What Is Happening? What Will Happen?

On December 19, 2007, Herbert J. Sims closed a $457,075,000 financing for a start-up CCRC on behalf of Hebrew SeniorLife. This is the largest CCRC ever underwritten and structured exclusively with bank financing.

In today’s market, the size of this deal would prevent it from being done due to a number of factors that have occurred over the past 18 months:

1. Most European banks have exited the senior living industry.
2. Up front and annual fees have tripled.
3. Renewals of letters of credit and loan extensions often require substantial pay-downs.
4. Missed covenants result in higher fees.
5. Equity requirements of 25% - 35% are common.
6. Loan to value requirements have become more onerous.
7. Bank participations rarely exceed $25 million on any single transaction.

We are often asked, “When will the banks go back to the good old days of 2007?” While we would not count on that happening, we are starting to see some activity among the banks that we hope would return us to the banking environment of the first half of 2008.

There are positives to the current banking environment:

• Banks are making money – $7.6 billion in the first quarter of 2009.
• Banks have raised $40 billion in new capital so far in the second quarter.
• Banks are positioning themselves to pay off TARP (U. S. Government) loans as soon as possible.
• Regional and local banks have recognized that the current environment has provided an opportunity to develop new business with many strong, local senior living providers.
• Changes in legislation have broadened the application of the Federal Home Loan Bank program as well as bank qualified bonds to allow banks with lower credit ratings to do business with senior living providers.

However, many banks still face difficulties:

• While banks were profitable in the first quarter of 2009, their profits were 60% lower than in the first quarter of 2008.
• The number of “problem banks” on the FDIC list rose from 252 at the end of the year to 305 as of March 31st.
• Despite an additional $60.9 billion set aside as reserves for losses, the ratio of reserves to non-current loans fell from 74.8% at the end of the year to 66.5% at the end of the first quarter – the lowest percentage in the past 17 years.
• Real estate comprises 84% of the $59.2 billion loans delinquent more than 90 days in the first quarter.