Sims Combines Draw-Down Bonds and Preferred Equity for Start-Up Rental
Cypress Point is a new construction rental senior living community to be located in Fort Myers, Florida. Once complete, the project will consist of 134 units, which includes 96 assisted living units comprising 102 beds, and 38 memory care units. The project includes the construction of three structures connected by corridors totaling approximately 105,000 square feet on a parcel of approximately five acres. The assisted living portion of the project will be located in three-story building. The memory care community will be a single-story structure containing all private room. The third building, located between the Assisted Living Community and the Memory Care Community, is planned to be connected via interior corridors and will contain the main entry, library, dining rooms, activities areas, exercise area, beauty shop, kitchen and administrative offices.
Cypress Point marks the fourth senior living community owned by Omega Communities, a for-profit company based in Birmingham, Alabama. Omega Communities specializes in the development of faith-based senior living communities in affinity relationships with well-established sponsoring churches. Omega Communities is the majority owner of The Springs of South Biscayne located in North Port, Florida, The Fountains of Hope located in Sarasota, Florida, and River Highlands located in Hoover, Alabama, all of which were financed through HJ Sims.
As is common with start-up projects, Cypress Point was constrained on its total borrowing capacity based on projected future cash flows from the project. Also, additional equity or subordinated debt was needed to make the project more attractive to bond investors on loan to cost basis. HJ Sims worked with Omega to structure an efficient financing to reduce negative arbitrage and total borrowing costs.
HJ Sims was able to place senior tax-exempt bonds issued on a draw-down basis with an institutional investor. By allowing the borrower to draw funds as needed during construction, as opposed to paying interest on the full par amount of the bond issue at closing, the draw-down structure provides significant interest savings during construction when compared to traditional bond financing structures. In addition, the senior bonds were structured with a debt service reserve which is funded at an amount equal to six months of interest, as opposed to a full year of maximum annual debt service, which further reduced total borrowing costs, providing additional savings in annual interest expense.
The savings from the draw-down feature and the smaller debt service reserve fund provided additional debt capacity, allowing HJ Sims to structure $3 million of preferred equity in the form of subordinated taxable bonds sold to Sims’ accredited retail investors.
The Series 2016 draw-down bonds were issued in an amount not to exceed $27.350 million. The draw-down feature of the bonds, along with the smaller debt service reserve fund, reduced overall borrowing costs by approximately $3.25 million, saving the project approximately $235,000 in annual interest expense.
The efficient structure of the senior bonds provided capacity for HJ Sims to structure and sell $3 million of preferred equity to its extensive accredited retail investor base. The preferred equity provided the funds needed to fill the gap in the capital stack between the senior debt and Omega’s equity investment, allowing Omega to maintain its capital budget for the project and limit the need for the borrower to raise additional equity.
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