If you’ve attended a seniors housing conference recently, odds are high that you have heard some discussion regarding the active adult segment. Momentum for active adult has been steadily building for years and it’s become a hot topic for developers, investors, and lenders alike. Although the concept of active adult has existed informally for decades, the increased level of interest has led to the creation of a formal definition, a better understanding of its key differentiating factors, and insights as to how financing considerations differ from those for independent and assisted living (AL) borrowers.
Building a Definition
The active adult subsector is designed to fill the gap between multifamily housing and the more traditional seniors housing option of independent living (IL). The National Investment Center (NIC) defines active adult as “age-eligible, market rate, multifamily properties that are lifestyle focused.” In its white paper, NIC positions active adult as “a response to the preferences of the leading edge of the baby boomer generation,” a massive and well-funded cohort that is expected to number over 85 million by 2025. Active adult communities have no required healthcare licensure, enjoy less operational intensity, and have longer patient length-of-stay periods than IL or AL. Meals are not included, although some communities may offer light dining options such as a continental breakfast or happy hour. A typical resident is a healthy, mostly independent 70ish-year-old who wants to live an active social life amongst peers in a secure, maintenance-free, amenity-rich setting.
Why the Investor and Lender Appeal?
The active adult segment features many compelling traits, including lower staffing needs as compared to traditional seniors housing, substantial growth potential, high operating margins, and limited competition, at least for now. The lower staffing needs is particularly compelling for an industry beset with staffing woes, as active adult communities offer fewer services and are less costly to staff and operate than IL or AL.
Attractive demographics also play a key role, as is often the case when it comes to the senior living industry, as many developers and investors see active adult as a means to fill boomers’ housing needs now as opposed to waiting for the generation to age into higher acuity settings. Further, the longer tenure (six to nine years) and 80% retention, according to NIC, makes the segment particularly appealing to risk-averse investors and developers. In comparison, the average tenure is four years in IL communities.
Financing Options for Active Adult
As the active adult sector has become better defined, the various financing options available for the sector have also become more established. The active adult lending market is expected to continue to be dynamic, but there are currently several different financing paths for owners of active adult communities to consider when developing, acquiring, or refinancing projects.
Fannie Mae and Freddie Mac, also known as the agencies, are quite familiar with the asset class as each have been financing these types of assets for several years, even though the segment hasn’t been formally defined. The agencies continue to be an attractive option for permanent financing via acquisition financing or refinancing, as key advantages of the loan programs include a streamlined underwriting process leading to timely closings, flexible financing structures in regard to loan terms, and the non-recourse feature.
Within Fannie Mae and Freddie Mac, there is some fluidity with how loan applications are reviewed and approved as active adult opportunities are reviewed by either the senior housing or multifamily teams, depending on the specific characteristics of the community. When considering an opportunity, the respective agency will review several components to determine the acuity level of the residents. Specifically, the rate structure, meal options offered, transportation services provided, and the coordination of resident care services such as therapy and medical care are all analyzed. If determined to contain a lower acuity resident population, the loan application will be processed by the multifamily team. If the residents tend to be less independent, the loan application will be processed by the seniors housing team. The financing experience between the two paths are comparable, with the exception that more favorable loan terms (i.e., interest rates and leverage) are generally offered through the multifamily option.
Bank financing continues to be an option worthy of consideration for financing active adult communities as well. Key advantages of bank financings include the ability to finance construction and more flexibility with underwriting and asset qualification metrics. Banks can be more fluid with how active adult opportunities are financed and monitored post-closing. An added key benefit of bank financing is that the first lien bank debt can be paired with mezzanine debt or preferred equity to obtain higher leverage. Terms for the bank loan and any mezzanine debt vary as they are dependent on the community and sponsor characteristics. It is worth noting that commercial banks are aware of Fannie and Freddie lending requirements, as they are often the primary source of bank repayment on active adult assets.
The U.S. Department of Housing and Urban Development’s (HUD)/Federal Housing Administration (FHA) seniors housing and care programs (LEAN) are typically not a great fit for the active adult sector due to the need to have a majority of the community licensed as a senior living facility, which usually isn’t the case for active adult. Exceptions do exist and can be pursued, but success will ultimately be dependent on the specifics of the facility’s operations and the senior housing licensure rules for the respective state.
HUD’s multifamily program (MAP) is also an option and often times can be a better fit, especially if the financing contains a construction component. To quality for HUD financing under the MAP program, the building cannot have a central commercial kitchen and Fair Housing Act regulations regarding prohibitions of age restrictions must be navigated. Therefore, there are some active adult communities that do not qualify for either HUD program. However, if HUD financing is an option, owners may benefit from a low, fixed interest rate with a term and amortization of up to 35 years as well as no recourse on the debt.
Lastly, there are other creative active adult financing solutions worthy of consideration. These include life insurance companies, equity funds created by financial investors, and joint ventures with groups focused on the sector or governmental programs such as SBA loans, PACE financing, or EB-5 financing.
For those looking to refinance, acquire, and/or renovate active adult communities, there are a few tips to keep in mind when searching for suitable financing for your community:
- When pursuing financing for an active adult property, the ownership team should have a clearly defined marketing plan that depicts the targeted resident, both near-term and long-term. Some active adult communities evolve into an independent model as residents age in place and care needs increase. This could become problematic for certain capital providers, such as the agencies, who need to maintain certain asset type requirements. If a marketing shift is contemplated in the future, that should be disclosed upfront to avoid any issues with lenders.
- There are numerous terms that are considered in a financing package. Examples include the interest rate, levels of leverage and recourse, timing to close, or covenants. Acknowledging that all terms are important, identifying those that are the most important to the borrower is a helpful exercise to complete at the onset of the financing process. This will allow the owner to better target the financing vehicles that best match its financing goals and objectives as each financing option has different strengths and weaknesses.
- Considering the multiple financing options available to active adult providers, multi-tracking various paths, at least during the initial stages of pursuit of financing, can be prudent. Considering the unique and evolving nature of the active adult market and at times a tumultuous macro lending environment, the appetite for capital providers can change quickly. Should this occur, multi-tracking the financing provides borrowers the ability to pivot to another financing option more efficiently if needed.
As the active adult sector has continued to become better defined and expand in popularity, both for consumers and providers, seniors housing financers have also evolved to match this momentum. Some financing vehicles may prove to be a better fit than others, but with numerous financing options, capital will continue to be available to fund the growth of this exciting new segment of the acuity spectrum.