Senior living providers are finding creative ways to fund their upcoming development projects, with a select few taking advantage of recent federal regulations and programs to produce cost savings.
Whether it’s utilizing an ever popular crowd-funding type of campaign or leveraging a U.S. immigrant investor program, senior housing developers in regionally diverse markets have found value in stepping outside the box when it comes to financing new construction.
And based on their successes, these innovative funding strategies may soon become common practices among others operating in the senior care space.
Mainstreet meets CrowdStreet
Carmel, Indiana-based senior housing developer Mainstreet pledges its commitment to transform the way care is delivered to seniors. That credo has been showcased in each of the company’s “NextGen” brand of medical resorts, and now the same mentality for innovation has shifted to how Mainstreet funds new development.
“Senior housing is certainly an interesting area now,” says Mainstreet Chairman and CEO Zeke Turner. “There is a lot of money coming in, and with that interest comes more opportunities.”
In April, the company launched a direct investment funding campaign to develop a its latest project, a 100-bed short-stay transitional care facility located in Bloomington, Indiana.
Part of Mainstreet’s medical resort pipeline, which consists of properties that blend concierge-style skilled nursing services within hotel-like environments, the $13.38 million Bloomington property was able to raise $1.8 million of those costs through the funding campaign in less than a month—exceeding the company’s anticipated goal of $1.5 million.
The success lies in part with Mainstreet’s partnership with CrowdStreet, a Portland, Oregon-based startup company that provides a secure online platform to connect accredited investors with professionally-managed real estate investment opportunities.
Utilizing the CrowdStreet platform enabled Mainstreet to not only increase its pool of investors nationwide, but it also helped the company save “well in excess of $100,000” on broker fees that it would have paid under more traditional financing methods, Turner says.
“It was an interesting experience for us to be able to pull in dollars from all across the U.S.,” says Turner. “Some came from investor relationships we had already and others were completely unknown.”
The inspiration to do something “new” in terms of development financing spawned not only from Mainstreet’s desires to innovate, but also as a result of recent changes to a historically long-standing federal law.
New rules, new opportunities
A changing regulatory landscape was a key driver influencing Mainstreet to embark on its own funding campaign, which Turner assures was in fact a “private placement” rather than a “crowd-fund.”
“We wanted to take advantage of the new changes of law and how they impacted different direct investment opportunities like this,” says Turner.
Whereas a crowd-funding campaign can include the members of the general public and companies not registered with the U.S. Securities and Exchange Commission (SEC), a private placement—under Rule 506 of the Securities Act of 1933—allows companies to solicit investments from accredited investors only.
The SEC defines accredited investors as individuals with annual incomes of at least $200,000, or those with assets totalling at least $1 million.
Historically, companies seeking private placement were prohibited from advertising their campaigns publicly, however, one of the biggest changes came last September with Title II of the JOBS Act.
Under Title II, companies are now allowed advertise their private placements publicly across various forms of communication, including print, radio, websites and even social media—a rule change that only increases potential for opportunity, says Tore Steen, CEO and co-founder of CrowdStreet.
“Usually, a company had access to a smaller group of investors within their geographical region,” says Steen. “Traditionally, they would find 5-10 high net worth investors, but with CrowdStreet, they now have access to thousands of investors on a secure, online marketplace.”
CrowdStreet works with companies across various sectors, including real estate developers in the hospitality, medical office building, as well as student housing industries.
Lately, the company has seen a growing interest among others in the senior living field looking to follow in similar footsteps like that of the Midwest-centric Mainstreet.
“We’ve been targeting and talking to other senior living developers and we’re in discussions with senior living communities on the East and West Coasts,” Steen says.
Mainstreet—CrowdStreet’s first senior housing partner—is still digesting what it has learned from the private placement experience and hopes to apply a similar initiative in the future, but on a much bigger scale, Turner says.
Where Mainstreet sought the help of investors from all across the U.S., another senior living developer has found success by looking for accredited investors abroad via a federal program that has been experiencing a resurgence.
Southeastern developer Omega Communities sees great promise in a program administered by the U.S. Citizenship and Immigration Services (USCIS)—so much that it plans to raise up to $20 million of program funds to finance the development of two more senior living projects.
The Immigrant Investor Program, also known as “EB-5,” was created by Congress in 1990 in efforts to stimulate the U.S. economy through job creation and capital investment by foreign investors.
In exchange, foreign investors may obtain a visa if they invest a minimum of $1 million—or $500,000 for rural or high unemployment areas—into a project that creates at least 10 full-time jobs for qualifying U.S. workers within two years.
EB-5 operates via what are known as “Regional Centers,” which USCIS defines as any economic entity, public or private, involved in the promotion of economic growth, regional productivity, job creation and increased domestic capital investment.
Omega Communities created two of these centers in 2013, one in Florida and the other in Puerto Rico, which will cover the company’s anticipated activity in the Caribbean.
In some circumstances, the cost of EB-5 funding is more attractive than ground up development and can also be better for a project’s financial health, says Jimmy Taylor, COO at Omega.
“If we invest certain equity dollars, or bring in an investor to invest on a short-term basis, we will then go and raise EB-5 funding to take out that higher cost or short-term bridge financing,” he says. “EB-5 has created a new bridge loan industry.”
Following this strategy of providing debt and equity on a short-term basis and then replacing it with EB-5 funds has allowed Omega to realize cost savings in the ballpark of $300,000 to $500,000, according to Taylor’s estimates.
Through its Florida Regional Center, Omega plans to raise approximately $5 million to $10 million in EB-5 funds to develop a 138-bed community called South Biscayne in North Port. Omega expects the total project costs for the development, which will be located within a 32-acre campus, will be $25.6 million.
Omega plans to raise a similar amount of EB-5 funds to develop Sarasota East at Church of Hope, a 126-unit senior living community that will be part of a 45-acre campus in Sarasota. In total, costs for the project are expected to be $26.2 million.
An increasing interest among foreign investors coupled with a greater acceptance from lenders has the potential to make EB-5 a more common method for senior housing developers to finance their next projects, suggests Taylor.
“As it becomes more mainstream, there are lenders that will now provide bridge financing for the project that will later be taken out by EB-5,” he says. “We’re only going to see it grow.
Just like any development, selecting the right professionals on both the legal and economic research sides will be key to any success in financing a project through EB-5.
“I-dotting and T-crossing are imperative,” Taylor says. “You have to make well-reasoned decisions and be very deliberate in the process. It’s not something that can be done quickly.”