September 23, 2019

Custom Fit for Borrowers

The Gentlemanual describes the process of procuring a bespoke suit as follows: “A unique, perfectly tailored suit is not an immediate thing… to get a perfect bespoke suit; you will have to work (with your tailor, of course) for it.”

The same is true for medical real estate financing. A borrower can get a loan off the rack with a predictable term, repayment structure, and basic elements. But it is rare that these standard lender offerings will provide features that are completely in sync with the borrower’s and related operating entity’s complex goals and objectives. Most often, there are some adjustments that should be made to make that financing fit really well. 

CMAC has found that, more often than not, medical borrowers tend to go to banks and accept an “off the rack” financing proposal that might work fine for some other businesses but could definitely use some tweaking to make it a much better physician-owned real estate fit. 

Well, that’s changing. CMAC Partners, the physician’s financial tailor, is reporting significant interest in creating bespoke financing across the country, which is giving physicians a better fitting product than ever before. Here are three adjustments that seem the most frequent:

  1. Cash is king: Strong cash flow from a real estate investment is often top of the list for borrowers. CMAC has therefore been tasked on a number of recent financings with minimizing the monthly payment during a refinance process. What would be the off the rack option? It would be a 20 or 25-year amortization (some of the longer repayment structures typically available on commercial financing). CMAC has gone a step further with two recent closings with unusually long 30-year amortizations for medical borrowers in Bend, Oregon and Denver, Colorado. Additionally, CMAC has been able to negotiate and close upon two recent refinance facilities that allow the real estate debt to sit interest only for 2 years – a Urology group in Tennessee and an Orthopedic group in Oklahoma. For those groups, minimizing the equity in the building to allow for more affordable future partner buy-ins was important – these custom repayment structures accomplished that beautifully. 
  2. Taxes matter: A key goal for many borrowers is to mitigate or eliminate personal guarantees and CMAC accomplishes this routinely for its borrowers. However, a cardiology group in Colorado had a more complex objective. They wanted to minimize personal guarantees, but their CPA had informed them that eliminating the guarantees would have tainted the “Qualified Non-Recourse” status of the loan and would have resulted in a sizeable taxable event for the physicians in varying degrees. Having consulted with the borrower’s advisors, CMAC determined the minimum level of guarantees to avoid the taxable event altogether. CMAC then encouraged lenders to allow this minimum level to be selected by owners if they wished, or choose any amount of guarantee above this as needed to avoid the taxable event. Each owner had only to guarantee the minimum necessary percentage with different owners guaranteeing different amounts. Truly a custom structure and it fit this group like a tailored glove. 
  3. Planning for future acquisitions: CMAC has now arranged several “reducing revolver” facilities for borrowers who are very active in real estate acquisitions. One such loan this year refinanced multiple properties owned by one borrower. Anticipating the eventual addition of some properties and the sale of others, using 1031 exchange, the Borrower wished to avoid repeated re-negotiations and additional financing costs. Under this structure, the Borrower will be able to draw up to the aggregate limit of $33 million but only pay interest on the amount actually borrowed. The only collateral is the ever-changing pool of properties.

These are just three of hundreds of unique financing structures that I have negotiated on behalf of my clients. With an ever-evolving repertoire of loan features that can be integrated into a real estate loan and with the right fiscal tailor, your loan should fit you like a glove and put you in a better financial position than was thought possible.