Exploring the Spectrum of Alternative Commercial Financing Solutions

As a healthcare real estate broker, I help clients find and acquire suitable properties for their medical practices, clinics, hospitals, or other healthcare facilities. One of the most challenging aspects of my job is securing adequate financing for these transactions, especially in the current market conditions. Traditional lenders, such as banks and credit unions, have become more stringent in their underwriting criteria and loan terms, making it harder for many healthcare providers to qualify for conventional loans. That is why I often explore alternative sources of financing to help my clients achieve their goals. While this article will delve deeper into alternative financing, understanding that what is suitable for each investor will vary according to what provides the most suitable terms. 

Private money lenders are individuals or organizations that provide money to investors, usually for real estate loans. This type of lending is less regulated than other sources of loans, such as banks, and offers more flexibility and speed in the lending process. Private money lenders can lend based on the value of the property, the borrower’s experience, and the potential return on investment, rather than on the borrower’s credit score, income, or debt-to-income ratio. Private money lenders can also offer customized loan terms, such as interest-only payments, balloon payments, or deferred payments, to suit the borrower’s needs and cash flow.

Private money lending can be a viable option for healthcare real estate investors who need quick and easy access to capital, who have a strong track record of successful projects, who have equity in the property or other assets to pledge as collateral, or who have a clear exit strategy to repay the loan. However, this lending type also comes with some drawbacks, such as higher interest rates, fees, and points, shorter loan terms, and higher risk of default and foreclosure. Therefore, private money lending should be used with caution and due diligence, and only by experienced and savvy investors who understand the risks and rewards involved.

Mezzanine financing is a hybrid form of financing that combines features of debt and equity. It is usually used to fund growth prospects, such as acquisitions and expansion of the business. This financing can be structured either as preferred stock or as unsecured debt, and it provides investors with an option to convert to equity interest in the case of default or under certain conditions. Mezzanine financing is subordinate to senior debt, but senior to pure equity, in the capital structure of the company.

Alternatively, mezzanine financing can be an attractive option for healthcare real estate investors who need to bridge the gap between senior debt and equity, who want to leverage their existing equity and increase their returns, who want to preserve their ownership and control of the company, or who want to take advantage of the tax benefits of interest deductibility. However, mezzanine financing also has some disadvantages, such as higher cost of capital, higher risk of dilution and loss of control, and higher complexity and legal fees. Therefore, mezzanine financing should be used with careful planning and negotiation, and only by sophisticated and well-capitalized investors who can meet the obligations and covenants of the mezzanine lenders.

SBA loans are business loans that are guaranteed by the U.S. Small Business Administration (SBA). These loans can be used by businesses to cover startup costs, expansions, real estate purchases, or a wide range of other business expenses. Because SBA loans are guaranteed by a federal agency (the SBA), they are lower risk for lenders and often offer more favorable terms and conditions than conventional loans, such as lower interest rates, longer repayment periods, and lower down payments.

SBA loans can be a beneficial option for healthcare real estate investors who qualify for the SBA’s eligibility requirements, which include being a small business as defined by the SBA, operating for profit, having a sound business purpose, and demonstrating a need for the loan. SBA loans can help healthcare real estate investors obtain financing that they might not otherwise be able to access, and can also provide counseling and education to help them start and grow their business. However, these loans also have some limitations, such as the availability and capacity of the SBA’s lending partners, the complexity and time-consuming nature of the application and approval process, and the fees and collateral requirements that may apply. Therefore, SBA loans should be used with thorough research and consultation, and only by eligible and responsible investors who can comply with the SBA’s loan program requirements and regulations.

Property Assessed Clean Energy (PACE) financing is a type of financing available to make energy efficiency upgrades and renewable energy improvements at a commercial or residential property. This type of financing is repaid as an assessment on the property’s regular tax bill, and is processed the same way as other local public benefit assessments. PACE financing is attached to the property rather than the owner, and the repayment obligation may transfer with property ownership if the buyer agrees to assume the PACE obligation and the new first mortgage holder allows the PACE obligation to remain on the property.

Financing with a PACE loan can be a beneficial option for healthcare real estate investors who want to improve the energy performance and sustainability of their properties, who want to lower their operating costs and increase their property value, who want to access long-term and low-interest financing without a large upfront payment, or who want to take advantage of the incentives and rebates offered by various PACE programs. However, this type of financing also has some limitations, such as the availability and eligibility of PACE programs in different jurisdictions, the approval and consent of the existing mortgage holders, the disclosure and transferability of the PACE obligation to the potential buyers, and the impact of the PACE assessment on the property tax bill; therefore, it should be used with thorough research and consultation, and only by informed and responsible investors who can comply with the PACE program requirements and regulations.

REITs are companies that own, operate, or finance income-generating real estate and are modeled after mutual funds, and pool the capital of numerous investors. This makes it possible for individual investors to earn dividends from real estate investments—without having to buy, manage, or finance any properties themselves. Most REITs are publicly traded on major securities exchanges, and investors can buy and sell them like stocks throughout the trading session. These funds typically trade under substantial volume and are considered very liquid instruments.

REITs can be a convenient and profitable option for healthcare real estate investors who want to diversify their portfolio and gain exposure to the real estate sector, who want to receive a steady income stream from dividends, who want to benefit from the capital appreciation of the underlying properties, or who want to enjoy the tax advantages of REITs, such as the exemption from corporate income tax if they distribute at least 90% of their taxable income to shareholders.

Each of these financing options has its own advantages and disadvantages, and requires careful analysis and evaluation before making a decision.