Residential Assisted Living Business Loans

If you are in the market to buy, start or invest in a residential assisted living business then an SBA loan will most likely provide the highest leverage and the greatest flexibility.

SBA loans for assisted living – specifically the SBA 7a loan – allow you to finance a residential assisted living business or an assisted living business and the home.  In other words, the loan can be used to finance businesses and/or property.

Purchase, Startup, Construction or Expansion

You can finance a residential care home with little or no money out of pocket depending on whether you are financing your first home or you have many.  Care home mortgages are readily available for the following:

• purchase of an existing residential assisted living business
• buying a residential care home business and property/home
• ground up construction or conversion of a home
• refinance of an existing residential assisted living business or home

Residential Assisted Living Business – No Down Payment

Financing for residential assisted living facilities is possible with no down payment if (and only if) you already own at least 1 successful residential assisted living facility for long enough to prove to a lender that you are a good operator.  Usually, this means at least 1 year, but it is a lender desision dependent on your qualifications and the strength and stability of the cash flow.

Frequently, lenders will want to see at least one business tax return covering a full year under your ownership/management and showing enough profit.

100% Construction Financing

The 7a program allows you to purchase just the business or the business and the home and experienced owners can even secure 100% ground up construction financing or get a loan for a purchase and renovation.  The key is having a long enough and successful enough track record of other homes.

If purchasing just the business then a 10 year loan is available.  If purchasing the business and the home and the home is more than 50% of the purchase price then a 25 year loan is available with the right lenders.  You can visit the 7a page of our website for a full rundown on most SBA 7a rules here: SBA 7a loan requirements.

Refinancing an SBA Care Home Mortgage

July 2022: Important Update

It is no secret that SBA loans are one of the few ways to get a residentially zoned property approved to operate a care home, assisted living or adult foster home, and many borrowers have figured this out over the last 5+ years.  However, many borrowers have a floating rate SBA 7a loan and most of those loans adjust with the Prime Rate…and Prime has been going up dramatically lately as have the interest rates for all loans.

Historically, there hasn’t been a good way to refinance these loans due to the fact that they are residential property with a commercial business operating out of them, but last year the SBA changed their guidelines to allow business owners to use the SBA 504 program to refinance an SBA 7a loan.

This is a fairly dramatic change to the SBA rules and gives those with SBA 7a care home mortgages who have seen their rate rise along with the Prime Rate an option to get into a long term fixed rate.

You can get a full rundown on the latest refinance rules here: SBA 504 Refinance

Keep in mind that the 504 program can only be used to refinance real estate, furniture, fixtures and equipment, so if your 7a loan was used to finance a lot of goodwill then the 504 might not be a good fit.  

Financing A New Care Home Business

The startup of a new care home business requires 10% down, but there is a lot of flexibility with where the down payment can come from.   (See further down the post for acceptable sources of down payment).

An SBA care home mortgage for a residential assisted living business is available for new businesses that can show the following:

1. clear and concise business plan
2. solid projections as well as good “assumptions” for the projections
3. good personal credit
4. enough relevant experience/proper management
5. enough net worth/reserves
6. outside income

Obviously, there is a lot more risk with a new business, so the more compelling a case you can make to a lender, the greater your odds of approval.

The good news is that the guaranty that lenders get with the SBA 7a is more or less a mortgage insurance policy that covers 75% of the loan amount, which removes a lot of risk for a lender and makes it easier for them to approve a loan to start/invest in a new residential assisted living business.

Care Home Mortgage Down Payment Options

Commercial mortgages for care homes through an SBA lender allow for a lot of flexibility with regard to the source of down payment and there are numerous ways you can come up with the 5% to 10% required for a business acquisition.

The down payment can come from the following sources when purchasing either the business or the business and the home/building:

1. Cash/Liquid Assets
2. Loans – as long as you have another source of stable income from another business, another job or a spouse with income, you are allowed to borrow all or part of the down payment per SBA rule.  There are many potential sources of funds for a down payment loan, but most often we see borrowers tapping home equity in a primary residence or an investment property to do this, especially in areas where property values have increased dramatically, like California.
3. 401k from a former employer (this can also be done tax and penalty free)
4. Loans against a 401k
5. Gift
6. Investors – the SBA allows you have “investors” who invest their cash in the business in exchange for a small ownership percentage in the business.  You just need to keep an investor under 20% ownership otherwise they would also have to guarantee the loan.
7. Seller held 2nd on “full standby”- (this is where the 5% referenced above comes into play) – a seller is allowed to hold up to half of the down payment required by the SBA for a board and care home loan for either the business or property (or both) AND have it count as additional equity or down payment as long as it is on “full standby,” which means that you are not supposed to make payments to the seller on that loan until you have paid off or refinanced the SBA loan.

Residential Assisted Living Business Financing Qualifications

There are many factors involved in undewriting a residential assisted living business, but at a minimum you need to have the following:

1. Good credit and good credit scores*
2. Experience in the industry or relevant experience that a lender can get comfortable with
3. The property/business you are looking to acquire needs to have good occupancy and cash flow

Financing for Larger Facilities

We see a lot of transactions where single family homes have been converted into a residential assisted living business for 6 to 8 residents, but it is possible to finance larger facilities as well as other types of properties as well.  Unusual situations can also be funded as long as the loan request make good sense.

As an example, one of our lenders recently funded a project with multiple homes and a common dining hall on one property.

Residential vs. Commercial – Which is it?

