A retirement home is a multi-residence property designed specifically for senior citizens. While there is a housing element to the property, there are also other amenities including kitchen/dining room, recreational spaces and health/hospice care. Examples of this type of asset include nursing homes and long-term care facilities.
Properties with stable cash flow and consistent operating histories are favourable candidates for base financing. For retirement assets, this can mean properties with consistent occupancy and a history of stabilized operations. The borrower’s experience as an operator is also a critical loan consideration. If there is an ownership group, management guarantees and competencies are required.
Base financing offers a term of five years or more, a fixed interest rate and is typically closed to prepayment for the term’s duration. For seniors properties, the two most common types of base financing are Canada Mortgage Housing Corporation insured (CMHC) and conventional.
CMHC-insured financing offers lower interest rates, terms of 5 years or more and higher loan to value ratios, making it a popular choice for most borrowers. There are also programs available to borrowers (i.e. the Energy Efficiency Program) that can help them increase their loan amounts, access premium credits and lower their monthly expenses.
Base financing is usually considered when borrowers want the payment predictability that comes with a fixed interest rate. However, it is important to note that a typical conventional financing term for a retirement asset is five years. Longer terms are available, but there is often greater scrutiny on future cash flows. Borrowers must be able to show that longer-term leases (i.e. maturing in 10 years or more) are in place for the duration of the mortgage term.
Commercial Mortgage Backed Securities (CMBS): CMBS is a conventional financing solution available for first mortgages on established, stabilized properties (generally three or more years of stable operating history). This type of financing works well for properties with in-place, stabilized net cash flow.
Bridge financing addresses a borrower’s short-term needs, usually three months to three years. Some borrowers choose bridge financing when they need flexibility to decide about the future of an asset (i.e. contemplating a sale, impending change in ownership structure or operational planning) or time to coordinate a standard financing option.
Bridge financing typically includes floating interest rates and usually allows some form of early prepayment. Consistent cash flows and strong operational histories are key considerations for this type of financing.
This short-term financing option enables access to a property’s equity for improvements, renovations or repairs, eliminating the need to raise funds from personal sources. The goal is usually to increase lease rates, secure longer leases and/or reduce operating expenses to drive up the value of the property and make it eligible for standard financing.
Second mortgages are often used to access equity in a property when a borrower wants to purchase another asset or renovate/repair a property. Borrowers with a first mortgage may be eligible for secondary financing on the same property. Options include standard or short-term financing as well CMHC or conventional.
Secondary financing is an attractive alternative to refinancing, especially if a borrower wants to avoid the penalties associated with breaking a mortgage mid term.