Financing a Rural Senior Housing Project in a Tough Economy

Date

Nov 24th, 2009 9:00am

Author

Ecumen Senior Housing Development

Category

senior housing development

With interest rates on long term tax exempt issues still at levels that do not work for many non-profit borrowers (coupled with the cost of reserve funds and funded interest). Many banks are currently unwilling to lend for construction of senior living projects (and in many cases, any project). This results in many projects sitting on the shelf waiting for an improved financing climate.

For projects in rural areas, the USDA community facilities program may be the key to getting your project off the ground. A few key points for starters:

• Community must be less than 25,000 in population
• Units can not have full kitchens(microwave, sink and small refrigerator are fine)
• The above requirement essentially means that this program works best for assisted living and memory care, as it is difficult to market units with this type of kitchen to independent living residents.
• USDA does not finance construction, but will provide an advance commitment for the take out of a construction loan from a local bank.

With many lenders fearful of the effect of the housing market on the viability of senior living projects, few are currently willing to lend for such development. For projects that meet the above criteria, the USDA has two programs that together work well for permanent financing and provides comfort to a construction lender, that there is a “take out” once construction is complete. The Guaranty program provides a lender a 90% guaranty of repayment in the event of a default by the Borrower.

The program allows for either a long term fixed interest rate or a rate subject to periodic reset. The USDA also has a direct loan program (for a portion of your project financing needs) that together with the guaranteed loan will provide the vast majority of the funds needed for your project. The direct loan provides a takeout with a low fixed interest rate for up to 40 years. Equity requirements will vary depending on the specifics of your project, but are usually significantly less than those required for other types of financing. While these programs have specific requirements regarding construction contracts and there may be some additional costs involved, they may be the key to moving your rural senior living project forward.  Additional information can be found here.