Love Funding has been lending for over 30 years, but the past eight have marked a shift.
FHA and HUD lending has always been a hallmark of the company, which offers refinance, construction and acquisition financing programs for multifamily and affordable housing, as well as senior housing/healthcare facilities and hospitals. But in 2007, the company decided to play to their strength and focus solely on government-backed loans.
Seniors Housing Business spoke with Love Funding Senior Vice President Jonathan Camps about the company’s continued driving of HUD lending in the seniors housing sector.
Seniors Housing Business: How long has Love Funding been in business, and when did the company start lending in the seniors housing industry specifically? Why, on the seniors housing front, does the company focus exclusively on providing HUD loans?
Jonathan Camps: Love Funding has been in business since 1984 and this past April marked our 30th anniversary. The company started lending in the seniors housing sector in the late ‘90s and we closed our first seniors housing transaction in 1999. Although Love Funding has always focused primarily on the HUD multifamily and seniors housing programs, in 2007 the company made the strategic decision to focus exclusively on those HUD programs. This decision was made because of the very specialized nature of HUD financing and Love Funding decided it was better to be a master of one type of financing than a generalist that offered multiple types of financing. With respect to skilled nursing, HUD financing undoubtedly provides the most favorable long-term execution and we anticipate that will continue to be the case for many years to come. With respect to the other sectors of seniors housing, HUD financing is still a very attractive option even though there are alternatives available. Love Funding has established a very strong relationship with the healthcare leadership at HUD and we continue to be encouraged by their desire to work with the industry to make further improvements to the programs.
SHB: What percentage of your total business is in seniors housing? Within your seniors housing business, what percentage is in skilled nursing vs. independent living vs. assisted living vs. memory care?
Camps: Historically, approximately 35 percent of our transactions have been in seniors housing, although we have certainly seen years where the percentage has been closer to 50 percent. We are one of the more balanced HUD lenders in the industry in terms of seniors housing and multifamily production.
Within our overall seniors housing business, about 60 percent of our transactions are skilled nursing, about 20 percent of our transactions are assisted living with a memory care component, about 10 percent are straight assisted living, about 5 percent are standalone memory care, and about 5 percent are mixed, meaning a combination of skilled nursing, assisted living, memory care, and/or independent living.
SHB: Is there anything about the company as it relates to seniors housing finance that our readers don’t know or should know that you’d like to etch on their minds?
Camps: Love Funding is under new ownership, after Midland States Bank purchased Heartland Bank at the end of 2014. Midland States Bank is now the parent company of Love Funding. This presents several opportunities for our HUD lending business going forward, including seniors housing. Leadership at both Love Funding and Midland States Bank are working hard to set up a bridge to HUD program, which will provide our seniors housing borrowers with stabilized assets in need of bridge loans for equity take-out and timing challenges that the HUD process can at times present. Discussions also include the possibility of being able to offer conventional construction financing for assisted living and memory care facilities, with a permanent take-out via the HUD 232/223(f) program. Currently, HUD requires that three years pass from the date of the final certificate of occupancy before an application for HUD 232/223(f) financing can be submitted. There is a strong indication that this timeframe could be reduced to two years at some point in the future, which would make this scenario that much more attractive.
In addition, Love Funding has worked collaboratively over the years with the HUD staff that administers the LEAN program, which has now been in place for nearly seven years. Our company is proud to continue to share that strong partnership today. Since the inception of the LEAN program, Love Funding has submitted nearly 150 refinance or acquisition financing applications to HUD totaling $1 billion, and each application was approved by HUD. We also recently received a perfect lender evaluation from LEAN for the 2014 fiscal year.
SHB: Len Lucas, senior director of Love Funding, recently told Seniors Housing Business that there is increased interest in the HUD new construction program, and that HUD has made great strides toward improving the execution of the program. What’s new or different about the HUD construction program and how the improvements are making a measurable difference?
Camps: During the last few years the HUD new construction program has been used sparingly by developers mainly because of the extraordinarily long lead time. The delay was largely attributable to the huge volume of refinances that forced HUD to create queues, as well as the lack of resources HUD was able to dedicate to the new construction program. At the height, some new construction transactions would wait in the queue for more than a year, then take another 120 days for the HUD review, and up to 90 additional days to close.
The atmosphere is different today. The HUD new construction queue is essentially non-existent, meaning 30 days or less of wait time in the queue. However, another piece of the equation is the review process by HUD once an application exits the queue. HUD recently announced that they are committed to a 60-day review period and they expect to meet this timeframe on a consistent basis because of the additional resources they have allocated.
