Hard Money Second Mortgages for Assisted Living Facilities

Several years of record low long-term interest rates have fueled demand on second mortgages for Assisted Living Facilities (ALFs). Owner-operators are able to access equity in their property to reinvest into the building or business. This blog post will cover what you need to know about tapping into equity from a senior living property using a hard money second mortgage.  

What is a Hard Money or Private Money Loan? 

A hard money loan is a mortgage made against a hard asset (real estate) by non-bank lenders: one or more individuals through a mortgage broker; family offices; real estate investors with a mortgage lending division; or a private mortgage fund comprised of several investors (Limited Partners — LP), under a fund manager or General Partner (GP). 

People often use “hard money" and “private money" interchangeably to refer to the same type of loan. Borrowers, real estate agents and traditional mortgage lenders call it hard money, while professionals in this niche call it private money lending. Hard money loans are based solely on the asset value, while private money underwrites loans using collateral value and borrower financial strength — determined by cash flow, liquidity, background and credit checks — before approving a loan. 

What is a Second Trust Deed?

A second mortgage is a subordinate mortgage made while the first mortgage is still in effect. The first mortgage will have priority on the property's assets if the borrower defaults. The second mortgage would only have a secondary claim to the assets, so the risk is usually offset by a higher interest rate than the first mortgage. 

Hard Money Second Mortgage Guidelines & Requirements

Each second mortgage loan scenario comes with its own set of unique circumstances to consider. However, this section will give you general guidelines to expect with a second mortgage on an assisted living facility.

• First lienholder must allow junior liens
  (you’ll find this in the Note or Loan Agreement)
• 65% Combined Loan-To-Value (CLTV)
• 11.00% to 13.00% interest-only
• 12-36 month terms
• Prepayment penalty or guaranteed interest on case-by-case basis
• Closing Costs: 3-5 Points + up to $1,995
• Lending only on the real estate — not the business 

Requirements for a hard money second mortgage:

• Appraisal or valuation
  (some lenders may do a site inspection or order a Broker Price Opinion [BPO])
• Loan application
• Use of funds
  What will the cash-out proceeds be used for — renovation, repairs, acquisition, business investment, etc.
• Credit check
• Background check
• Note and loan agreement — 1st mortgage
  This contains the language about whether junior liens are allowed.
• Mortgage verification — 1st mortgage
  The second will want to verify that the first mortgage payments have been made on time for the past 12-24 months.
• Property financials — P&L and YTD balance sheet
• 2-6 months bank statements
• Entity documents
  Articles, bylaws or operating agreement, and EIN
• Intercreditor agreement
  First and second lienholders complete an agreement to notify each other if the borrower defaults on either loan. If the borrower defaults on the second mortgage, the second lender will notify the first lienholder in writing.
• Exit strategy
  The proposed second lienholder wants to know how you'll pay off the loan before giving you money. We’ll talk about this in the next section. 

For more in-depth information, you can read our article, "What Are Hard Money Loan Requirements?"

Exit Strategies for Hard Money Second Mortgages

Before getting you into a hard money second mortgage, we want to know how you plan on getting out of it. There are three basic exit strategies with hard money second mortgages: 

1. Property Sale
2. Amortizing Loan Paid Down Over 24-60 Months
3. Refinance into Institutional Financing

Property Sale

If you plan to sell the property, it would be smart to connect the mortgage broker and/or hard money lender with your real estate agent to discuss the timing and expected list price. This way, the loan is written in conjunction with your expected sale date. 

For example, if you take a $200,000 cash-out second mortgage to renovate the property prior to selling, you'll likely only need a 12-18 month term with a 3-4 month interest guarantee (3-4 required payments), rather than a 5-year loan with a 12-month interest guarantee. 

Amortizing Loan Paid Down Over 24-60 Months

Some borrowers take out a smaller second mortgage ($200,000) that amortizes in 2-5 years.  

• $200,000
• 12.000%
• $9,414/mo (24-month term)
• $6,642/mo (36-month term)
• $5,266/mo (48-month term)
• $4,448/mo (60-month term)

FCTD doesn’t do many amortizing hard money loans. However, we have a large network of trust deed investors and mortgage lenders who are open to structuring a fully amortizing loan. 

Refinance into Institutional Financing

If the exit strategy is to refinance into an institutional loan, first check with bankers and mortgage brokers about commercial, government-backed loan programs. As we say, “We want to make sure we can get you out before we get you in.” 

Below are some of the most common institutional funding sources: 

• Fannie Mae and Freddie Mac Senior Housing Loans
• HUD-Insured Loans through FHA
• SBA 7(a) & 504 Loans
• Bank Loans
  Portfolio lenders may offer second mortgages, so you can pay off the hard money second while keeping an existing institutional first mortgage in place (at an ultra-low interest rate.)
• CMBS Loans
  Commercial mortgage brokers may have lending sources that offer second mortgages.  

Conclusion

If you're thinking about a hard money second mortgage for an assisted living facility, this blog post offered some general guidance for expected terms and requirements you’ll need to prepare. The first place to start is with the Note and Loan Agreement on your existing first mortgage to ensure it allows junior liens. Once that’s confirmed, start from the end: the exit strategy. Know how you intend to pay off the loan before you inquire about a second mortgage. From there, the rest of the conditions are fairly standard and easy to provide, especially if you’ve been in business awhile and have your documents in order.