HJ Sims successfully completes an approximate $51.45 million transaction for a start-up rental community in Delray Beach, Florida
“This innovative structure demonstrated that Section 142(d) financing is a very viable alternative for senior living communities, provided that they are structured appropriately. The efficient structure that HJ Sims and Tuscan Gardens co-crafted to achieve a balance between borrower and bondholder needs was an absolute win for us all by creating greater financial stability for the community and increased collateral value for the bondholders without undue operational or financial stress as has appeared to be the case with previous 142(d) structures.”
– Larry Pino, CEO of Tuscan Gardens
Tuscan Gardens of Delray Beach (the “Community”) is a new rental assisted living and memory care community that will consist of 138 total units, including 88 assisted living units and 50 memory support units. This includes 16 catered assisted living units, which are assisted living units specifically marketed to residents who are more independent but would like the safety and security of an assisted living facility. The Community will be located on 7.57 acres on an in-fill site off of Sims Road just north of Atlantic Avenue, the main east/west thoroughfare in Delray Beach, which is located in Palm Beach County, Florida. All of units are ‘qualified residential rental units’ within the meaning of section 142(d) of the Internal Revenue Code of 1986. The Community is owned by affiliates of the Tuscan Gardens Group, a developer and owner of senior living communities. The project marks the third start-up community by Tuscan Gardens and their sixth community that is under common ownership. The location is situated in a very strong market where there are over 41,000 households age 75 or older in the primary market area.
Tuscan Gardens had acquired the site in December 2017 due to a deadline with the seller even though the project had not received all of its development approvals and permits to commence construction. Given the strong market demographics, Tuscan Gardens did not want to lose control of the land and was able to secure financing to take down the land to allow for more time to complete its development milestones. This allowed for the project to commence site work while the final structure of the bond issue for the construction financing could be finalized and to lock in current market construction pricing.
Given some of the recent struggles of some other start-up rental community bond issues, Tuscan Gardens sought the guidance of HJ Sims to help create a unique bond structure that would help minimize the amount of debt issued for the project and provide an efficient capital structure during the construction and lease-up of the community. The goals of the financing were to: 1) Implement a structure to minimize debt service, given that non-rated fixed rate bond issues typically require all the proceeds to be financed upfront; 2) ensure that the adequate amount of reserves were funded through construction and lease-up; and 3) create the ability for a refinancing of the bond issue as soon as the project reached stabilization, which is expected in the feasibility study to occur in 2023 (5 years from closing).
Tuscan Gardens provided for equity in the transaction of $4.7 million of cash and $1.65 million of deferred fees, including a liquidity support agreement of $1 million to provide reserves toward the Community.
Sims collaborated with bond investors to structure a transaction that allowed for the utilization of step-coupons for the multiple series of bonds, which would have an initial lower coupon during construction and lease-up and then step up to a more traditional high yield coupon at the end of that period, which encompassed a total of 42 months. The bond issue provided for capitalized interest for the entire 42 month period and for appropriate working capital reserves for start-up losses.
To accommodate the lower coupon during the initial period, yet also meet the yield parameters of the bond investors, a mandatory tender feature was installed to require Tuscan Gardens to refinance or redeem the bonds no later than 2029 (11 years from closing). The bonds also feature an optional redemption period beginning in 2023 to provide for a 6 year window, when the bonds could be refinanced depending on both capital market conditions and the financial performance of the Community. The incorporation of these step-coupons across all series of bonds resulted in $4.9 million in less par issued and $7.2 million in debt service savings through the mandatory tender in 2029.
Sims successfully closed on the $51.45 million bond issue on November 30th, 2018 and the structure had three series of bonds, including $11.6 million of subordinate bonds. The senior bonds were structured to provide for approximately 70% loan to cost, which resulted in a forecasted debt service coverage ratio of 1.68x.
For more information on how Tuscan Gardens Delray Beach was Financed Right® by HJ Sims, please contact: