Nursing Home Financing: 7 Funding Options for Buying, Building, or Expanding a Facility

What Makes Nursing Home Financing Different From Other Business Loans?

There is a distinct difference in how a nursing home is financed as compared to an ordinary small business loan. For one, the asset at hand is linked to a license and not merely to the real estate. In most states, bed counts are put under the purview of Certificate of Need programs; a facility has to demonstrate that there is a need in the community prior to putting new beds or breaking ground on a site. The National Conference of State Legislatures puts it at 35 states plus Washington, D.C. where such programs are in effect.

Underwriting is driven by the regulatory environment. When a lender is appraising nursing home financing, they will take in the whole picture: the real estate, the equipment and the facility’s Medicaid bed allocation. The latter is of particular interest as it is usually what dictates the property’s revenue potential. One does not see the same level of restriction with an assisted living operation that has no skilled nursing designation, but then again, a lender will be mindful of local zoning and staffing ratios before giving approval.

How Does SBA Financing Work for a Nursing Home Acquisition?

The Small Business Administration backs two loan programs that commonly fit nursing home financing for buying an existing skilled nursing facility, or SNF.

• SBA 7(a) loans can fund a facility purchase, working capital, and equipment together in one loan, and can be paired with SBA 504 financing for up to $10 million in combined loan proceeds, according to gov.

• SBA 504 loans finance the real estate and major fixed assets specifically, with long-term fixed rates and amortization schedules that can run up to 25 years, per SBA program details.

• Both programs require the operating business to be for-profit and to meet SBA size standards for its industry.

Can Commercial Real Estate Loans Help Buy an Existing Nursing Home?

A conventional commercial real estate loan is often the more practical option if you’re an operator that needs to close quickly, or your purchase price is above SBA program limits. Instead of an SBA guaranty, since these loans are underwritten directly on the property and the cash flow of the operation, there can be fewer restrictions on eligibility but usually a larger down payment.

• Faster closing timelines than SBA-backed financing in many cases
• No SBA size-standard restrictions on the business
• Down payment and term requirements set by the individual lender

What Is Assisted Living Construction Financing for a New Facility?

With assisted living construction financing, the lender may release the money in stages as construction progresses rather than providing the entire amount upfront. For example, funds may be released when the land is purchased and again as the foundation, building, and other parts of the project are completed. Lenders may also want to see that the necessary state licenses and Certificate of Need approval have been obtained, where required, or that there is a clear plan for getting them before the facility opens.

• Land acquisition and site preparation costs
• Phased draw schedules tied to construction milestones
• Coordination with state licensing timelines before opening day

How Does Renovation Financing Expand an Assisted Living Facility?

A new building isn’t needed by many operators. They need more capacity or better accommodation at the current facility. Renovations are often financed under the umbrella of nursing home financing that includes:

• Converting semi-private rooms into private rooms to meet resident demand
• ADA and life-safety code upgrades required for licensing renewal
• Adding Medicaid-certified beds within an existing footprint, where state bed allocation rules allow it

How Does Equipment Financing Support Nursing Home Medical Supplies?

A skilled nursing facility must account for the ongoing expense of such items as resident beds, physical therapy gear, monitoring systems and mobility lifts; these are costs that exist apart from any outlay on construction or real estate. With equipment financing, an operator can avoid the need to put down cash at the outset and distribute the cost over the life of the asset. In doing so, working capital is kept on hand for the more immediate demands of running the place, like payroll.

Common categories financed this way include:

• Resident beds, mattresses, and mobility lifts
• Rehabilitation and physical therapy equipment
• Nurse call systems and monitoring technology
• Kitchen and laundry equipment for larger facilities

When Does a Line of Credit Fit Nursing Home Financing Needs?

Even in the best-run facilities there are timing gaps between care delivery and getting paid for it. Medicaid, Medicare and Medicare Advantage plan reimbursements generally do not come in until the day after a resident is admitted. Because of this lag, a revolving line of credit is the best option.

With a line of credit, an operator has the flexibility to put money where it is needed and make repayments as reimbursements are received, instead of having to take on a set sum of debt in advance. Reimbursement schedules can be quite different from one resident to the next; for instance, Medicare Part A will pay for skilled nursing care after a qualifying hospitalization but only for so long, and there is no coverage for long-term custodial needs, as Medicare.gov makes clear. Such an arrangement is well suited to facilities that have to contend with:

• Delays between billed and paid claims under Medicaid or Medicare Part A
• Seasonal swings in occupancy or room and board revenue
• Short-term supply restocking between billing cycles

How Do Term Loans Fit Into Nursing Home Financing for Staffing?

Since term loans offer a lump sum amount in one go, it can quite well for a one-time expense that has a clear cost and timeline. For instance, there may be a requirement to hire staff for a nursing home before a new wing is opened. Or there may be a need to train employees or install new software. Since a term loan provides a fixed amount that is repaid over a fixed period, this can make it easier to plan repayments when the expense is not expected to continue once the project is complete.

How Do Operators Match Nursing Home Financing to Their Project Goals?

It is always useful and recommended that facilities match the funding sources to the project, rather than just search for one funding option for all. This is because most nursing home financing needs usually fall into a few select categories:

• Buying an existing facility: SBA financing or a commercial real estate loan
• Building new: assisted living construction financing
• Adding or upgrading beds: renovation financing
• Replacing or upgrading equipment: equipment financing
• Covering reimbursement timing gaps: a line of credit
• Funding a defined staffing or operational project: a term loan

Conclusion

There is more to nursing home financing than one would find in most small business lending. The reason is that the license, the property, and the payer mix are inextricably linked. When an operator puts together a deal for a facility, he is in effect putting capital behind two elements: the real estate and the Medicaid bed allocation which gives it its worth. Even construction work comes with its own set of demands; a renovation will have a licensing timeline to contend with in addition to the standard draw schedule. And for running the place on a daily basis, the tools at hand have to be suited to a reimbursement cycle, not what you see in a service or retail concern. In the end, long-term care operators are usually better off over the course of a project by selecting from among these seven options as opposed to relying on one loan.