Don Pelgrim

Although traditional loans from banks and agencies tend to dominate discussion of financing in retirement homes, short-term financing or bridging loans are a tool that every owner and operator should know and have in their box. tools, especially in a rising interest rate environment. and credit restrictions.

A bridging loan is a unique tool. Think of it like a pipe wrench. You won’t be using it every day, but when you have a leaky faucet, you need this special tool.

The right tools for the job make all the difference in the world, and ensuring you have a diverse financial toolkit with resources at your fingertips is crucial to capitalizing on strategic business goals. As counterintuitive as it may seem, permanent funding isn’t always the best tool for the job.

What is a bridging loan?

A bridge loan is short-term or interim financing that is generally used by a borrower until the borrower obtains permanent financing or sells the underlying property. Bridge loans use a collateral-based lending approach, emphasizing and weighting the cash flow and value of real estate collateral (such as an assisted living facility or continuing care retirement community). In contrast, traditional lenders will place the most importance on credit history and other factors. As the name suggests, a bridge loan connects you from point A to point B, covering a time or financing gap and creating a stronger foundation to receive traditional long-term financing after stabilization.

Benefits of the loan

Bridge lenders are generally not regulated in the same way as banks and therefore are not subject to market effects and underwriting restrictions that banks have. It is also important to note that banking rules and regulations fluctuate with the economic tide. In an environment of economic uncertainty and anxiety about an impending recession, sources of short-term private capital are filling the gaps that traditional lenders cannot fill. Additionally, these same economic conditions can affect how loans are funded on Wall Street. For example, when the Fed raises interest rates to stave off a recession, pricing a new mortgage-backed issue is difficult and can put bond sales in limbo. At the same time, inflation can affect operating costs and capitalized rates. All of these factors affect the availability of capital and whether it is easy or difficult to access.

On average, it takes a bank 120 days to close a transaction; bridge lenders complete transactions in approximately 30-45 days. Although there is a premium for this speed, in the form of a higher interest rate, you gain a competitive advantage by using the flexibility of a bridge loan in a market where traditional capital is more increasingly difficult to find – and increasingly regulated.

What happens when you don’t meet the credit criteria for traditional loans? Or what happens when your transaction can’t afford to wait 120 days? Time is on your side with bridging loans.

Common Ways to Use Bridge Loans

Bridge loans are useful in a variety of circumstances, including opportunistic and value-added acquisitions of nearby properties or complementary facilities (for example, a self-contained assisted living community acquires a nearby facility). Similarly, an owner may be ready to retire and hand over the operational reins to someone else, requiring cash refinancing or finding a new owner.

In other circumstances, an operator in a long-standing community with minor wear and tear may choose to refresh and rebrand to regain a competitive edge in a market saturated with competition and new amenities. Another common example is the owner of an assisted living community who wishes to alter the building footprint to increase the number of memory care units.

While the list of scenarios could go on and on, this is just a sampling of the ways retirement homes can leverage bridging loans to bolster occupancy, improve resident amenities and generate income.

Bridge loans are not the answer to all scenarios, but neither is traditional bank financing. By examining a range of financial possibilities alongside existing market conditions, all owners and operators should assemble a diverse financial toolkit that offers specialized and reliable options for seeking short-term financing.

Don Pelgrim is the CEO of Wilshire Financial Partners, a real estate finance and investment company specializing in bridging loans and equity solutions for seniors housing and healthcare ranging from $1 million to $10 million nationwide. Prior to joining Wilshire, he was a practicing lawyer and held several senior positions in the banking and financial services industry. He holds a JD from Loyola Law School in Los Angeles and an undergraduate degree in business administration from Hofstra University.

The opinions expressed in each McKnight Senior Residence marketplace column are those of the author and are not necessarily those of McKnight Senior Residence.

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