estate transactions.

Since the mid-1980s, Cambridge has been a national healthcare lender and investor, having closed more than $120 million in healthcare financings and investments. In 1993, the company completed $30 million in healthcare commitments and closings and has another $100 million in pipeline transactions under way.

Davis offers several reasons for a return to optimism about healthcare:

* Last year was a period of positive transformation, with many major players finally establishing their identities vis-a-vis healthcare.

* The U.S. Department of Housing and Urban Development (HUD) continues to be a major factor in health-care financing.

* Healthcare conduits via Wall Street Real Estate Mortgage Investment Conduits (REMICs) began emerging in 1993 and have the potential for much stronger activity in 1994.

* Real Estate Investment Trusts (REITs) continue to gain strength, which should continue in 1994.

* Commercial banks began re-establishing their positions and should emerge with an even stronger commitment.

* The interest of equity investors was strong in 1993 and is expected to become even more pronounced in 1994.

"Overall, 1993 was a positive year for healthcare properties, a year of transformation. This year will be a critical one, to establish the platform and position of major healthcare investors and lenders for the next five years. It is a very important transition,' says Davis.

He provides this rundown of how important segments of the healthcare investment community are expected to be involved in 1994:

Government Financing

With a program extending over 40 years, HUD will remain the No. 1 source for healthcare financing in the country. Its focus is on new or rehabbed expanded nursing homes and assisted-living facilities. HUD not only offers the most competitive terms (90 percent loan-to-cost at current interest rates around 7.75 percent), but provides fixed-rate construction and permanent loans.

"HUD's attitudes toward healthcare have become even more positive over the past few years and apparently views nursing homes and assisted-living transactions as a growing part of its business," says Davis.

Insurance Companies

"Yesterday's lenders," the insurance companies that used to be major factors, will remain on the sidelines, still suffering from the 1989-92 real estate depression.

"Insurance companies have been sticking with more conventional, mainstream transactions. This isn't likely to change any time soon," says Davis.

Commercial Ranks

These institutions, historically a positive force in healthcare lending, are expected to once again be a major supplier of capital. They have the resources and understand nursing homes and business-oriented healthcare investments.

Davis believes the more enlightened and aggressive posture shown by commercial banks in 1-993 will continue for many years in the future.

Real Estate Investment Trusts

A consistent source of capital for the past five years, REIT activities are expected to remain strong. Cambridge expects that REITs will reduce their interest rates because of competitive forces.

Wall Street Conduits

The structure of these commercial pass-throughs is great for healthcare real estate, Davis says, but some items need to be adjusted to make the programs more competitive. These include interest rates and other terms and conditions of the transactions. To date, there has not been much completed activity in this siena.

Credit Companies

These institutions have never been able to relate to healthcare real estate. With a few minor exceptions, this will not change, according to Cambridge. Says Davis: "When this group of investors finally begins to accept healthcare properties as an appropriate property type, it will provide a muchneeded capital source." But not much will change in 1994, he adds.

Private Investors

Private investors have developed a strong interest in healthcare properties, especially for sale/leasebacks. Due to the type of yields available, they will continue to be an excellent equity source, Davis notes.

Savings and Loan Associations 

With few exceptions, S&Ls have not been a factor in healthcare financing since the crisis of the late 1980s. Before that, they had an ability to understand and relate to healthcare properties.

Some S&Ls that can continue this orientation will remain active, but it is unlikely that this segment will be a major factor in the foreseeable future.

"The attitudes and positions that lending industry segments exhibit toward healthcare real estate in 1994 will be the benchmark for many years to come. Everyone involved in the industry will be watching very cautiously," Davis concluded.