This season we continue to monitor recent and pending changes to financing options, including the effectiveness of new LEAN processing for senior housing and care, an anticipated change that would make federal hospital mortgage insurance easier to use for refinancing, and the elimination of the interest subsidy on USDA guaranteed loans for affordable rural housing. We are especially glad in this edition to share our Adam Smith's commentary on "Efficient, Strategic and Purposeful" investing, an asset allocation strategy that should intrigue nonprofits.
If there are any topics you would like to see covered in The Capital Issue, please contact us.
Thomas R. Green, CEO
At a time when many national banks are still loath to lend, borrowers are turning to a recently-created financing option that lets smaller local banks participate in debt structures usually available only from much larger institutions. Non-rated and low-investment grade hospitals, senior housing and care providers and others are leveraging local bank resources to finance projects that might otherwise be put on hold.
Much of the recent discussion of federal hospital mortgage insurance has tended to be directed toward smaller facilities that lacked a wide variety of financing options. Rather than being painted as a financing option for a limp economy, however, the Section 242 program should be considered as part of any hospital’s financing discussions – under any market conditions. Its competitive fixed interest rates, 25-year amortization and non-recourse nature make it an excellent choice for small independent hospitals, but also for larger facilities and for systems.
Financing structures may have fixed interest rates, lock borrowers out of prepaying debt, or lock them into debt covenants. Yet a property’s strategic plans, the local and national economies, and other internal and external credit factors are far from “fixed” or “locked.” Changes in the markets, in the financial sector itself, or to the property can provide impetus to update a debt structure through a refinance.
The USDA Rural Development 538 loan program has been a very effective source of guaranteed funding for multifamily properties in rural areas. For this reason, many of us were caught off guard earlier this year when Congress passed and the President signed the 2009 Omnibus Appropriations Bill, which included a provision eliminating interest rate subsidy on new 538 loans. It was this 250 basis point reduction on the first $1.5 million in debt that made the program so compatible with low-income housing tax credits.
It is widely accepted that all investors seek the highest return for a given level of risk; however, each investor’s tolerance for risk is unique. An institution’s risk tolerance should be defined by its embedded liabilities, such as a target rate of return for pension plans, a spending policy for endowments and foundations, or debt covenants for institutions with outstanding debt. Given that virtually all institutions have embedded liabilities, institutional investors should be just as concerned with minimizing the volatility of returns as with maximizing the absolute level of returns.