My Realty Gains
Richard Lynn provides capital (debt and equity) for all types of commercial real estate with a specialty in Seniors Housing.
What You’re Going to Learn:
Why are the institutional lenders so much concerned about lending in Assisted Living properties?
Prashant Kumar, CCIM – Why are the lenders so much concerned about lending? Our returns are much higher, right? As compared to multifamily but in multifamily, any time they can have, they can go and take a friendly loan. Why not in assisted living?
Richard Lynn – For assisted living, I’ll make it a little bit broader. You could call it seniors housing and senior housing goes from independent living to assisted living, memory care, skilled nursing, those different types where you’re helping people with services. The real key, which I’ve used a few different times. For the people that have been on this podcast before, I’m sure you’ve heard that the three keys to real estate are location, location, and location. Well, in senior housing, It’s the operator. You have to align yourself with some group or entity that is very knowledgeable and experienced in operating these facilities. That should be your question about financing, you may have a very good project, everything’s lined up from a Real estate standpoint, but if you don’t have an operator, a lender won’t take you seriously. So that’s where it differentiates from other property types.
Prashant Kumar, CCIM – Awesome, this is a very good point. You hit the nail right on the head. A lot of people don’t understand and all they see is the number of returns that they get on their money in multifamily or on paper on assisted living. But they don’t understand how much work it is for the operator to run a project like this and how much is the operator at stake, their wealth at stake for the project to become successful. Am I correct?
Richard Lynn – There’s no question about it, I was going to go, it might be a little bit too deep for this crowd. I’m not sure of their expertise. But in senior housing, there are two important elements to it. There’s the Real Estate and the operation. They have something called an Opt Co for operation or Prop Co for the property, those two elements of it. Being the Real Estate person can own the Real Estate, but you have a symbiotic relationship with the operator. And so the two of them work together. You have to work together to create the value of Real Estate. So you can have a well-conceived project, a great location, and perfect demographics in the area, but you have to have that orchestra leader of the operator to maximize the value for you because there are so many risks in this.
You have the Real Estate as well as the operating risk. You are taking care of people’s lives in apartments, you’re taking care of people’s lives, but not to the same extent that you are here. There is a lot more risk, and a lot more variables.
People, the operators, many of them, they love it, they embrace it. This is important to them to take care of people and they thrive in that environment. But it’s a unique individual that is willing to do this to help these people. And you have to find the balance of the person that can help these people and provide a great service, but also have business acumen too. So finding the right person is hard. But when they’re there, then the project can excel.
Prashant Kumar, CCIM -If I’m a tenant then I would go sign up the lease. And I take the keys from my apartment and after that, I don’t have to go to the office at all. I don’t have to see any manager in the leasing office or anything. I pay my bills online or pay by check or whatever. If there’s no maintenance request, I don’t have to go meet with them. But in assisted living, it is a different story. You are taking care of seniors day in and day out, 24 hours a day. Right.
Richard Lynn – That’s a wonderful point. It’s 24/7. You have to be on call and prepared to help them.
Prashant Kumar, CCIM – Yeah. I mean, you have nursing staff, you are always on the hook and you are taking care of them all the time. And such a humble job. I mean, as you said, it’s not about the economics. It is about humility also. You do that with passion and you love doing that. Basically, in the end, you end up making a little bit more money. But to our economic points, the points, and economics, lenders don’t take your humility seriously. They want to make sure that you have done it before.
How do you see new operators jumping into Assisted Living and How should they come by when there is a lot of competition?
Prashant Kumar, CCIM – How do you see new operators jumping into this area? How should they jump into this area? How can they come in? It’s a tough space to get in.
