How Long-Term Care Facility Owners Can Finance Their Way to Success

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By Alexander Cohen, CEO of Liberty SBF

Assisted living, skilled nursing, and memory care facilities are undergoing a transformation as they rebuild in the face of rising costs and fewer residents. 

According to an analysis by the American Health Care Association and National Center for Assisted Living, the long-term care industry is expected to lose $94 billion over a two-year period of 2020 and 2021. 

With an increased cost for care—the analysis estimated $30 billion was spent on personal protective equipment and additional staffing across the sector due to COVID-19—and a decrease in residents, many facilities are doing everything they can to remain in operation.

As owners of these facilities look to make improvements to both indoor and outdoor living spaces in hopes of attracting new residents or prospective buyers, there is potential to benefit from financing options for those that don’t have available capital. 

How SBA 504 loans can help

Owners of long-term care facilities are sometimes unaware that real estate assets may qualify for subsidies by the Small Business Administration (SBA). The organization provides financing options that could help borrowers who are willing to sign recourse. 

With an SBA 504 loan, borrowers can lower their monthly operating costs and potentially access capital to use on improvements with up to 85% of cost for ground-up acquisition and construction financing, or for cash-out refinances at a very low rate. This specific loan offering from the SBA requires as little as 10% down and has a fixed interest rate with no outside collateral needed. It also has lower fees and prepayment penalties associated with it than other SBA offerings. For loans approved between Feb. 1, 2021 and Sept. 30, 2021, the SBA will automatically subsidize the first six months of principal, interest, and any associated fees starting with the first payment. 

With interest rates at all-time lows, now is the time to act on these opportunities and improve the standing of facilities as the sector attracts M&A attention. According to data from Irving Levin Associates, there were 109 publicly announced senior housing and care acquisitions in the second quarter of 2021, a 31% rise over the first quarter of the year.

Refinancing SBA 7a loans

Recent legislation that became effective in July was aimed at helping small businesses with an attractive opportunity to refinance SBA 7a loans to SBA 504 loans. Previously, the opportunity to use SBA 504 as a refinance vehicle meant waiting two years, but this legislation reduces that to only six months.

Another benefit of the new rules is the option to refinance up to 100% of a project’s debt, increased from the previous limit of 50%, and the removal of a requirement that borrowers must be current on all payments for at least a year before filing an SBA application. An additional advantage of 504 loans is borrowers can cash out up to 20% of their property value for working capital needs.

The 7a loan is the SBA’s flagship program and 2020 yielded approximately 42,000 7a loans worth a combined $22.55 billion. Those loans are usually used for working capital, equipment, debt consolidation, or business or small-balance commercial real estate acquisitions. 7a loans feature a variable interest rate, so there are benefits of refinancing that into a 504 loan, which typically carries a lower, fixed interest rate. 

Overall, the long-term care sector has been among the most affected by the pandemic. While the CARES Act provided some level of relief, there are financing options that may be able to help these businesses as well. As the economy grows and interest rates remain low, now is the time to consider securing a new loan or refinancing a current one as a strategic business move. 

If you have an established relationship with a bank, it’s best to consult with them to ensure you are participating in the best loan program for you. If you do not have a strong relationship with your current lender, consulting with a non-bank lender like Liberty SBF will allow you to better understand your options.

Alexander Cohen is CEO of Liberty SBF, an experienced commercial real estate finance company. With a special expertise in small-balance commercial lending, Liberty SBF is positioned to address the needs of small businesses facing a challenging credit environment.

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