3 min read
Hard Money Second Mortgages for Assisted Living Facilities
Several years of record low long-term interest rates have fueled demand on second mortgages for Assisted Living...
Assisted living hard money loans provide owners and operators with the capital to build, purchase or improve their senior housing property. An assisted living facility can use an asset-based hard money loan to purchase a new property and make necessary upgrades to improve resident livability, or increase cash flow before refinancing into a traditional long-term bank loan.
This article will cover several important aspects of senior housing or assisted living hard money financing, including:
For those accustomed to borrowing money from a bank, you might not be familiar with hard money lending. Hard money loans, or private money loans, are two different names that describe the same thing: equity-based, short-term (12-36-month) bridge loans made by private lenders and used by real estate investors on their investment properties. The loans are secured by real estate, which is a hard asset — and why it’s called hard money.
There are five different types of private lenders who fund hard money loans:
Hard money loans can be obtained through mortgage brokers, like First Capital Trust Deeds (FCTD), or directly through a private lender. There are advantages and disadvantages of working with brokers and direct lenders, which I detail in this article. (Don’t worry, I address my bias as a mortgage broker for 20+ years!)
Hard money lenders will finance different types of assisted living and senior living facilities. These include:
FCTD has worked with several assisted living facility owners over the years, brokering short-term hard money bridge loans secured by their real estate. Below are some of the loan scenarios closed on assisted living facilities:
As mortgage brokers, FCTD is able to secure financing for projects that because of borrower, cashflow, or property conditions, aren’t a good match for banks or other institutional lenders. FCTD’s large database of lenders, from individuals to mortgage fund managers, allows us to help investors obtain the right bridge loan financing for their present situation and take them to where they want to be — a property sale or a refinance into a long-term institutional loan.
No two hard money loans have the same pricing, especially for assisted living facilities. Pricing depends on capital availability for specific loan scenarios and geographic areas.
For example, there are hundreds of private lenders that would fund a 12-month bridge loan for an assisted living facility in Los Angeles, California, but just a few dozen lenders who would finance a similar property in Fargo, North Dakota. The more lenders offering loans, the more competitive the options, and the greater the likelihood the borrower will get a lower cost for their hard money loan.
The more complicated the loan scenario (i.e. construction financing or a cross-collateral blanket loan against several properties), the higher the pricing.
As mortgage brokers, we work with numerous lenders that can lend against an assisted living facility with many different types of loans. However, there isn’t a one-size-fits-all pricing model. Each loan has its strengths and weaknesses, and lenders will price according to the risk involved.
I’ve written about the various pricing and expense details a borrower should expect in this article: Hard Money Loan Pricing, Interest Rates, Fees, Closing Costs. It’s filled with critical information and worth a read so you know what costs to expect.
Let’s be honest — hard money loans are the option of last resort for an assisted living facility owner or operator. The reasons for this are simple:
The risk to an owner is that the higher costs of servicing the monthly debt can drain liquidity faster than a long-term institutional loan. A $3 million loan at 12.00% carries a $30,000/month interest-only payment whereas a $3 million loan at 5.50% has a $17,034/month amortizing payment (principal and interest). Carrying costs are a very real risk that brokers and lenders will evaluate to make sure the borrower has sufficient liquidity to cover the debt service expense.
Short-term hard money loans mature (become due in full) in 12, 24 or 36 months, at which point the borrower must make the balloon payment. Real estate projects are fraught with delays, whether it’s hold ups with construction, permits, licensing, occupancy, or take out financing. The best way a borrower can avoid these timetable risks is to pay on time and communicate early and often with the lender about delays as they happen. Borrowers who do are more likely to receive an extension (for a fee) on the maturity date and final balloon payment, if needed.
As I mentioned above, hard money loans are not the ideal financing solution for assisted living or senior living facility owners. Hard money loans are a stop gap solution, whereas institutional loans, often government-backed, are ideal for stabilized properties.
Below are the different types of long-term financing that FCTD’s clients have used to pay off their short-term hard money bridge loans:
Conclusion
Assisted living hard money loans can be a strategic source of capital for owners and operators of senior living facilities, providing a bridge financing option to build, purchase or improve their properties. Hard money loans serve as a viable option when traditional financing is not available because of the property's condition, cash flow, or the borrower's financial situation. These loans are asset-based, short-term, and require high interest rates, points and fees — making them a loan of last resort for most borrowers. However, there are scenarios when hard money loans can help with critical funds for a renovation or as temporary financing in a tight situation.
It's important to note that hard money loans are not a permanent financing solution. Borrowers should explore long-term options, such as government-backed loans, bank loans, or CMBS loans to pay off their hard money bridge loans. Our article has covered the various financing options for assisted living facilities, associated risks, and costs of hard money loans, as well as the exit strategies for borrowers seeking to pay off their loans. Overall, with the right knowledge and support, assisted living facilities can leverage hard money loans to grow and improve their businesses to provide the best experience for their residents.
Jul 3, 2023 by Ted Spradlin
Several years of record low long-term interest rates have fueled demand on second mortgages for Assisted Living...
Apr 11, 2023 by Ted Spradlin
If you’re looking for financing on a senior living property, check out the best examples of assisted living hard money...