Care Home Mortgages
If you are buying a care home business – where you finance both the business and the home – you may find that your financing options are limited unless you consider an SBA loan for assisted living. Care home mortgages are readily available from some SBA lenders for these types of businesses/properties.
Financing for residential assisted living facilities is possible with no down payment if you already own at least 1 successful residential assisted living facility or with just 10% down if you are purchasing your first care home…or 5% down if you have a seller willing to hold a 2nd mortgage on “standby.”
Also, if the building or home is the larger percentage of the purchase price then care home mortgages are available with a 25 year term and amortization.
Residential assisted living homes – aka Board and Care homes, Adult 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 and Texas as well as many other states.
Group Home financing is also possible. The key to qualifying whether you are looking to finance a residential care home or a group home is that you must be providing “healthcare or medical services.” (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:
- Good credit for any owners
- 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.
- 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.
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 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:
- Cash/Liquid Assets
- 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.
- 401k from a former employer (this can also be done tax and penalty free)
- Loans against a 401k
- Investors – the SBA allows you have “investors” who invest their cash in the business in exchange for an ownership percentage in business. You just need to keep an investor under 20% ownership otherwise they would also have to guarantee the loan.
- Seller – 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 allowed to make payments to the seller on that loan until you have paid off or refinanced the SBA loan.
- In a business expansion scenario where you already have a history of owning at least one profitiable care home it may also be possible to cross collateralize another property in lieu of a down payment.
Care Home Mortgage Financing Qualifications
There are many factors that come into play with residential or board and care home financing, but at a minimum you need to have the following:
- Good credit and good credit scores*
- Experience in the industry or relevant experience that a lender can get comfortable with
- The property/business you are looking to acquire needs to have good occupancy and cash flow
Board and Care Home Financing for Multiple Unit Properties
We see a lot of transactions where single family homes have been converted into an assisted living facility 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 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 Headquarters, 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 isn’t 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 will usually be a prior to loan closing/funds disbursement condition.
Assisted Living Construction Financing – SBA Loans for Construction or Renovation
SBA loans are available for construction (including ground up) or renovation of a residential assisted living as long as you qualify and have enough strengths to get a lender comfortable with the additional risk of a construction loan.
SBA Loans for Startup of a Residential Assisted Living
Startups are also possible for those with existing care homes or those with a solid business plan and enough experience, net worth and income to get it done.
Startups require 10% down per SBA rule and the same potential sources of down payment exist as mentioned above.
Please contact me at jking (at) green commercial capital (dot) com or 1-800-414-5285 to discuss your situation.
* Credit is very important, but 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.