HJ Sims Finds Low Cost-of-Capital for Lutheran Village at Miller’s Grant Despite High-Rate Environment
“HJ Sims has once again navigated the team to a successful financing for LSMMD communities. The Lutheran Village at Millers Grant expansion project was seemingly besieged with challenges from needing a multi-bank solution, LTV appraisals, needing MDOA approval for a non-resident bank, and a shortened time frame necessitating a close by calendar year end. Each obstacle was addressed quickly and professionally keeping the team focused and together as we worked through this effort. I cannot thank Aaron Rulnick and Brady Richarson enough for all their efforts and guidance throughout the effort.”
– Steven D Powell , V.P. of Finance & Technology
Partnered Right®
Lutheran Village at Miller’s Grant (“LVMG”) is a not-for-profit, single-site life plan community located in Ellicott City, MD. The community is a subsidiary of the parent-organization Lutheran Social Ministries of Maryland “LSMMD”, which operates another life plan community located in Westminster, MD, Carroll Lutheran Village. HJ Sims has had a longstanding relationship with LSMMD, and all of its subsidiaries, dating back to 2004. Through multiple advisory and financing engagements, HJ Sims has forged a relationship with LSSMD over the last two decades, establishing a partnership which has helped the organization realize the growth of its mission; master plans; and overall strategic positioning within the Maryland market. When the organization was exploring the development of a new life plan campus in 2014, HJ Sims helped to structure and finance the new 2start-up campus, to be named Lutheran Village at Miller’s Grant.
Today, Lutheran Village at Miller’s Grant is a premier life plan community in Howard County and the greater Maryland region. The campus is the newest life plan community within the market area, and has continued to strengthen its competitive position within the market via various capital investment, innovative activities, and community engagement.
Since the development of Lutheran Village at Miller’s Grant in 2014, the master plan has contemplated a second phase of construction to grow the community’s independent living inventory and provide additional healthcare offerings to residents. Over the years, the second phase has altered its course; however, the goal of the phase has remained in-tact. In 2023, the second phase was finalized and poised to offer several levels of care including forty-three independent living units; four assisted living units; twenty memory care units; four skilled nursing units; as well as a new dining venue and a large performing arts center. With plans for the expansion settled, HJ Sims was once again engaged to source the financing and help the project come to fruition.
Structured Right®
HJ Sims began crafting a formal plan of finance for the expansion project in June of 2023. At that time, the bank lending environment was still experiencing aftershocks related to the historic collapse of Silicon Valley Bank, which caused numerous institutions to tighten lending standards or cease lending efforts altogether. Tightened credit markets were coupled with higher interest rates, influenced by the Federal Reserve, perceived economic headwinds, and deteriorating credit quality in the broader senior-living sector. Despite a difficult bank lending environment, HJ Sims adamantly pursued bank capital as an integral part of the financing structure. A bank vehicle would provide cost-of-capital relief in a higher yield environment, and complement the several phases of construction that were needed to complete the project via a draw-down solution. With a tailored plan of finance, and strong business case for Lutheran Village at Miller’s Grant, HJ Sims solicited numerous lending institutions for financing proposals.
Sims received numerous term sheets and paired two banks together to finance the entire project with $76.5 million in committed bank capital. Given the amount of bank capital HJ Sims had sourced, the plan of finance evolved into three distinct tranches: an entrance fee tranche would be established allowing LVMG to deleverage $22.5 million of the financing with initial entrance fees paid by the project’s new independent living residents; a tranche would be established to finance the proposed performing arts center, which provided a separate draw schedule and completion date for the balance of the project, allowing LVMG to save on funded interest; and a final tranche would be established to fund the remaining proceeds needed to complete the entire project.