Richard Lynn – I’ll focus on the operator side versus The Real Estate side. So let’s focus on that first. Generally, the new people that come into it may have come from a very large organization and they’ve had enough of the bureaucratic part and want to get on their own. Those people can be very good at starting up along those lines. When I sold to an individual, so all of you know, was an converted hotel, that it’s life at Comfort Hotel and the owner of the hotel decided to create an independent living facility which was a very good idea, but it was beyond his capabilities. He needed some extra capital he wasn’t aware of it. He fell in disarray and so then the bank took it over, and somebody came in and stabilized it. But then I brought in a person who had worked for another company who wanted to go out on their own and this was his entree into the business. So the combination too. He had the operations business and the operation experience, and this was a lower cost per unit that he could get into it. That would be someone who was in a big senior housing company wanting to have enough of the bureaucracy and want to go out on their own because this is a way for you both to have the operation of the business and The Real Estate make money and to do well. The other side of it is someone who’s in the healthcare business who is either in the hospital world or doctor world and had enough of it and where this can then become a business for them instead of the bureaucracy of the hospital or they were a nurse but they have a more entrepreneurial spirit. This is another very good candidate that could get into the operation side and provide that operational expertise that’s needed to make me successful.
Prashant Kumar, CCIM – That is an awesome answer.
Why is the third-party operator’s resume not favorable to the lenders?
Prashant Kumar, CCIM – Why is the third-party operation not considered a skill? Because those who are new want the third-party operators to come into the picture. Why that resume is not favorable to lenders?
Richard Lynn – I understand what you’re saying. If you have a big enough management company and a big enough investor, then the banks are comfortable with it because you have some mass there and you have some backup in case there’s an issue. You have an organization behind you. If you can prove that there are many of them, a management company and you have an organization behind you then the lenders will be satisfied with you. But if you don’t have all that behind you, then the lenders want to make sure that the operator has some real skin in the game to keep their focus and attention on it because there are ups and downs with the business, you have to make sure that everyone’s interests are aligned. Someone isn’t just looking to get a management fee.
Prashant Kumar, CCIM – Got it.
How an entrepreneur can help a Real Estate operator?
Prashant Kumar, CCIM – Please give me an example. How can an entrepreneur like myself help an operator?
Richard Lynn – Someone who’s been in the industry that you are close to and can trust, that doesn’t have the capital to buy or to get into home places, you might invest a little bit of money but get an ownership stake in the whole development because they need to bring some money to the table. This is a way to leverage yourself from the operation side and not take all the risks of the Real Estate side because when you’re owning the Real Estate, you have to put up a lot more capital, significantly more. And whether or not you have to sign for the bank with the things like what is your responsibilities with the loan that you have, and if you have other risks on that side. It is possible, haven’t seen it a lot, but it is possible if you find somebody that you are comfortable with (an operator) and you could help them to work themselves into some of these facilities from that standpoint. Does that make sense?
Prashant Kumar, CCIM – That does. It makes a lot of sense. I’m just trying to understand different permutations and combinations.
What should be the size of the project or level of investment in which lendors are comfortable?
Prashant Kumar, CCIM – What is the level of investment or what should be the size of the project lenders are comfortable with?
Richard Lynn – There is a hotel that we converted. That was at the lower end of the spectrum. That was an older property renovated. That was a $4 million purchase price for 100 units. So that’s $40,000 a unit. That would be at the low end of the spectrum. Another one at that same level of $4 million approximately. Someone developed a new project for 50 units in a very small town in the USA that’s about $80,000 of units. But that’s at the small end.
Most of the projects start to come in between ten and $20 million. So that’s kind of where the newer projects are that would be more in the middle, If you had a distribution of ten to 20 million, there’s some outside of 50 million, there’s some at 30 or 3 million or 1 million but ten to 20 would be it. And then you’d ask generally what you have to invest, what a lender will require you to invest is somewhere plus or minus 25% equity in there.
You’re talking about a $4 million acquisition, you’re talking about a million dollars for 10 million two and a half million. And that’s then assuming then you have to be bankable, your balance sheet has to be strong enough for a lender to accept you from the debt standpoint. So the two sides would be focusing on whether it is enough liquidity to provide for the equity and a strong enough balance sheet for the lender to accept you as a reasonable credit risk.
What are the nuances in senior assisted living financing in terms of debt and equity?
Prashant Kumar, CCIM – What are the nuances in senior assisted living financing in terms of debt and equity? Is it a little bit challenging?
Richard Lynn – The financing part is more challenging than other commercial Real Estate because it’s a business. It is a true business. And if you look at it from the top line, you have significant variable revenue sources which could be government, could be insurance companies, or could be individuals. So that’s a unique set. But then your expenses are varied as well. You have professionals on there that you don’t require in other types of commercial Real Estate that’s really where the difference makes it more complicated and more challenging.
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