Top 5 Financing Options for Senior Housing Facilities
In this article, we detail the most common loan programs available for financing senior housing acquisitions, constructions, or rehabilitation.
Although the senior housing industry has had its ups and downs over the past few years, with roughly 10,000 Baby Boomers hitting retirement age every day, the sector proves to be a strong investment option.
In the third quarter of 2022, overall senior housing occupancy stood at 82.2% up 100 basis points over the previous quarter, according to the National Investment for Seniors Housing & Care (NIC) data. During the same period, rent rates were up 4.4% on a year-over-year basis, while the annual absorption rate increased by 5.4%. Thanks to strong market fundamentals, deals also continued to materialize in the third quarter of the year, with senior housing transactions amounting to more than $1.3 billion, NIC data revealed.
It is without a doubt that senior housing is a rapidly growing industry with plenty of opportunities for investors. But with any investment, it's important to choose the right financing option for your property. To help you make the best decision for your investment, we've compiled a list of the most common financing options available for senior housing facilities.
1. Fannie Mae Senior Housing Loans
As a government-sponsored enterprise (GSE) focused on ensuring enough liquidity, stability, and affordability when financing housing across the U.S., Fannie Mae provides some of the best loan terms available for senior housing facilities. The program covers nearly all types of senior housing, including independent living, assisted living, and memory care communities. Additionally, the program is available for continuing care retirement communities and some skilled nursing facilities as well.
Fannie Mae’s senior housing loan program offers five- to 30-year terms and amortizations of 30 years, fixed and variable rates, and up to 75% of LTV — depending on the property type — and can be used to acquire or refinance a purpose-built senior housing facility. Most loans are non-recourse with standard carve-outs. Fannie Mae also offers early rate locks through its Streamlined Rate Lock option to help borrowers manage interest rate risks.
2. Freddie Mac Senior Housing Loans
Freddie Mac is another GSE that provides financing for senior housing properties. Freddie Mac loans are typically offered at lower interest rates compared to traditional bank loans, making them an attractive option for potential borrowers. Similar to Fannie Mae, Freddie Mac’s senior housing loan program is designed for the acquisition and refinancing of designated senior housing facilities, including independent living, assisted living, memory care properties, and properties with some skilled nursing units.
Freddie Mac’s senior housing loan program offers five- to 10-year terms for adjustable-rate loans and up to 30 years for fixed-rate loans. Freddie Mac loans offer LTVs of up to 75% and DSCRs as low as 1.30x and are non-recourse with standard carve-outs. Prepayment options include defeasance for fixed-rate loans, but yield maintenance is also available.
3. HUD-Insured Loans
The U.S. Department of Housing and Urban Development (HUD) offers long-term, fixed-rate and non-recourse loans for the development, rehabilitation, and acquisition of senior housing properties.
HUD’s 232 program insures mortgage loans to support the construction and rehabilitation of properties intended for senior citizens who need long-term care or medical attention, including nursing homes, board, and care properties and assisted living facilities. Whereas, HUD’s 232/223(f) loan program is available for borrowers who want to acquire or refinance a senior housing property.
The minimum loan amount for each program is $2 million, with terms ranging between 10 and 40 years, and LTVs of up to 80% for for-profit entities and 85% for nonprofit organizations.
Eligible borrowers include developers, constructors, investors, public entities, and private nonprofit organizations and associations. HUD-insured loans are backed by the federal government and are available through lenders approved by the Federal Housing Administration.
4. SBA 504 Loans
Small Business Administration loans are another government-backed financing option available for senior housing facilities. More specifically, the SBA 504 program is an affordable financing vehicle for those who want to improve, build, or acquire an assisted living facility. The SBA 504 program provides long-term, fixed-rate loans, and requires only a 10% down payment.
The SBA also offers additional funding for those who wish to become more environmentally friendly through the SBA 504 Green Program. To become eligible, borrowers must cut their facility’s energy use by 10% by implementing green options such as wind, solar or geothermal power, or invest in a new property that uses 10% less energy.
5. Conventional Loans
While government-backed loan programs offer some of the best terms available, conventional loans from banks, credit unions, and other private lenders are another loan option to consider when financing senior housing properties. However, it is important to keep in mind that because they are not insured by government-backed entities, conventional loans generally have higher interest rates, shorter amortization periods, and more rigid credit score requirements. Nonetheless, conventional loans can close faster, and can offer more flexible loan terms.
Related Questions
What are the best financing options for senior housing facilities?
The best financing options for senior housing facilities include government-backed loan programs such as FHA, HUD, and USDA loans, as well as conventional loans from banks, credit unions, and other private lenders. Additionally, the Small Business Administration (SBA) offers the SBA 504 program, which provides long-term, fixed-rate loans with only a 10% down payment, and the SBA 504 Green Program, which provides additional funding for those who wish to become more environmentally friendly.
For more information, please see the following sources:
What are the advantages and disadvantages of financing senior housing facilities?
The advantages of financing senior housing facilities include access to government-backed loan programs with some of the best terms available, as well as conventional loans from banks, credit unions, and other private lenders. Government-backed loan programs offer lower interest rates, longer amortization periods, and more lenient credit score requirements. Conventional loans can close faster, and can offer more flexible loan terms.
The disadvantages of financing senior housing facilities include higher interest rates, shorter amortization periods, and more rigid credit score requirements for conventional loans. Additionally, government-backed loan programs may not be available for all types of senior housing, such as skilled nursing facilities.
What are the most common types of financing for senior housing facilities?
The most common types of financing for senior housing facilities are Fannie Mae® Senior Housing Loans and conventional loans from banks, credit unions, and other private lenders. Fannie Mae's senior housing loan program offers five- to 30-year terms and amortizations of 30 years, fixed and variable rates, and up to 75% of LTV — depending on the property type — and can be used to acquire or refinance a purpose-built senior housing facility. Most loans are non-recourse with standard carve-outs. Conventional loans generally have higher interest rates, shorter amortization periods, and more rigid credit score requirements, but can close faster and offer more flexible loan terms.
For more information, please see Fannie Mae® Senior Housing Loans and conventional loans from banks, credit unions, and other private lenders.
What are the eligibility requirements for financing senior housing facilities?
The eligibility requirements for financing senior housing facilities vary depending on the type of loan. For HUD-insured loans, eligible borrowers include developers, constructors, investors, public entities, and private nonprofit organizations and associations. For SBA 504 loans, borrowers must cut their facility’s energy use by 10% by implementing green options such as wind, solar or geothermal power, or invest in a new property that uses 10% less energy. For more information, please visit the following links:
What are the tax implications of financing senior housing facilities?
The tax implications of financing senior housing facilities depend on the type of loan you choose. For example, with an SBA 504 loan, the borrower can take advantage of the tax benefits associated with the loan, such as the ability to deduct interest payments and the ability to depreciate the property. Additionally, the SBA 504 Green Program offers additional tax benefits for those who invest in green options such as wind, solar, or geothermal power. However, with conventional loans, there are no tax benefits associated with the loan.
What are the best strategies for securing financing for senior housing facilities?
The best strategies for securing financing for senior housing facilities depend on the borrower's needs and preferences. Government-backed loan programs such as FHA, HUD, and USDA loans offer some of the best terms available, and can be used to purchase, refinance, or construct senior housing facilities. Additionally, the Small Business Administration (SBA) offers the SBA 504 program, which provides long-term, fixed-rate loans with only a 10% down payment. Conventional loans from banks, credit unions, and other private lenders are another loan option to consider, although they generally have higher interest rates, shorter amortization periods, and more rigid credit score requirements.
For more information, please see the following sources: