Strategies for Financing Senior Housing Conversions
It’s complicated! MHN looks at how some recent senior housing adaptive reuse projects were financed.
As developers increasingly mull converting struggling hotels or retail spaces into much-needed senior housing, they face myriad challenge, including arranging often complicated financing packages.
“It’s an interesting and compelling idea but not something you should do without your eyes wide open,” said Beth Burnham Mace, chief economist at National Investment Center for Seniors Housing & Care. “It’s not just a slam dunk and a no-brainer.”
If you are looking to transform a former school, hospital, office, factory or other defunct property into senior living residences, there is a long list of boxes to check in order to get your project to the starting gate.
Considerations include local demand, access, zoning, cost per unit and licensing requirements, said Todd Hudgins, senior vice president, senior living, at Erdman, which provides market analysis, development, architecture, engineering and construction services in the senior living and health care sectors.
“With construction costs so high and the current labor crisis affecting the operating side, the scrutiny on the operating entity is pretty heavy, Hudgins said. “The scrutiny on the due diligence and business plan for the conversion is also important. What is appealing, in some cases, is the lowering of the cost basis, which helps the project pencil out.”
When a developer might want to convert a building, they can expect the debt and equity underwriting to be similar to that of a new development, said Joel Mendes, senior director, JLL Capital Markets, Americas, co-head of JLL’s National Seniors Housing Debt Practice.
“We’re going to be looking at the market, the sponsor and the operator, the proposed-as-built layout and the underwriting metrics,” he said. “The building, like any new development, is going to be leasing up from zero. So, you have to assess the demand in an area in the same way you would for new development.”
Lenders and investors, Mendes added, are expecting the repurposed building to look to the consumer as if it was originally designed to be senior housing. The properties should have the same level of appeal, both inside and out, and, therefore, the rates and the operating expenses should be similar to that of new developments.
Over the past year, a number of investors in the hotel and senior sectors have realized that conversion of hotels to various types of senior communities can be a win-win. That’s because hotels often have the infrastructure to accommodate independent living, assisted living and memory care.
“The restaurants and kitchens are in place, said Senior Housing Global Advisors Principal Mel Gamzon. “More than ample public space is available and if the hotel rooms can be reconfigured, investors and the debt markets are seriously looking at these conversion opportunities.”
While capital is available, he cautioned the business strategy must be “bulletproof.”
Construction costs should be below or at least equal to, but not higher than, the cost of new construction, and there should be a very compelling reason to spend more than $300,000 per unit for a hotel conversion, Gamzon said.
Senior housing experts and lenders say the best conversion properties are all-suites hotels or those with many suites. Hotels with all studios can be cost-prohibitive to repurpose into one-bedrooms with kitchenettes.
“Memory care is different,” said Mendes. “Studio units still work fine for memory care. They work fine for assisted living as well, just not an entire property of them.”
Capitol Seniors Housing, a Washington, D.C.,-based senior living development and investment firm, recently converted a former 150,000-square-foot Residence Inn by Marriott in Plainview, N.Y., into 114 studios, one- and two-bedroom suites.
Ironically, the hotel itself was a converted property. It had been built as a senior living facility in 1988 before its struggling owner transformed it into a hotel. Because the property was a permitted use, CSH did not have to go through rezoning or special use approvals, said CSH Principal Fred Moon.
CSH renovated the existing amenities, addressed deferred maintenance and made units and common areas more senior-friendly.
CSH paid $20.3 million in February 2019 for the 4.2-acre hotel property and spent $30 million in renovations on the Residences at Plainview. The company used “a relationship balance sheet lender” for the financing, Moon said. The Long Island property is its only hotel conversion.
“I’m not sure that we really saved (money) in this situation,” he said. “If we had built from the ground up, we likely would have built something else. But what we did get was certainty, and we saved time.”
Affordable Financing Packages
On the Upper West Side of Manhattan, a seven-story former hotel dating back to 1899, is being transformed into 77 affordable residences for very low-income seniors by Fairstead, a Manhattan-based developer. The 38,000-square-foot Park 79 project, Fairstead’s first adaptive reuse project, is expected to deliver in early 2022, according to Brett Meringoff, Fairstead senior vice president of acquisitions and development.
