Residential Care Home Financing
Residential Care Home financing where you finance both the business and the home is available with just 10% down and if you have another source of income (another business, another job, income from a spouse, etc.) the 10% can be borrowed.
“Board and 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 (RCFE’s). They are also popular in Arizona and Texas as well as many other states.
Essentially, residential care homes are an assisted living facility in a residential setting where the owners of the facility provide board and care and possibly a few other services for the residents. They are popular with residents because they are usually less expensive than the larger institutional assisted living facilities and residents enjoy the smaller in-home setting. They are popular with owners because they are easier to manage, less expensive to purchase and maintain and usually very profitable.
Residential Care Home financing is readily available (in one loan) for both the business and the building, and if the building is the larger percentage of the purchase price then the entire amount can be financed over 25 years.
Residential vs. Commercial
The issue many lenders face when financing residential care facilities is that they are technically both residential and commercial in nature (they are 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.
The good news is that there is financing available from lenders under the SBA 7a program as well as the SBA 504 program.
The primary difference between the two programs is that the 7a can be used to finance both the goodwill of the business and the real estate whereas the 504 can only be used for the real estate.
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 is usually a floating rate, but it has a very reasonable and short prepayment penalty, so while it is not ideal, it can enable you to purchase the business and building and refinance in the not too distant future.
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 acquire a residential care home using a 504 for the real estate and a 7a for the business.
New SBA rule as of April 1st 2019
As of April 1st 2019 all residential care facilties that do NOT provide “healthcare or medical” services will no longer be eligible for SBA loans. This is a major change and is going to cause problems for many borrowers looking to finance these types of properties/businesses. It is not yet clear exactly how lenders and/or the SBA will define “healthcare/medical” services, but 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.
There are many factors that come into play with financing, but at a minimum you need to have good credit and good credit scores,* experience in the industry or VERY relevant experience and the property/business you are looking to acquire needs to have good occupancy and cash flow. (Loans are available for startup and for construction of new facilities).
Unusual situations can also be funded but the situation needs to make sense. As an example, one of our lenders recently funded a project with multiple homes and a common dining hall on one property.
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.
For more information about financing other types of Assisted Living and Senior Care facilities including HUD Loans you can visit our website here.