Senior living providers and investors are familiar with the financing options from Fannie Mae, Freddie Mac, and HUD. Less well known are the government-subsidized loan programs for healthcare facilities through the U.S. Small Business Administration (SBA). Liberty SBF is a specialty finance company that offers SBA, conventional and bridge loans.
NIC Chief Economist Beth Mace recently discussed the SBA program and other financing options with Alex Cohen, CEO at Liberty SBF. Here is a recap of their conversation.
Mace: Can you tell our readership about Liberty SBF?
Cohen: We launched the firm in 2011 and have been lending through several business cycles. We work with a lot of businesses that are buying or refinancing real estate for their companies, or what we call owner-user commercial real estate finance. We have closed more than $2 billion in commercial real estate loans. One of the eligible asset classes is healthcare, including skilled nursing, assisted living and memory care. When we first launched the firm, we were co-lending with the SBA and financed a decent number of assisted living and skilled nursing facilities and that’s how we were introduced to the asset class. We now have a full range of loan products for healthcare facilities and medical practice owners.
Mace: What distinguishes Liberty SBF from other lenders? You are a non-bank lender. What does that mean?
Cohen: We are a specialty finance company, a non-depository lender. We do not finance our operations through deposits. We have private equity and institutional investors who invest in our assets, but we are not a bank. That gives us some flexibility in terms of the deals we can underwrite. It allows us to operate in an area of the credit space where banks might not feel comfortable during choppy times. Certainly, the last 18 months have been choppy considering COVID-19, but we have continued to lend in the healthcare space. Compared to other specialty finance companies, we tend to provide loans for assets in the $2 million-$20 million range. We are focused on lower middle market or small balance commercial loans.
Mace: Is your cost of borrowing higher or lower for a borrower than that of a conventional bank?
Cohen: We offer some very attractive rate products. The way we finance these products is very efficient. On the permanent financing side, we can offer very attractive high-leverage, low-cost products. Some of our larger permanent financing deals are being priced in the high 2%-3% with up to 80%-85% leverage. That’s very attractive financing for these healthcare facilities which are an eligible asset class for government subsidized or quasi-subsidized programs. We tend to work with the SBA. Some of its offerings beat comparable offerings from HUD, Fannie Mae, and Freddie Mac. The SBA programs aren’t as well known in the sector. We are trying to educate the healthcare facility owner community about other financing options available for ground-up construction, transitional type business plans for existing assets, or permanent financing for stabilized properties.
Mace: What types of loans do you provide?
Cohen: We offer SBA, conventional, and bridge loans for healthcare facilities. One of the most attractive loan products we offer is the SBA 504 loan. Facility owners can get up to 85% loan-to-cost financing through the SBA with Liberty SBF as the co-lender. The loan can be used for ground-up construction, for example, and the borrower can secure up to the total cost of financing. It is a recourse loan. The way the program works, we partner with a Certified Development Company (CDC). A CDC is a nonprofit organization that promotes economic development within its community through 504 loans. CDCs are certified and regulated by the SBA, and work with the SBA and participating lenders, such as Liberty SBF, to provide financing to small businesses. The CDCs underwrite the loans with us and submit it to the SBA. When the loan is authorized, we fund the entire project. The SBA takes us out either at completion of construction, or shortly after the loan closes.
Mace: Is the process similar to the way Fannie Mae and Freddie Mac partner with Delegated Underwriting and Servicing (DUS) lenders?
Cohen: Each government program works a little differently. There are many CDCs, and we work with the largest ones. CDCs also work with other state and local subsidy programs. The CDCs are typically well versed on healthcare facilities. We manage the process, not the borrower, so it’s pretty seamless. And because we’re specialists, we can get these deals done in 45-60 days, whereas a large bank lender may take 90-120 days to close.
Mace: When you say healthcare facilities, can you define the types of assets?
Cohen: The types of assets we finance are assisted living, skilled nursing, memory care, and rehab facilities. The assets typically have a higher acuity of care. We also finance medical office buildings, which are eligible under the SBA program. Active adult and independent living properties would be considered investment real estate from our perspective. We do offer bridge lending on multi-family properties, including some age-restricted senior housing.