Merchants Capital originated a $51 million construction loan and a $28.4 million Freddie Mac Cash Unfunded Forward Commitment. The package includes a 9 percent Low Income Housing Tax Credit equity investment from Boston Financial. Fairstead is contributing $4.7 million. The property will also be supported with a Project-Based Section 8 contract.
“We created a strategy by putting the pieces together and working with the city and HPD (New York City Department of Housing Preservation and Development) in order to bring together different funding sources to make the conversion of Park 79 into permanent senior supportive housing,” Meringoff said.
Fairstead brought Merchants Capital in about two years before closing to help navigate the public side of the financing, said Michael Milazzo, Merchants’ senior vice president who originated the loans. Milazzo noted there were no unusual underwriting issues with the project and because the project is independent living and each unit was required to have a bathroom and kitchen, it made each unit feel like “home” for the senior residents.
Providence Community Housing is converting Our Lady of Lourdes School in New Orleans into 62 units. The building, constructed in 1957, is owned by Blessed Trinity parish and PCH will have a long-term land lease. Financing sources include 4 percent LIHTC to be funded by the Finance Authority of New Orleans totaling about $9 million, federal and state historic tax credits totaling about $5.7 million, and an approximately $7.7 million HUD 221(d)(4) loan to be originated by Bellwether Enterprise.
FANO is also expected to approve tax-exempt bonds and tax abatement, a payment in lieu of taxes. Our Lady of Lourdes will be Enterprise Green Communities 2020 certified and the units will be supported with a Project-Based Section 8 contract from the Housing Authority of New Orleans.
“I’d say the biggest challenge with all these moving pieces is that each of these government agencies has their own level of scrutiny,” said Anthea Martin, a senior vice president at Bellwether Enterprise, who is arranging the HUD loan.
The HUD 221(d)(4) loan process takes at least a year to process. Closing is anticipated by May with development immediately following and taking about one year.
Evergreen Real Estate Group has converted two former hospitals to senior housing: the 11-story, 200,000-square-foot Ravenswood Hospital built in 1974 in Chicago, and the historic St. Charles Hospital in Aurora, Ill.
The $81.6 million, 193-unit Ravenswood Senior Living project was completed in May, and all 74 independent living units have been leased. About 30 percent of the assisted living units have been leased, said David Block, Evergreen’s director of development. The assisted living units, developed under a state Medicaid waiver program, take longer to select eligible tenants.
Financing included $22.25 million from the Chicago Housing Authority, a project co-sponsor. The largest piece was the first mortgage totaling about $29 million. The mortgage was issued by the Illinois Housing Development Authority using HUD Section 542 (c), a federal risk share program. Funding also including a total of $17.5 million in tax credits, most of which were 4 percent Low Income Housing Tax Credits, and a smaller amount from the state, the Illinois Donation Tax Credit.
The financing includes $4 million of interim revenue that can be used as a funding source to pay off the construction loan once the property is operating and about $5 million in a Deferred Developer Fee.
Evergreen completed a $24 million adaptive reuse project four years ago at the former St. Charles Hospital, a six-story Art Deco building constructed in 1932. The Aurora St. Charles Senior Living, a 60-unit independent living facility, provides affordable housing for low-income seniors. Due to the age of the building, Evergreen received $3.8 million in federal historic tax credits.
The property also received just over $3 million in a state tax credit known as the River Edge Redevelopment Zone credit. Block said Evergreen went through IHDA to get approximately $12 million in 9 percent LIHTC credits and also a $3 million first mortgage.
Evergreen is working in Wisconsin on its third senior housing adaptive reuse project. This time the developer will be repurposing a former Christmas tree and tinsel factory built in Manitowoc, Wisc., in 1918, into about 80 units of affordable senior housing. Block said financing will include federal and state historic tax credits as well as LIHTC credits.