Assisted Living Construction Loans & Pre-Construction Phase Equity Financing

The times are changing; senior housing property developers seeking assisted living construction loans, mezzanine loans and/or bridge loans are finding the increased equity requirements hard to accept.  In point of fact, most assisted living construction loans are still being provided through the FHA/HUD Section 232 Board & Care Loan Insurance Program, but the lead time for processing in most major markets makes the HUD program non-competitive due to a variety of reasons:

1. The HUD approach requires the senior housing developer to shoulder the carrying costs of the project for 12 to 18 months.  This adds significant working capital costs to the project budget that are not part of the HUD reimbursement structure.

2. The HUD approach reduces the overall loan-to-cost ratio - in some cases the effective loan-to-cost ratio dips below 80%.

3. The HUD approach requires the assisted living project to have the market feasibility study continuously updated for each successive 6-month period.  HUD places limits on the reimbursement for market feasibility studies, thus leaving the developer to pay the freight two, three, even four times.  If the market conditions change (more competition enters the market) the assisted living project may no longer qualify for underwriting - leaving the assisted living developer out of business for the given location.

Rainmaker's approach is to sidestep the entirety of the HUD-insured construction loan process and create a structured funding for the project that focuses on obtaining a commercial loan that is non-recourse due to the amount of equity capital provided in the financing structure that is over and above the requirement for any loan to be issued.

Rainmaker's 5-point approach to financing assisted living new construction projects includes:

1. Developer Seed Capital.  For the typical assisted living care facility construction loan financing, the developer seed capital is typically $350,000 plus the cost of obtaining site control of the proposed project site.  These funds are subject to withdrawal under certain circumstances (i.e.: if the TIC plan sales provide sufficient additional capital contributions to allow the withdrawal to be acceptable to all parties).  This is one of the primary goals of the Rainmaker approach - get the developer's seed capital back out of the deal as quickly as possible to allow the developer to begin work on the next project development due diligence documentation requirements.

2. Statutory Investment Incentives.  The project site and the type of development may in fact have a statutory entitlement to certain investment incentives.  Rainmaker focuses on commoditizing those incentives that do not require an application and award process that is subject to regulatory judgment and/or lottery awards as being too risky to warrant spending developer seed capital upon.  Those entitlements that are available by wrote are used to create classes of preferred equity securities that, in turn, are used by the developer to purchase credit enhancement for the benefit of the construction lender or to provide the means for the developer to execute an interest rate buy-down on the construction loan.

Continued on following page.