Second Mortgage Financing Funds Recapitalization and Expansion in Arizona
Heritage Village Assisted Living (“Heritage Village” or the “Community”) is a 96-unit, 138-bed assisted living and memory care community located in Mesa, Arizona. Acquired in 2017 by Madison Realty Companies (“Madison”), the community consists of six custom-built assisted living and memory care homes and a medical office building.
Based in Pasadena, California, Madison is a private real estate firm with expertise in acquiring income producing real estate. Madison’s primary seniors housing strategy focuses on acquiring undervalued properties and expanding/upgrading those properties to add value and increase cash flow. Madison and its affiliates own 23 assisted living and memory care properties located primarily in the southwest and western states.
Heritage Village is operated by SAL Management Group, LLC (“SAL”). SAL operates 26 communities with over 1,200 assisted living and memory care units. SAL also currently operates all nine of Madison’s communities including three properties in the greater Mesa, AZ market.
Madison was seeking to expand Heritage Village with the development of two additional assisted living and memory care buildings each consisting of 16 units and 23 beds. To facilitate the expansion, Madison was searching for a new lender to refinance the Community’s existing senior loan and repay a third-party note.
HJ Sims partnered with a national bank (the “Bank Partner”) to propose a high-leverage financing solution to fund the expansion and recapitalize existing debt, with the Bank Partner providing a first-mortgage loan and HJ Sims funding a subordinate second mortgage loan (the “Sims Loan”). Collectively the first- and second-mortgage loans funded i) the repayment of an existing senior loan, ii) repayment of a third party note, iii) the development of two additional assisted living and memory care buildings, and iv) provided required reserves and covered transaction costs associated with the financing.
The combined first- and second-mortgage loans proved to be an attractive option as it provided higher leverage compared to a conventional bank loan, allowing Madison to avoid raising unsecured subordinate debt at a higher cost of capital or diluting its ownership in the property from taking on additional equity partners. The Sims Loan was structured with a one-year interest only period and amortizes based on a 25-year scheduled thereafter, allowing Madison to limit debt service expense over the near-term as it completes the expansion project. Additionally, the first-mortgage loan includes provisions to fund an “Earn-out” once certain thresholds are met, allowing Madison to access equity in the Community to pursue other opportunities.
A new entity, Madison Funding I, LLC (the “Sims Issuer”), was formed to issue taxable bonds to fund the Sims Loan. HJ Sims successfully sold $5.115 million of subordinate taxable bonds to its high-net-worth accredited investors.
For more information on how Monarch Financing IV was Financed Right® by HJ Sims, please contact: