Please see the Special Note below.
One of the bigger checks that assisted living owners write each month is for their mortgage payment. But with all that an owner already has on their plate, this part of their business might not get the attention it deserves.
If you have a loan with a long-term and low interest rate, good for you.
If you have a loan that’s coming due in the next few years or a loan with an interest rate that’s higher than you like, then read on.
Interest Rates Are Climbing
Anyone watching business news lately has seen that interest rates are climbing. From the historic lows near the beginning of the pandemic, the yield of the 10 year US Treasury bond, which is often a benchmark for many loans, has climbed from under 0.60% to around 1.60% today. Interest rates are still low compared to the average over the past few decades. But the trend appears to be toward higher rates, which means it’s time to consider locking in today’s rates – if you haven’t already done so.
Let’s look at a quick example.
If you have a $1 million mortgage on your assisted living facility (some of you may have a lot less than this amount, and some of you have many times this amount), then an interest rate increase of one percent makes a big difference. Assuming that a new loan has an amortization period of 25 years, then the difference in monthly payments between a 4% interest rate and a 5% interest rate is $567 a month or $6,804 a year.
Just because interest rates have been climbing this year doesn’t mean you’re ready to refinance your mortgage. Here are some of the questions you might want to consider first.
What Are Your Future Plans?
Refinancing a mortgage loan for your assisted living facility has costs, both in dollars and your time. So the cost of refinancing must always be weighed against the benefit.
If you think a sale of your assisted living facility or some other strategic change, say an expansion, are in your future a few years from now, then the cost-benefit analysis might steer you away from refinancing.
Before jumping at a lower rate, think about your strategic plan and make sure that your financing matches your overall plans.
Do You Have a Pre-Payment Penalty?
Looking at the cost and benefit of refinancing was discussed above. But one cost that some forget to consider is a pre-payment penalty.
Many of us have purchased homes before and the mortgage loans we take almost never have a pre-payment penalty. You can pre-pay some of your balance or the whole balance anytime without penalty.
Some of you have assisted living homes, single-family homes converted to use for assisted living – sometimes called residential assisted living. For these types of assisted living facilities, perhaps you were able to obtain a loan without a pre-payment penalty.
But as your property becomes less like a single family home, your loan often becomes less like loans for single family homes, too.
Many first-time assisted living owners and some seasoned owners will use SBA loans or other mortgage loans from non-bank institutions, even if the loan originates with your local bank. These loans often have pre-payment penalties that can add thousands of dollars to your payoff. HUD, Fannie Mae, Freddie Mac, CMBS, and many other types of loans for larger assisted living facilities can have pre-payment penalties that could add hundreds of thousands to your payoff. And that’s fine – when you take that type of loan you’re making a long-term commitment to your lender, probably in exchange for some other benefits.
Just always know if you have a pre-payment penalty with your loan and how much it may cost if you refi your loan early. Sometimes paying the penalty is worth the price but make sure you count the cost early in the process.
Are You Ready For a New Loan?
Refinancing about nine months ago may have been the ideal time to lock in a low interest rate for years to come. But many lenders were simply on the sidelines. The risks associated with Covid-19 for assisted living facilities were too great for lenders to make new loans. You might have wanted to refinance but your lender, like many lenders, wasn’t in the mood. (On the other hand, I heard reports of some lenders that were very helpful to their existing borrowers, helping ensure both bank and assisted living facility came through the pandemic still in business.)
The good news is that lenders are certainly back to the business of making new loans, even if there are some extra hoops to jump through as the pandemic wears on.
Your lender might be ready to make a loan but are you?
The pandemic has been a tragedy and struggle for so many people. Assisted living owners have also had their share of struggles.
When refinancing a mortgage loan for your assisted living facility, you want the facility to be operating at peak performance, or as close to it as possible, so that it appraises at top dollar and your income more easily supports debt service. Some assisted living facilities are still making their way back to the performance they experienced before Covid. And many have fully bounced back but, like everyone, they have some tough months in the past 12 that will need to be considered by their lender.
The further any troubles are behind you, the easier it should be to refinance with the best terms.
What’s The Right Type of Loan?
There are many types of loans that you might want to consider for refinancing your assisted living facility. But not all loans may be available to all facilities.
There are some loan features that may be appealing to any assisted living owner, such as low interest rates, non-recourse, fixed rates, long terms, long amortization periods, minimal reporting, no escrows, quick funding, low application costs, and more. But it’s difficult to get all of these features in a single loan – there are always tradeoffs.
The question is really what type of loan is right for you and your property? What are your priorities? What are your timelines? What is the size and type of your property? What is your ownership structure?
All of these questions will help lead to the right type of loan, whether it ends up a commercial loan from a community bank, an SBA or HUD loan, a loan from another government-sponsored enterprise, or maybe even a loan from a private investor. All of these are on the table but not all of them are right for you.
Who Can Help Me?
There are many places you can turn to for help when refinancing your assisted living facility, and asking many people is probably a good idea. Each lender you speak with may highlight the benefits of what they have to offer and note the drawbacks of any alternatives.
Always remember – most lenders are in the business of selling loans to borrowers. They need to make sales to stay in business. Some of us may have started our careers and still hold the mindset that when we’re asking for a loan it’s almost like we’re asking someone a favor. The fact is that lenders want (need) to make loans, so we should approach the process as if we’re the one shopping for the right loan and helping them reach their goals. At the same time, my business philosophy is to always seek a win-win arrangement and to always work in a helpful, friendly, and collaborative way so that others will want to do business with you again and again.
So when you’re ready to refinance, consider talking to local bankers and mortgage brokers, talk with national lenders that specialize in assisted living, talk with your CPA or attorney for tips, talk with your state assisted living trade association for referrals to lenders active in your business, and talk to other assisted living owners that may have had a good or bad experience that they’d be willing to share. It’s like shopping for anything, talk to lots of people, get plenty of reviews, and then do your homework before picking the right lender to help you refinance your assisted living facility.
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[Special Note: Please remember, every situation is different – while this general information may be appropriate for some, it may not be for you – check with your own advisors and do your own research to make sure you have the information you need before taking action on this subject.]