Mace: Do you offer conventional and bridge financing?
Cohen: Yes, we offer conventional and bridge financing. Our leverage is not as high with those products. But our borrowers can obtain permanent financing through our conventional offerings.
Mace: Do you finance the operations/cash flow part of the senior housing business or just the real estate?
Cohen: We only finance the real estate.
Mace: Were you active lenders during the pandemic?
Cohen: We were very lucky. We were designated as a Paycheck Protection Program (PPP) lender. We made PPP loans to a lot of companies in our servicing portfolios as well as to new businesses. We financed close to $200 million in healthcare-related businesses and financed about $1 billion in total for all types of companies. We were able to help healthcare borrowers, including our own existing borrowers, to weather the storm. Our bridge loan business has been active, helping owners refinance their facilities at a lower leverage point. The PPP program was successful and popular with borrowers. Now, we are working through the PPP forgiveness process with our borrowers and new customers. They must demonstrate the funds were used for legitimate operating expenses. And at that point, the loan becomes a grant that is tax free income for the business. Facility owners, particularly smaller, closely held healthcare facility owners, should keep in mind that the SBA was chosen as the vehicle through which the government provided stimulus to the entire business community, not just small businesses. The SBA has provided loan and fee deferments, and some rules have been changed. For example, borrowers can refinance SBA and HUD debt into an SBA 504 loan, an option that was not available before. It can be an opportunity for borrowers to pull cash out and lower the interest rate. Also, the government continues to provide other subsidies to healthcare facility providers, through programs such as the Provider Relief Fund. We have a great originations team, and we can be helpful if anyone has questions on the programs.
Mace: How large is Liberty SBF’s book of business for senior housing?
Cohen: Our servicing portfolio is several billion dollars. Our goal, as we transition from PPP to core lending, is to deploy about $100 million-$150 million between now and the end of the year. We have a number of healthcare transactions in the pipeline. There is a lot of interest from borrowers who believe we are at or near the bottom of the rate cycle and want to take advantage of the low-cost financing.
Mace: Has your bridge lending program been especially active during the pandemic? Why is that?
Cohen: Yes, our bridge lending program has been active. Borrowers with loans at maturity on their existing conventional debt or with an underperforming asset are taking advantage of bridge financing to reposition the facility. Or perhaps a buyer making an acquisition needs a bridge loan to execute a business plan to improve the census or put CapEx into the building to stabilize the property to get permanent financing or sell the asset.
Mace: Do you offer non-recourse bridge loans?
Cohen: We do offer non-recourse bridge loans. They are typically larger in size than recourse loans. Non-recourse bridge loans range from about $5 million to $15 million, with about 65% loan-to-value.
Mace: Broadly, what do you look for in a borrower?
Cohen: Operating experience is key. What is their operating experience for these types of facilities and sizes? Do they understand the market? Are they in town? We look at the borrower’s net worth and liquidity relative to the loan amount we are making. We focus on the recourse guarantors—ultimately the owners of the business—and the non-recourse carve out guarantors.
Mace: Do you often turn anyone down?
Cohen: We look at deals all day long. We are focused on originating deals that fit our credit box. We offer a large swath of products to the industry and can cater to different borrower profiles. Certain situations are not financeable for us and those are deals we cannot move forward with.
Mace: Where do you get your lending ability from? Institutional groups? High net-worth individuals?
Cohen: Our limited partners are primarily family offices. We have a well-capitalized operating company. The decision makers at our company are principals and managers. We were successful with the PPP program, and we are deploying that capital back into the market through our core programs with our limited partners and other institutional investors. They are very aggressively seeking investment opportunities at this point. We feel good about our capital position and our ability to lend.
Mace: What else would you like to share with our readership?
Cohen: I’m looking forward to the NIC Fall Conference in Houston. If anyone would like to set up a meeting during the Conference, please contact us.
