$3m / 60% LTV Assisted Living Facility Refi - Financing Survey/Review

[Chris Mason]

Scenario: This scenario is an amalgamation of a few inquiries that I've had in the last couple months. Person purchased a neglected facility using hard money. Took a few years to get licensing, permits, etc, to either restore it to being an assisted living facility, or convert it into one. Now it's stable, and time to take out the hard money with long term institutional debt. They purchased it for $3m, put $750k into it, we expect it to appraise for $5m, and are seeking loan proceeds of $3m.

Here are three commercial mortgages that might be a good fit (click to enlarge, if necessary):

Not listed there, but from left to right: 

Points are 1.25, 1.5, and 1.

Prepayment penalties are 5 years, no, and no.

The way to read "3/25, 15 years maturity" is that the rate is fixed for 3 years then adjusts, it has a 25 year amortization, and a balloon payment at the 15 year mark. 

Commentary/review on which might be a good fit for which use case or goal-set.

The Bank Option: Best rate hands down, and longest amortization. Someone might want to fire-and-forget this refi and not touch it, so they might not care about the 5 year prepayment penalty. On the other hand, this lender is also very picky, for example they require 100% liquidity of the borrower, meaning someone would need $3m liquid to get this $3m refi (& you don't get to count loan proceeds towards that liquidity). If the ownership of this assisted living facility didn't care about the prepayment penalty, and the bank didn't "swipe left" on the property based on things like experience level of the ownership and/or management team, this might be a clear winner. 

Credit Union #1: This has the longest maturity, so there's an element of "fire and forget" here too. No prepayment penalty is nice. The shorter amortization bumps the payment up $2k/mo, but at the profit levels of these types of facilities, that's a drop in the bucket. If the bank swiped left on the deal, or if the ownership thought rates would be dropping soon, this is a really good option too. If rates did drop, that 3 year fixed period means their rate would automatically drop with it, so they wouldn't have to refinance if they didn't want to, but if they did want to (cash out refi made possible by a recession forcing more elderly people into assisted living facilities, thus driving up rents, and the value of assisted living facilities? Doesn't sound like too crazy a scenario to me...), there wouldn't be any penalty. This is a Florida lender that requires that the property and borrowers be Florida residents. 

Credit Union #2: I think the only reason to really consider this one (I don't think the slightly lower points makes that much of a difference) is if the above two options both passed on the deal, a possible reason for that would be (ahem, guess why I am saying what I'm about to say...) an inexperienced management team trying to justify this refinance based on only 6 months of financials (rather than say a 1-2+ year track record of success, or experience with other facilities, etc). Oddly enough, the small print says California-based owners would get a slightly better rate, but it doesn't specify what. 

[Jeffrey Abraham]

What is the NOI on the facility and how many rooms are you renting I think you could do it as a dscr loan and refi it with a hedge fund and get 65% cash out and close with 14days

[Chris Mason]

Quote from @Jeffrey Abraham:

What is the NOI on the facility and how many rooms are you renting I think you could do it as a dscr loan and refi it with a hedge fund and get 65% cash out and close with 14days

Established and competently run assisted living facilities aren't ever NOI/DSCR-constrained, so that's not important for the asset class.

All standard commercial mortgages include DSCR, calling an assisted living facility mortgage a "DSCR loan" is like calling a home loan a "DTI mortgage," or calling a cup of coffee a "caffeine coffee," or calling a gun a "bullet gun." It's already built in, no need to specify.

Time is money, sure, anyone can close in 14 days -- and pay for it for years to come.

[Jeffrey Abraham]

You make a compelling point about the terminology and inherent considerations in commercial mortgages, particularly for assisted living facilities. Since DSCR (Debt Service Coverage Ratio) is a standard commercial real estate lending metric, it's redundant to label these mortgages as "DSCR loans." This is akin to stating the obvious, as DSCR assessments are fundamental in determining the viability of such loans, similar to DTI (Debt-to-Income) ratios for residential mortgages.

Your emphasis on the operational efficiency of well-run assisted living facilities highlights that their financial performance typically isn't constrained by DSCR limitations. These facilities often have stable and predictable income streams due to consistent demand, making them attractive investments.

Additionally, the trade-off between the speed of closing a deal and the long-term financial implications is crucial. While quick closings can be advantageous, they might come with higher costs or less favorable terms, impacting the financial health of the investment over time.