LeadingAge Magazine · November/December 2013 • Volume 03 • Number 06

Preserving a Secure Future With Multi-Source Financing

November 08, 2013 | by Leah Thayer

Capital is available for new projects, renovations and refinancing, but providers may need to juggle multiple funding sources. Here is a look at how some members have navigated those waters.

The capital market has been on a wild ride since the 2008 financial crisis, and growing numbers of providers have had little choice but to buckle up and hang on. Limited by low net operating income in the debt they can leverage from a single lending source, their challenge is to sort through an ever-shifting supply of funding options for development projects. When those needs are significant—say, many millions of dollars to modernize a community dating from The Ed Sullivan Show era—the solution lies in patching together multiple sources.


  • In one of Atlanta’s wealthiest neighborhoods, a $32 million refinancing funded by a mix of tax credits, a loan from the Atlanta Housing Authority and a FHA-insured mortgage has made Campbell-Stone in Buckhead a stronger provider of affordable quality apartments than at any time in its 40-plus years. Among other improvements, many of the cramped, dated and unmarketable studio apartments have been combined into modern one- and two-bedroom apartments, bringing occupancy at the three-building, now 342-unit complex to 100 percent. “None of it would have been feasible with single-source financing,” says Cliff Pepper, executive director of Campbell-Stone Retirement Living.
  • In a quiet valley a few miles outside of Honolulu, Palolo Chinese Home is in the final phases of a $20-million-plus renovation and expansion that has overhauled its aging infrastructure, produced a state-of-the-art food service kitchen and nearly doubled residential capacity, among other outcomes. “We have a large and growing elderly population here in Hawaii,” says Darryl Ing, CEO of the nearly 100-year-old organization. “We could never have done this without multiple sources of financing,” including a bank loan, foundations and trusts, individual donations, state grants and community development funds.
  • A former high school in the St. Louis suburb of Affton has been transformed into the Village at Mackenzie Place, the first foray by Lutheran Senior Services into multi-source funding for affordable housing. The 121-unit community has a mix of three apartment types—rent-subsidized, rent-controlled and market-rate—developed using two HUD Section 202 grants, low-income tax credits and historic tax credits. Prior to this project, which altogether cost about $20 million, “we pretty much did a 202 project every year,” says Paul Ogier, CFO. As 202 funds dwindled, and to be able to serve poor as well as moderate-income seniors, “we needed other ways to do affordable housing.”
  • In Johnstown, Ohio, National Church Residences is investing more than $10 million to redevelop Chimes Terrace, a 30-year-old Section 8 apartment complex, as a supportive housing hybrid: a not-for-profit part with 24 Section 8 assisted living units, and a for-profit part with 36 Section 8 independent living units. “We applied for two very competitive programs, hoping we would win one,” says Michelle Norris, senior vice president of development and public policy. In fact they won funds from both: HUD’s Assisted Living Conversion Program and the Low-Income Housing Tax Credit, which required a partnership between a general partner (an NCR subsidiary) and a limited partnership (a for-profit entity). “We then spent the better part of a year and a half trying to make those awards work together,” a process that led to basically dividing the building into two distinct halves.

As construction on Chimes Terrace continues, Norris half-jokingly calls the hybrid project “a poster child” of how not to finance a development effort. “We are using the mantra of ‘It should not be this complicated to create an affordable continuum of care,’” she says.

No, it should not. Truthfully, however, assembling financing is rarely simple.

First the good news. For strong not-for-profit providers seeking to refinance, remodel and/or redevelop existing affordable communities, money is available. “There does seem to a loosening of capital and investment for these purposes,” says Gates Dunaway, a consultant in affordable housing financing and principal of the Gates Dunaway Group in Atlanta.

“Everyone’s trying to find alternate sources of funding in today’s tight capital markets,” says Ing. “Bank financing really is not the preferred choice.” Nor do funders want to single-handedly bear the risk of a project’s success or failure. “One question we get from many organizations, when we request a sizeable grant, is whether they’ll be the only organization that we are relying on to secure funding,” he adds.

Depending on the project, providers are finding capital from a variety of sources—sometimes a huge variety. Aaron Rulnick is a principal at HJ Sims, which has provided more than $16 billion in senior living financing since 1965. He cites a recent project that used 14 different financing sources. Thankfully more common, it seems, are scenarios involving a mere handful of sources.

Stewards of Affordable Housing for the Future (SAHF) is a network of 11 “social enterprise nonprofits,” including a number of prominent LeadingAge-member housing providers. SAHF President Bill Kelly provided a big-picture overview of financing arrangements.