In addition, HUD’s transparency and certainty of execution for the new construction program has been called into question in the past. HUD has provided much more guidance to the industry in terms of how they view the overall risk of a new construction transaction when it is submitted. Very strong market demand and the experience and financial capability of the sponsorship continue to be the most important factors when evaluating the feasibility of the HUD program for a new construction loan.
SHB: Starting with the first quarter of 2015, new financial reporting requirements from the U.S. Department of Housing & Urban Development require that operators of healthcare facilities financed under Section 232 of the National Housing Act (Section 232 Program) must submit to HUD and to Love Funding, on a quarterly basis, financial reports relating to facility operations. Quarterly reports must be submitted no later than 60 days after the end of the period covered, except for reports relating to the final quarter of each year, which shall be submitted no later than 90 days after fiscal year end. What’s the impetus behind that move by HUD and what impact does that have on lenders and borrowers?
Camps: Prior to the implementation of this requirement, only an annual audit was performed on the mortgagor entity. This meant that the operations of the facility were not being captured in the audit, except in the rare instances where the owner and the operator were the same entity, or no operating lease was in place. And, even if the operations were captured in the annual audit, once a year is not really sufficient to properly monitor the operations of a seniors housing facility.
Both HUD and the lenders have taken a more proactive approach to asset management, with the primary goal being to head off an issue before it becomes one that is insurmountable. Quarterly reporting of the operations makes sense, but there will be some initial kinks to work out with the reporting system itself. The implementation of this rule, and the expectation that more asset management responsibilities will be transferred from HUD to the lender, require lenders to provide additional training to existing staff and potentially bring in more experienced staff.
SHB: Technology seems to be playing an increasingly important role in the seniors housing industry on the operations side, including everything from electronic medical records to LED lighting. At the various seniors housing conferences we attend, we often hear about the importance of an operator having the ability to capture data, analyze it and share it. When you are underwriting a loan on an existing property, whether it is acquisition financing or refinancing, to what extent does the operator’s tech-savviness play a factor?
Camps: We always look very closely at an operator or manager when underwriting healthcare transactions. In particular we focus on quality of care, survey results, legal issues, credit and overall experience. With technical improvements we would expect to see more positive results with regards to resident/patient outcomes and satisfaction.
Although initial/start-up costs associated with the purchase of new technology may be high, we expect to see savings in the operating expenses due to the efficiencies gained through the use of technology. Utility expenses as an example should be lower with regards to LED lighting and maintenance supplies due to the long life of these products. Technology improvements almost always translate to improvement in risk management as more tools are available to management to track and report areas of risk.
In particular, for skilled nursing facilities we’ve noticed that improvements in technology have led to a higher CMS star rating, which is highly scrutinized by the lender and HUD. Higher star ratings and patient satisfaction should lead to higher occupancy and revenue. Technology could also be a competitive advantage in the market place if the competing properties in the area do not utilize such technology. Overall technological improvements demonstrate the operator’s commitment to improved operations, management and resident care.
SHB: Does Love Funding underwrite a loan on a standalone memory care facility much differently than an assisted living facility that has a memory care component? Please explain.
Camps: I would say no, especially for stabilized assets. Memory care residents are considered higher in acuity and therefore a memory care operation, versus a straight assisted living operation, carries higher operating expenses and a lower margin. Our underwriting takes this into consideration, but the historical performance for stabilized assets is typically the driver.
A new construction transaction, or a substantial rehabilitation transaction, which will be adding new memory care units must properly account for the market demand. Different assumptions are used to determine memory care demand, such as the target population group and the income qualifier. Of course, it is always important that the operator or management agent has a strong level of memory care experience.
SHB: A year ago, the conventional wisdom in the seniors housing industry was that the 10-year Treasury yield would be much higher today than it is today (closer to 3 percent than 2 percent). Now we’re hearing a lot of lenders say with confidence that they expect the 10-year yield to rise only slightly this year. Is there a sense of complacency settling in among lenders and borrowers alike that these extremely low rates are the new norm, or do most industry experts know the current interest rate environment is not a permanent condition?
Camps: I don’t think anyone in the industry ever believes that a low rate environment is a permanent condition! With that being said, I think the industry as a whole believes the low rate environment will remain in place for the balance of the year. Love Funding is certainly in that camp, based on our experience and the market intelligence we receive from our business partners. The current political and economic environments point in the direction of stable interest rates, which is good for HUD lenders and borrowers alike.