How to do it ... Refinancing
There are many sound reasons for long-term care providers to refinance, says Chris Taylor, managing director, Real Estate Finance, GE Capital, Healthcare Financial Services. These include the need for additional leverage, lower interest costs, extending the amortization or life of a mortgage and reducing or eliminating personal risk, or recourse. The number one reason, however, is the pending maturity of existing mortgages or loans.
Refinancing when rates are low mitigates expensive debt, freeing up cash for anything from expansion to acquisitions to additional staff to new equipment, adds Kathryn Burton Gray, senior managing director, Red Capital Group.
Still, one common
mistake many providers make is refinancing when business is suffering or revenues are declining, which can create “an extreme likelihood of default,” warns Gerald Swiacki, senior vice president, Southeast regional manager, Lancaster Pollard. Another reason to skip is if an operator is approaching retirement, or closing.
“If you're an operator who only expects to be in the industry a few more years, it might not make sense to go to a 30-year mortgage,” says Erik Howard, managing director, Real Estate Finance, Capital Funding LLC.
Providers need to ask themselves: “Are you creating net present value savings based on how long you expect to hold the property? If not, stay put,” advises Jeffrey Sands, managing principal, HJ Sims & Co.
Deciding when to
refinance is as important as anything else. One event that signals “refinance now” is the high prospect of lending rates creeping up during a period of historically low ones, according to Howard.
A great time to refinance comes “after a strong series of quarters that demonstrated either stable or improving revenues and operating margins,” adds Jeff Gardner, senior vice president and director, BMO Harris Bank. “This will allow the borrower to maximize leverage and command the lowest pricing and fees.”
Don't be lured just by great rates.
“Time and time again, we find owners who became overly fixated on the initial interest rate, and locked themselves into financing packages that no longer meet their goals,” says Bill Wilson, senior vice president and regional manager, Central States, Lancaster Pollard.
Once you've decided to refinance, understand that the level of wiggle room varies by type of lender and loan.
“Commercial banks generally can offer the most flexible structures but tend to be less competitive on leverage,” adds Gardner, while “finance companies, agency lenders and life companies can generally offer higher leverage but are more rigid on the other components.” In general, the more flexible, the better.
One of the most critical negotiable sticking points is pre-payment terms and penalties, particularly with shorter-term debt.
“Avoid a debt structure that limits your ability to pre-pay, or imposes significant penalties if you do pre-pay,” warns Jeff Binder, principal and managing director, Senior Living Investment Brokerage.
Adds Steve Kennedy, managing director at Lancaster Pollard: “One thing often overlooked is prepayment provisions. Many falsely assume that prepayment provisions are pre-determined, particularly with HUD insured loans. However, they are negotiable and, if negotiated appropriately, can provide flexibility and allow you to act on a refinance in the future.”
A successful refinance negotiation requires compromise.
“In the end, be reasonable,” says Swiacki.
Never is there a better reason to sweat the small stuff than when it comes to refinancing.
Therefore, carefully look at grace periods, renewals provisions, fees and interest rate swaps, and pre-payment clauses and covenants.