The $8 billion/year Low-Income Housing Tax Credit is significant “for someone who follows certain rules,” Kelly says. Administered by the states, these credits are awarded to developers of qualified affordable rental projects who have been selected from an application process. Developers then sell the credits to investors (often large banks) to raise capital or equity for projects, reducing the debt the providers would otherwise have to borrow. “They’ll get the tax benefits and you’ll get the property back in 15 years,” Kelly explains.

Competitive as they are, tax credits are often a good option for improving existing properties in this market. “States change their plans for issuing these credits year to year, and there seems to be a swing towards preservation that has stuck in most states,” says Dunaway.

In addition, many projects are funded by a first mortgage, often FHA-insured, along with “gap” loans, such as money from the state or local government, block grants or HUD’s HOME Program.

Combined with low interest rates, the friendlier lending climate has fueled aggressive refinancing. “A great deal of refinancing activity took place when the fixed-rate market bounced back post-crisis,” says Tom Meyers, managing director with Ziegler, which helps many LeadingAge members with financing. “Providers took advantage of lower rates, and many were able to secure improved financing arrangements.”

Refinancing activity was especially robust early this year, according to Rulnick. “Long-term interest rates were near record lows and borrowers were able to realize significant cash flow savings and/or refinance short-term bank debt with attractive long-term fixed rate financing,” he says.

Moreover, “It’s a scarcity issue,” says Dunaway. “It is cheaper to refinance and preserve than it is to build new.”

There’s even been some government innovation. In the past few years, HUD’s LEAN program, which centralizes and streamlines applications and approvals, has spurred dramatic “growth in FHA insurance for new construction and substantial rehabilitation of healthcare projects, and for acquisitions and refinancing of existing health care properties,” says Rulnick.

New funding techniques are being eyed by providers as well. Dunaway notes the creation this year of SPRAC (Senior Preservation Rental Assistance Contract) funding, which provides rental subsidies for seniors in non-Section 8 units in certain types of HUD 202 properties. SPRAC, for which initial funding is being evaluated now, will enable owners to leverage an increase in income to refinance and access a much larger amount of refinancing funds than they could get otherwise.

Rulnick points to “renewed interest among REITs under a sale and lease-back arrangement where the senior living provider would retain management of the community.”

Now for the not-so-good news.

Lenders, their terms and their requirements are in a constant state of flux, very little money is currently available for new developments, and borrowers are being scrutinized ever more closely for everything from their balance sheet and occupancy history to their competitors’ pricing.

“Since the fall 2008 financial crisis, we have seen major ebbs and flows in the availability of financing options for senior living providers,” says Rulnick. Citing events including the “virtual exit” of international banks from the senior living market, ups and downs in the bond-buying market, and rising interest rates, he agrees that multiple funding sources have become especially necessary for multimillion-dollar renovations and expansions.

Especially scarce is financing for new affordable housing “as it competes with the need to preserve what we have,” says Dunaway. She also points to setbacks facing the 202-PRAC (Preservation Rental Assistance Contract) program, once a key funding source for low-income seniors. “Funding under the PRAC program has shrunk to a level that it is no longer a major force of new construction funding,” she says.

The fixed-rate market has also ebbed and flowed, and most recently ebbed again, due to “municipal fund outflows that are limiting the amount of cash available,” says Meyers. “The fund managers very much like our sector and find this type of investment appealing, but there are fewer dollars out there until the inflows come back into the market on a consistent basis.”

Further challenges are likely from stepped-up regulation of banking and more. “If people have letters of credit, it is reasonable to believe that these will be harder to solicit in the future because of the regulatory environment,” says Meyers. “With banks, we are in a very favorable lending window right now, but broadly speaking, easy capital shouldn’t be counted on.”

For his part, Rulnick anticipates “continued pressure to expand regulatory requirements on and oversight of assisted living/memory care providers.” Moreover, he says, “If there are more CCRC bankruptcies, state regulators may tighten requirements on the treatment of entrance fees, increase reserve requirements and intensify scrutiny of resident contracts.”

Lining up multiple funding sources for a major project can be tricky, and every provider interviewed for this story faced obstacles in doing so. In the massive renovation of Campbell-Stone at Buckhead, Pepper and his team competed for $8 million in equity from nine percent Low Income Housing Tax Credits (which would yield more money for renovations than the less-competitive four percent credits). “The process was extremely competitive, and you have no idea whether you’ll be awarded the funds or not,” he says.

