How to Use Tax-Exempt Bonds to Finance Your Senior Living Project

How to Use Tax-Exempt Bonds to Finance Your Senior Living Project

Apr 03, 2024

With America’s Baby Boomer generation getting older and people living longer, the demand for senior living facilities is increasing exponentially. These facilities are important not only for the care they provide but also for enhancing the quality of life for seniors. However, funding these projects can be challenging because of the high costs involved. Tax-exempt bonds help finance multifamily rental housing projects, making affordable housing available for families with low to moderate incomes, including seniors. This approach allows developers to fund their projects through government incentives, helping to meet the increasing need for affordable and accessible senior housing.

NexGen Title Agency has closed numerous public and private bond-financed deals in the senior living space. We have the experience to facilitate a smooth and efficient closing in a complex transaction. This experience provides much-needed support to the attorneys representing the financial institution, the developer, and other involved parties, which helps keep legal fees in check for the developer/borrower.

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The senior living population is set for growth.

The upcoming demographic shift in the United States is undeniable—with the senior population seeing nearly record-breaking expansion. According to the U.S. Census Bureau:

  • The number of people aged 65 and older is anticipated to more than double from the figures recorded in 2014, achieving unprecedented growth by 2060.
  • The real surge is taking place as we speak in the current decade, from 2020 to 2030. During this decade alone, the senior segment will grow by an astonishing 18 million individuals, totaling 74 million seniors.
  • This expanding demographic will represent over 20% of the entire U.S. population, marking a considerable shift in the nation’s age distribution.
  • With more seniors, there’s a growing demand for various housing options tailored to their needs. These include multifamily senior apartments, continuing care retirement communities, independent living facilities, assisted living facilities, skilled nursing facilities, and memory care facilities.

Identifying Financing Options for Senior Living Facilities

Using tax-exempt bonds to fund senior living projects presents significant cost savings, making these facilities more affordable to build and run. This is because interest rates on these bonds are much lower—up to 30% to 35% less than regular loans. This is important for building facilities that cater to older people, who often need special features and staff and may have limited financial resources.

Also, tax-exempt bonds are a practical financial tool at all stages of a senior living project, covering land acquisition, construction, enhancements, or refinancing activities. Their lower interest rates save costs throughout the project’s lifecycle, even when the facility is operational and at full capacity. By strategically combining tax-exempt bonds with grants, investment capital, and, occasionally, local government contributions, a comprehensive funding model is established. This sustained financial advantage directly supports the affordability of living expenses for seniors, ensuring their access to better care and amenities.

The goal is to select the option that offers the most benefits given the project’s specific circumstances. Let’s take a look at two options below:

Option 1: Qualified 501(c)(3) Bonds

  • Threshold Requirement: To qualify for 501(c)(3) bonds, the senior living facility must be owned by a 501(c)(3) organization or a single-member LLC/partnership where all members are 501(c)(3) organizations.
  • Charitable Purpose: The facility must address three primary needs of seniors:

    • Age-Appropriate Housing: The housing should cater to seniors’ unique needs.
    • Housing-Related Financial Security: Efforts must be made to maintain residents who face unexpected financial challenges.
    • Health Care: Providing on-site health and nursing care or transfer agreements to other facilities/providers.

Option 2: Multifamily Exempt Facility Bonds

  • For-Profit Developers: Section 142(d) allows for-profit developers to issue tax-exempt bonds for senior housing and care communities that meet affordability requirements.
  • Long-Term, Nonrecourse Bonds: They allow for-profit developers to issue long-term, nonrecourse bonds at competitive high-yield interest rates for new construction or substantial renovation of seniors housing and care communities that meet affordability requirements.

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A Side-by-Side Comparison

While both options offer unique advantages, the terms and conditions for Qualified 501(c)(3) Bonds and Multifamily Exempt Facility Bonds vary based on the specific project requirements. For organizations focusing on non-revenue-driven motives and providing extensive senior care services, Qualified 501(c)(3) Bonds may be more appropriate.

Alternatively, projects aiming to reach a wider array of income levels and possibly include profit-driven models might benefit more from the versatility of Multifamily Exempt Facility Bonds.

Getting Started with NexGen

If you are an operator or developer of a senior living facility,  obtaining the right financing matters for both the project lifecycle and providing seniors the care they need. At NexGen Title Agency,  we are affiliated with a significant number of attorneys who are bond and tax experts and have helped many developers secure millions of dollars for senior living projects.

Our commercial title insurance services assist developers, borrowers, and their legal teams with a cost-effective means to process and close their transactions in a professional and team-like manner with security and efficiency.For more guidance on evaluating and applying these financing options to your project, contact us for specialized assistance.

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