Leveraging the Bank RFP Process to Optimize the Outcome for Pre-Development Capital
“Any time an organization undertakes a significant expansion of its mission with significant financial implications it is wise to engage partners who understand the business complexities and impact to the community. The professionals at HJ Sims offer advice, counsel and they help structure deals that enable organizations to preserve as well as expand their mission to serve people. It is clear in working with Aaron, Tom, David, and everyone at Sims that they share the commitment to serve over simply putting a deal together.”
– Jeff Weatherhead, President/CEO
Partnered Right®
Plymouth Harbor is a not-for-profit senior living provider located in Sarasota, Florida. The community consists of 215 independent living units, 30 assisted living units, 30 memory care units, and 51 skilled nursing units. The community has been located right on the Sarasota Bay since 1966, when it first opened to residents. The community has expanded over time, most recently in 2015 with an assisted living and memory care project.
However, due to strong demand for larger units, Plymouth Harbor had combined independent living units over time causing ILU inventory to decrease from 343 ILUs to 215 ILUs. As a result, Plymouth Harbor has been planning a major independent living expansion project to ensure the community continues to have the scale to remain competitive in the Sarasota market. The project is anticipated to include 152 new units with several new community spaces and amenities.
Plymouth Harbor’s debt burden had historically been very modest and they had not typically brought in investment banking partners to assist when they did borrow. But given the importance of the project to the continued long-term success of the organization, as well as the amount of predevelopment costs that would need to be incurred to reach permanent financing, Plymouth Harbor selected Sims to educate the board on large-scale expansion projects as well as to assist with securing a predevelopment loan to preserve the organization’s existing liquidity.
Structured Right®
Since the predevelopment loan would only be outstanding for a short period of time (less than 3 years), Sims initially suggested working with Plymouth Harbor’s existing lender to secure a loan. Plymouth Harbor had approximately $27 million across two series of outstanding loans with this lender at a very low, fixed cost of capital (synthetically fixed with a swap). Sims worked with Plymouth Harbor to request a $17 million predevelopment loan from the existing lender on a tax-exempt basis. While the existing lender let us know that they could provide the full loan request of $17 million, they indicated that they wouldn’t be able to provide the loan on a tax-exempt basis. Given high short-term rates at the time due to the Federal Reserve’s rate hikes, lending on a taxable basis (“Option 1”) meant that the cost of capital would be considerably higher. Further, the existing lender indicated that they wouldn’t allow another lender to provide the predevelopment loan.
Sims ran several plan of finance scenarios to determine if it made sense to refinance the organization’s existing debt so that the predevelopment loan could be provided on a tax-exempt basis (“Option 2”). The analysis showed that borrowing the predevelopment loan on a tax-exempt basis produced economically equivalent results relative to Option 1, despite the inherent need to refinance the organization’s existing low-cost debt at higher interest rates. The results were due to 1) the ability to terminate the existing swaps, which now represented a positive value to Plymouth Harbor due to increases in interest rates, to pay down debt and 2) the lower cost of capital on the predevelopment loan due to borrowing on a tax-exempt basis.
Based on the results of the analysis, Plymouth Harbor decided to solicit banking proposals to refinance the organization’s debt and provide predevelopment capital. Sims ran the bank solicitation process on behalf of Plymouth Harbor, soliciting several banks that would likely have an interest in the opportunity. Plymouth Harbor ultimately received multiple competitive proposals. Each proposal showed that despite the higher interest rates on the refinancing debt, projected debt service was actually lower than Option 1 due to lending the predevelopment loan on a tax-exempt basis. However, the proposals would require Plymouth Harbor to move its existing banking relationship (including deposits and operating accounts) to the new banking partner, which would take a considerable amount of time and resources from management. The upcoming permanent financing also meant that there would likely be a request for future bank financing that may necessitate a new banking relationship. Plymouth Harbor wanted to avoid transferring their banking relationship for the predevelopment loan and again in two to three years for the permanent financing.
Based on this feedback, Sims and Plymouth Harbor went back to Plymouth Harbor’s existing lender to request that they lend the predevelopment loan on a tax-exempt basis. The bank ultimately agreed to lend on a tax-exempt basis due to pressure from management as well as the potential loss of its banking relationship with the organization.
Executed Right®
With the existing lender providing the predevelopment loan on a tax-exempt basis, Sims pulled together the working group to begin the tax-exempt issuance process. The legal documentation process was straightforward due to working from the same documents from the last financing with the lender. Moreover, the issuer approval process included multiple levels of review by the County. Sims worked with Plymouth Harbor to prepare the application materials as well as to attend and present at the approval meetings. The community successfully received all of their required approvals by mid-October 2024.
Financed Right®
On October 31, 2024, Plymouth Harbor and its existing lender closed on the $17 million predevelopment financing. Over the next two to three years, Plymouth Harbor will work to secure entitlements, presales, and a GMP contract to secure permanent financing.
For more information, please contact:
Tom Bowden
804.613.3280
Aaron Rulnick
203.418.9008