Given the size of the financing, the principal amount of bank debt outstanding would eventually allow HJ Sims to amend LVMG’s existing Master Trust Indenture (“MTI) which secures the outstanding 2014 bonds issued for the initial start-up financing. The strategy was to draft an amended MTI, which would give LVMG a more flexible covenant structure reflecting its credit profile as a mature life plan community. Since the bank debt was originally on a draw-down basis, there would be a “springing MTI” which would effectuate at a later date, when the principal amount of bank debt outstanding became the majority of LVMG’s debt, over the 2014 bondholders.
Executed Right®
With both banks secured by a first mortgage tied to LVMG’s campus, a loan-to-value requirement was imposed by one of the banks. As HJ Sims worked with both banks to receive formal credit commitments in mid-November, an appraisal required by one of the banks indicated a vastly lower value than what was expected and created a financing gap since one of the banks was limited by the value assigned to LVMG. Typically, life plan communities are valued based upon the income capitalization approach, which is greatly influenced by capitalization rates. In short, a higher interest rate environment drove up capitalization rates; ultimately, lowering the valuation of LVMG’s campus and its overall operations. HJ Sims provided an extensive review of the appraisal, and worked with the appraiser to revise several assumptions utilized throughout the report which led to a material increase in the appraised value of LVMG; though, the adjusted value was not enough to close the entire loan-to-value gap. Two options were explored to address the LTV gap: utilize LVMG’s strong cash position to increase the amount of equity and/or cash collateralize a portion of the bonds; or obtain approval by the other banking partner to subordinate their position relative to the bank imposing the loan-to-value requirement. After strategizing with LVMG, it was decided to pursue the subordination structure. LVMG wanted flexibility with its cash position and did not want to tie up any liquidity in the near-term. HJ Sims was tasked with negotiating a subordination of the bank providing the entrance fee debt. After numerous discussions, the entrance fee bank agreed to subordinate their position relative to the other bank; however, there were two conditions 1) the entire $22.5 million entrance fee tranche had to be funded at closing; and 2) the financing had to close in 2023. HJ Sims had to pivot the entire plan of finance and close the transaction in approximately five weeks, while navigating the holiday season.
After crafting the new plan of finance, which contained the same three tranches of debt but with the entrance fee tranche subordinated, the existing MTI had to be amended to effectuate the subordination. With approximately $53.9 million of 2014 bonds outstanding, the plan of finance now had to close on approximately $54 million, before the end of the year, to amend the existing MTI and allow for the subordination of bank lending the entrance fee debt. This financing task was processed concurrently with the need for new sets of financing documents; approvals from the Maryland Department of Aging to allow LVMG to have deposits with one of the out-of-state banking partners; a feasibility study requirement imposed by the original 2014 financing, to incur additional indebtedness; a delayed site permitting process which required additional agreements with the banks, in order to give them comfort to advance proceeds at closing; and an approval from an issuer which also required the deal to close in 2023.
In spite of the nuances and various components added to the financing, HJ Sims helped to coordinate all of these items with the broader working group, ensuring that LVMG would receive an efficient financing structure and low cost-of-capital for this milestone project.
Financed Right®
On December 28th, with one business day left in the 2023 calendar year, the financing closed with an initial draw on all three tranches totaling $54.05 million (to amend the existing MTI). The financing was complimented with a swap structure, via four swaps, which locked the interest rate for the project’s construction draws in addition to the amount advanced at closing. The financing closed with a blended cost-of-capital at 4.32%, a 30-year amortization, and a 10-year commitment on the two long-term tranches of debt. The entrance fee debt closed with a 5-year term, with a swap allowing for a payoff in year 3 anticipating a fast project fill-up. The initial $54.05 million will be invested with a trustee, and drawn over time, with the remaining portion of the financing to be drawn once the initial funds are depleted. The plan of finance allows Lutheran Village at Miller’s Grant to successfully realize the second phase of its master plan with a financing structure that allows a draw-down feature, a low cost-of-capital, and lifted the financial viability of the project – truly Financed Right.
For more information, please contact:
Aaron Rulnick
301.424.9135
Brady Richardson
443.340.9980