At A Glance:

Location: 3-Site Portfolio, Massachusetts
Transaction Type:Recapitalization
Capital Type:Interim Bank & Mezzanine Debt for HUD take-out
Property Type: Three-building Skilled Nursing Portfolio
Capital Amount:$20,500,000
Total Capitalization:$25,800,000
Common Equity:$5,300,000
Mezzanine Debt:$1,500,000
Senior Debt:$19,000,000

The Client

Valencia Realty Capital was referred to this veteran skilled nursing operator and investor through an investment sales broker. The client had an operating portfolio of over five buildings throughout Massachusetts. The subject transaction was a three-building portfolio that the client was looking to cash out refinance at a high LTV.

The Deal

The goal for this deal was to refinance the client’s existing loan and pay off additional unsecured private investors. The client had a portfolio of partially stabilized nursing homes in Boston and was over-leveraged based on traditional lending criteria. They had been trying to source senior debt to clean up the capital stack – including private investors who had contributed capital and needed to be repaid.

HUD Financing

When it comes to competitive financing for nursing homes, HUD Financing is the holy grail. Loans are insured by the US Federal Housing Administration (FHA), an entity managed by the Department of Housing and Urban Development (HUD). As these lending facilities are effectively subsidized by the US federal government, they provide highly competitive rates and leverage on a non-recourse basis for residential and healthcare assets. However, there is strict criteria that must be met in order to qualify. It is essential for real estate entrepreneurs searching for HUD Financing to prove historical performance.

This client’s overall goal was to refinance their portfolio of properties to a $20.5MM HUD loan. In order to qualify for this level of proceeds, they would need to boost their net operating income (NOI). However, it would take 2 years to achieve this based on their financial projections.

Their Challenge

case-study-20mm-structured-financing-for-skilled-nursing-portfolio-recapitalizationThe nursing home capital markets are quite specialized given the owner-operated nature of the asset class, which is under tight regulation. This, combined with the fact that the properties were not fully stabilized, and the client had very high payoff amounts compared to the current value of the portfolio, presented challenges.

Overall, the main obstacle this client faced was achieving max leverage of their portfolio while exploring ways to get cash out. With a significant amount of existing debt on their portfolio such as senior debt and small private unsecured investors and lenders, they wanted to cash out and recapitalize their portfolio. The client’s existing lending relationships were not presenting viable options to collect the proceeds necessary to pay off private investors.

In skilled nursing, margins are very tight to begin with. From the industry being highly specialized within the medical care sphere to higher-than-average operating costs, these dynamic elements play a major role in obtaining viable lending. In addition, the assets were situated in relatively tough locations, adding another level of complexity for potential deals.

Working within the nursing industry is also operations intensive. These businesses are paid by the government through Medicare and Medicaid. This can make the coordination of initiatives, investments, and overall operations challenging. Furthermore, they are not paid privately in contrast to most assisted living or memory care communities.

All of these factors make it a complicated asset class to finance. It requires a capital advisor who understands the complexities of the skilled nursing industry. Additionally, they need to know how to underwrite and tell a story in a way that the lenders understand and appreciate.

Our Solution

In order to bridge the client to a low-cost, high-leverage FHA/HUD Section 232 loan, they needed a low-cost interim/bridge loan to provide them with the timeline to stabilize the performance of their portfolio. Our solution was to first bring in a 2-year floating-rate bank loan for $16MM with an added $3MM line of credit needed for working capital to run the business. Additionally, to meet the total proceeds required, a mezzanine lender was sourced for $1.5MM. This mezzanine investor was comfortable underwriting the HUD take-out.

Senior debt was an interim loan of $16MM, plus a $3MM revolving line of credit, totaling $19MM. This loan had a floating interest rate of 2.75% over one-month LIBOR with a 1.50% floor on LIBOR.

Since the bank maxed out their leverage, they required the additional proceeds of a mezzanine loan to fill the gap on the capital stack. The mezzanine loan rate was 12.5% interest with an 18 month initial term and multiple six-month extensions.

In this case, the borrower was required to maintain a minimum Fixed Charge Coverage Ratio of 1.15X.

The Fixed Charge Coverage Ratio is calculated as the ratio of TTM EBITDA (earnings before interest, taxes, depreciation, and amortization) less unfinanced capital expenditure payments, divided by the sum of interest and actual principal on debt outstanding, taxes, distributions, and certain restricted payments.


We successfully lined the client up with the capital they needed to make improvements to their operation. As a result, they were set on the path to qualify for the HUD Section 232 Loan take-out.

To learn how Valencia Realty Capital can help to unlock your trapped equity, contact us today.

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