Covenant Village Partners with HJ Sims for Historic Investment in Community’s Future
“Covenant Village will forever be impacted by the role HJ Sims played in the implementation of our Campus Master Plan. The Team of Tom Bowden and David Saustad deftly navigated the financing journey for a community that had not undertaken such a complex project in its 42-year history.
They delicately navigated the financing options with our partner bank—new to senior living. They were able to shift midstream from a tax-free bank bond issue to a conventional bank loan as the process matured. Moreover, it was their work with our capable and engaged (but conservative) board that was most impactful – it was not a coincidence we had been debt free for decades. Sims worked closely with our Board with both professionalism and earnestness which was pivotal to the project and financing moving forward.
Their counsel, discernment, and creativity were the spark for a successful closing. If you need a dedicated and determined advocate, there is none better than Sims!”
-Dale Melton, Chief Executive Officer of Covenant Village
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Partnered Right®
Covenant Village is a not-for-profit life plan community located in Gastonia, North Carolina that opened its doors in 1982. The community has 138 independent living apartments, 42 independent living cottages, and 71 health care units. Covenant Village is the industry leader in the market and enjoys a robust waiting list. The market position and demand create consistently high census for the community. However, like many LPCs, inflation through the pandemic impaired their margins. Fortunately, Covenant Village had completed a master planning process in 2021. The planning process culminated in an independent living expansion project that would add 21 villas homes, renovated dining amenities, updated community parking, exterior updates to cottages, and a new pavilion. Future phases of the master plan include potentially adding 14 village park homes. These projects will add the scale to preserve the margins necessary to continue reinvesting in its mission.
Covenant Village engaged Sims in 2023 to assist with securing financing for the master planned projects. Prior to beginning the financing process, Sims worked with Covenant Village’s management team to educate their Board on financing projects. This financing would be the organization’s first significant debt borrowing in decades, with Covenant Village only having a small loan outstanding of $1.3 million at the time. Given the large borrowing and the volatile financing markets, the Board was concerned about the potential effect the project could have on the existing community. Sims prepared several education sessions on potential plans of finance and their effects on the community, as well as working with the organization’s feasibility consultant to ensure the project met the Board’s expectations on financial performance. Ultimately, the Board felt comfortable moving forward with the entire master plan in the summer of 2023 based on these discussions.
Structured Right®
When reviewing the plan of finance options with Covenant Village, the management team and the Board indicated a preference for utilizing bank debt for the project. At the time the bond market for non-rated borrowers was volatile. However, the bank market was also turbulent following the collapse of Silicon Valley Bank. Nevertheless, bank debt represented the most efficient structure due to the ability to draw the debt down over time, the lower cost of capital, and foregoing the funding of certain reserves.
Sims began the bank solicitation process in the fall of 2023. The solicitation included national, regional, and local banks in the Gastonia area. Despite strong financial projections, many banks chose not to propose terms for the financing due to the ongoing challenges in the bank market. Because the project was key to the long-term success of the organization and needed to move forward, Sims also identified multiple alternative funding sources that could be tapped if needed. Covenant Village ultimately received three bank term sheets: two for a portion of the financing and the other for the full financing request, as well as a commitment to fund the future phase of the master plan. Sims also obtained a term sheet from an alternative investor. The proposal for the full request came from a local bank in Gastonia that was in the process of merging with a larger bank headquartered outside of North Carolina. Neither bank had experience lending to a not-for-profit entrance fee community. During the solicitation process, Covenant Village’s management team and Sims worked to educate the banks on the organization’s structure and the proposed plan of finance. The banks were ultimately able to get comfortable and provided an attractive proposal to finance the projects.
Upon selecting a banking partner, Sims and Covenant Village began to review conduit issuer options. In North Carolina, not-for-profits can utilize the Medical Care Commission (MCC) or use out of state issuers, including the Public Finance Authority (PFA). Sims reviewed the benefits and considerations of each issuer with the organization. Covenant Village decided to utilize the PFA due to their flexible closing timeline. Further, since the bank would not benefit from an exemption from state income taxes (which can only be achieved by using an in-state issuer), Covenant Village would not receive a lower cost of capital from utilizing the MCC in this instance.
Executed Right®
With the bank and conduit issuer selected, Covenant Village began the due diligence and documentation process to close the loan. The selected banking partner had limited experience with tax-exempt debt and Sims worked with Covenant Village’s legal team to assist with getting the bank comfortable with the structure. However, after completing the bank’s due diligence process, they found that they would not be able to provide the loans on a tax-exempt basis. This change increased the cost of capital significantly. Covenant Village and its Board expressed concerns over this change and asked Sims about other options. Fortunately, after lengthy discussions with the banks, they agreed to honor their previous pricing even though the loans would be provided on a taxable basis which was indicative of the partnership the banks wanted to establish with Covenant Village.
The banks and Covenant Village executed a revised term sheet and began documenting the loans. Since the debt would be taxable, a conduit issuer was not needed which would simplify the closing process.
Financed Right®
On July 18, 2024, Covenant Village closed on the $39 million financing. As mentioned, the bank honored their tax-exempt pricing, which resulted in a low cost of capital to Covenant Village in the current market. The bank provided a 5-year term, with an automatic 5-year renewal if the loans are not in default. The organization is planning to enter into a forward starting swap upon receipt of certain approvals in the development process. The current indication for the forward starting swap on the long-term debt is in the mid 4% range, which is very attractive relative to other non-rated peers and comparable to credits with investment grade ratings.