The issue many lenders face when evaluating a board and care home mortgage request is that residential care facilities are technically both residential and commercial in nature – they are usually single family homes in neighborhoods, but they require licensing for the facility and the operators and thus are not eligible for conventional residential financing.  This unusual hybrid of a commercial business in a single family home (and in a single family neighborhood) typically creates confusion on the part of local bankers as to what type of financing they can offer.

SBA 504 vs 7a

The 2 primary types of care home mortgages are the SBA 504 and the SBA 7a.

In the case of assisted living/senior care, the SBA 504 can only be used to purchase real estate and FF&E, meaning you cannot use it to purchase a business.  As mentioned above, the 7a can be used for the business and/or the building and as a result the 7a is the more versatile program.  The 504 is worth looking at if you are paying cash for the business, the seller is financing the business or if you need to refinance a residenital care home you already own.

In order to get a full 25 year amortization with the 7a, the real estate needs to be the larger percentage of the financed amount, otherwise lenders will shorten the term of the loan to somewhere between 10 and 25 years.

One downside to the 7a is that it can sometimes be a floating rate, but it has a very reasonable and short prepayment penalty, so it is a great option that enables you to purchase the business and building with the idea of refinancing after 2 or 3 years should that be necessary.

The obvious downside to the 504 is that you cannot use it to purchase a business, but it does offer excellent terms if you already own the business and want to purchase the real estate.  It may also be possible to get 2 SBA loans for a residential care home: a 504 for the real estate and a 7a for the business.

Healthcare or Medical Services Requirement

Per SBA rule, all residential care facilties must provide “healthcare or medical” services.

This rule came about in April of 2019 and the SBA has not given much guidance on it since, so it is still a bit of a gray area and it is up to lenders to decide what they consider “healthcare or medical services.”  One would have to assume that any facility that is not providing some level of care beyond just room and board will not be eligible.  The fact that the rule is vague leaves room for interpretation from lenders and thus far, providing services such as dispensing meds or providing transportation to doctor’s visits might be enough.

Update June 11, 2022:

The SBA has updated this guideline.

Per SBA, assistance with “Activities of Daily Living” (ADLs) meets the requirement of “providing healthcare and/or medical services.” Again, this still allows for a lot of interpretation on the part of lenders, which is a good thing.

SBA Adult Care Home Licensing Requirements

The SBA has also stated that there is NOT a requirement that licensed nurses be on staff unless that is a condition of the state where the business and property are located to grant a license to the facility.  Also, proper licensing is sometimes a “prior to loan closing” or funds disbursement condition, although there are many states where it is not possible to get the license until you own the home.  However, there are reasonable lenders who will give you time to secure the license post-closing.

Residential Assisted Living Business Construction Financing – SBA Loans for Construction or Renovation

SBA loans are available for construction (including ground up), conversions or renovation of both commercial and residential assisted living facilities as long as you have the right qualifications to get a lender comfortable with the additional risk of a construction loan.

In fact, 100% construction loans are available for experienced owners who are building a new location as long as you have a long enough and profitable enough history with your current location(s) and your business plan and projections make sense the the SBA lender.

Also, there are some SBA lenders who will add a lot of extra working capital into the loan to help you ramp up the business/new location in addition to financing all payments during construction into the loan.

Residential assisted living businesses – aka Board and Care homes, Adult Care Homes, Adult Foster Homes (Adult Foster Care Homes) or Personal Care Homes – have become very popular across the U.S.

In Florida they are known as Adult Family Care Homes (AFCH’s) and in California they are commonly referred to as Residential Care Facilities for the Elderly or RCFE’s.  They are also popular in Arizona, Texas, Washington, Oregon as well as many other states.

Group Home financing is also possible.  The key to qualifying for SBA financing for a residential care home, adult foster care home or a group home is that you must provide some minimal amount of “healthcare or medical services,” and it can be very minimal.  (See more about this below).

Assisted Living Facility Financing – 100%

If you are trying to figure out how to get funding to buy a care home and you are expanding an existing assisted living facility or residential care home business then 100% financing is available via the SBA.

The keys to qualifying for SBA loans for assisted living are as follows:

1. Good credit for any owners
2. Solid, consistent cash flow for your exisiting facilities/home(s) and solid consistent cash flow for the facility you are purchasing.  It is possible to purchase an underperforming facility/home that doesn’t quite have strong enough cash flow as long as you can provide a solid plan to do so AND have the right experience to get a lender comfortable with your plan and your projections.
3. A long enough period of ownership for any existing facilities.  i.e. it would be difficult to get 100% if you recently purchased a residential care home business and were looking to expand, but once you have owned the business long enough to prove that it can do well under your managment/ownership then you should be eligible to purchase another with no down payment.

*maximum loan amount for 100% financing for almost all transactions will be $5 million, but exceptionally strong borrowers/strong transactions can get 100% financing above $5 million.

Please contact me at jking (at) green commercial capital (dot) com or 1-800-414-5285 to discuss your situation.

* Credit is very important for any type of financing and SBA care home mortgages are no exception, however some derogatory accounts are acceptable as long as they are isolated.  As an example, we were recently able to get a commitment for a client who was refinancing a facility in spite of the fact that they had a repossession a few years back.  The loan worked because the repo was an explainable, isolated incident and it helped that the client had a lot of equity in the home as well as 100% occupancy and great cash flow. 

Care home mortgages are also possible with an SBA loan if you have a previous bankruptcy as long as the BK was long enough ago and explainable.     

For more information about financing other types of Assisted Living and Senior Care facilities including HUD Loans you can visit our website here.