By comparison, “easiest was identifying the lender who would hold the actual mortgage” of $14.9 million, he says. Many lenders competed for this very attractive deal, and Prudential Mortgage Capital Company won.

Having strong co-developers was critical at Campbell-Stone. Also key: healthy relations with the local HUD office, and an active and deeply knowledgeable board with expertise in banking, hospitality, legal issues and more. “As the marketplace changes and becomes more demanding, what really has become important is having the board’s support and presence at the table when we’re talking about strategy,” Pepper says.

Securing the funds does not necessarily guarantee a smooth process, however. “By the time we got to the closing table and met with the general contractor, we had to value-engineer and shave a couple million off our wish list,” Pepper says. Construction itself produced some unexpected change orders too, like the $600,000 cost of removing asbestos from eight floors of one building.

(A detailed case study of the Campbell-Stone Apartments project is available here.)

Board and other connections also proved pivotal to helping Palolo Chinese Home meet its goal of $20 million (the cost has since surpassed that) to dramatically expand programs, services and facilities while remaining affordable. This 10-year, two-phase project included upgrading the campus infrastructure; renovating an existing building to accommodate a community outreach program, an adult day care program and a 15-bed skilled nursing unit; and constructing a three-story building for skilled nursing, a state-of-the-art food service kitchen and a wellness center.

The new building represented PCH’s first new construction since 1972; collectively the project was the largest undertaking ever by the organization, which has been in its current location since 1920. “We had to be creative,” says Ing. Among the many checkboxes on funders’ lists was one for “how much support you’re getting from your own people—your employees and board of directors.”

To the latter point, the organization’s board has played a major role in ongoing fundraising that includes an annual golf tournament and a biannual fundraising dinner, annual appeal letters, participation in the Aloha United Way and grant applications sent to “every local foundation where we qualified for their support,” Ing says. In addition, several efforts leveraged the Home’s Chinese heritage. “We created a subcommittee of persons well connected in the Chinese community who approached all the Chinese societies and clubs”—more than 80 in all, Ing says. Yet another board committee approached wealthy Chinese families, some with ties to PCH’s origins.

In securing $1.6 million through Hawaii’s grant-in-aid process, Ing recalls “constantly meeting with key legislators to get their support,” along with attending many long hearings. Once the funds were won, the next step is to win the support of key departments in getting the governor to actually release the funds. Such lengthy timelines can be deadly. “Because the grant in aid is part of the state budget, monies lapse if they are not encumbered by the end of the biennium year,” he adds. When this happened to PCH, it lost out on $800,000.

Here are tips for strengthening the general operating characteristics that lenders like to see.

Strengthen your finances. “Be the strongest credit provider you can be,” says Meyers. “Do whatever you can to strengthen your organization operationally and fiscally. This ranges from having a robust and proactive board to ensuring solid financial and operating ratios.” Prepare for accelerating change in the business model and industry consolidation, he adds. “For-profit providers are building very aggressively today and the not-for-profit providers need to be prepared for more competition.”

This applies to refinancing too, according to Rulnick: “Banks and bond funds carefully analyze an organization’s historic operating performance, liquidity, leverage, market position, among other factors, when evaluating a refinancing request.”

Assemble a strong development team, from your architects and contractors to your local staff to the consultants and lenders who guide you through the financial process. In leading the redevelopment of Campbell-Stone in Buckhead, Pepper singles out the knowledge and expertise of Dunaway in particular, along with “identifying a GC that embraces the fact that we are mission-based and service-driven.”

For NCR’s success with tax credits, Norris calls out the organization’s diverse in-house team, including attorneys and paralegals, a well-rounded construction team and policy experts concentrated in key states. “The states want to be sure they’re awarding only the very best projects.”

Respect the regulatory process. More regulation is expected, as noted in this article. What’s more, the growing integration of supportive services with housing puts the onus on providers to be proactive in anticipating policy trends. This awareness led to Norris’s title change about a year ago, from chief development officer to senior vice president of development and public policy.

Don’t expect quick results with any government grants or programs either, a reality exacerbated by federal sequestration and the shutdown. “Be patient,” adds Pepper. “With so many pieces, you have to remember that the wheels can grind slowly at times.”

Articulate your unique story. Many entities are competing for the same funding sources, underscoring the benefits of asserting your longevity and commitment to your community. “Key to success is having a story (project) that people will want to support,” says Ing. “With over 100 years of service to Hawaii, everyone knew about Palolo Chinese Home. That made our story of transforming the Home from a small care home for men deep in the Palolo Valley to a major provider of a continuum of services for all of Hawaii’s seniors.”