Q&A Highlights

Transcripts

Today we're joined by Pace Loan Group CEO Ralph Golberstein and Peter Grabell, Managing Director and Head of production at Pace Loan Group. We're going to break down how C-PACE helps one of our most prolific asset classes. From filling financing gaps to working alongside multiple lenders when a single source just isn't enough. C-PACE is becoming a central part of the senior housing capital stack.

Peter Grabell, Head of Production at PLG. Just give us a quick background and sort of, you know on yourself, your history, how you kind of came to be at PLG. Sure. So I have been in commercial real estate all my life and spent about 12 years in the CMBS world, starting in the late 90s. And I was presented with a PACE opportunity in 2015.

Nothing about the product, but I thought, this sounds pretty cool. So I figured, let me take a flyer and get into it. I went through two acquisitions. My original PACE shop was acquired by another firm that was then acquired by a large regional bank. I then left to go to another private PACE originator for a couple of years, and we had all crossed paths at conferences, and then one of my former employees joined.

You joined PLG and we were we were in touch quite a bit. He said, yeah, you know, these are just great guys. These are just great people. And you know that especially, you know, the further I've gotten into my career, the more important the people become. Not just the dollars and cents, not just the paycheck. So having, I think, such a, such a collegial and collaborative work environment really was a big draw for me to come to PLG.

Yeah. And I remember meeting you for the very first time in 2017, in Denver at the PACE Nation Conference, where I didn't know anyone. I was like, oh, here's a guy in the Starbucks line, Peter Grabell. Yeah, it's kind of fun to watch it come full circle. And, you know, whatever it is. I'm seven, eight years later that you're part of the team and, you know, thanks.

We're going to talk today about senior living as an asset class and its utility with C-PACE as a financing source. We have it's historically always been one of our top three asset classes. As a firm dating back to 2017, our top three have always been senior living, hospitality, and market-rate multifamily. And this is a really interesting you want to think about.

We have a ton of use cases and excited to have you here talking about senior living for C-PACE. Thanks Rafi. And it's a phenomenal time for this sector

because it just has a lot of tailwinds right now with more capital coming into the business and of course, in ever increasing demand. So it's a great time to be in the industry and lending into that industry.

Why do you. I mean, I have my opinion and he probably has his, but why do you think C-PACE lends itself so well to senior living? The reason I think it lends itself so well to senior living is, number one, there's still hesitancy of conventional senior lenders to lend into the space because it is a very special use and you need very specific expertise to run a senior living facility.

So there are still banks out there that are reluctant to lend into that sector. So it creates an a financing gap that PACE helps fill. That really would be the primary driver. I think something that I've observed just about our own book is on the senior living side. When we think about the capital stacks, it's been a lot of bank plus PACE, but also a lot of credit Union plus bank, which I think is is just an interesting nuance that credit unions who have a different mandate generally than banks, tend to be pretty positive toward this space.

I mean, the last deal we just closed in, not the last deal, but a deal we closed recently with a credit union in Oregon, the Cedar Brook Senior Living deal. Do you want to talk about that deal a little bit, kind of how that came together and what it looked like? Sure. So that deal for us was about a 25, $26 million investment in the project.

The alternative was for the sponsor to go out and get secondary financing, mezzanine financing, basically at twice the rate of PACE financing. So it really brought economic strength to the deal, financial strength to the deal that made it viable to proceed. That was a that was a credit union. I believe that we paired. That was pretty unique. Yes.

And it was a TIC. Ten in common. Yes, which adds a whole other layer of complexity to some underwriting. And it had some other structural mechanisms added into the deal didn't it. Oh we tranched it. Yeah. Yep. Yeah. So and that's really a newer phenomenon in the PACE world to stage fund versus funded closing. So yes it did. We did add a tranch element into that.

And the whole idea behind chain being that we basically delayed the draw so that the sponsors incur less interest carrying negative ARB and just significantly cost savings measure for those folks. So yeah. Yeah. So tranching, TIC, senior living, credit union and it worked great. It did. It was a perfect storm. But yeah executed pretty much flawlessly. Yeah. And on the back end the loan servicing team says it's the construction draws are going well.

Progress is going well. So it's doing exactly what we plan for it to do. And that I believe that was traditional AL, IL, MC right? So assisted living, independent living, memory care. Right. So in our world yes we'll from if you go think the acuity spectrum we'll go start from independent living, to assisted, to memory care where we don't venture is when there's actual nursing care involved.

It's very, very specialized. And it's it's just an area that I think requires a lot of operating expertise and one that is we feel is beyond our scope. So basically on the acuity spectrum will go as far as memory care. Yeah. And we've done on very rare occasion skilled nursing. But it is like once in a blue moon.

Yeah. There's just a lot of risk associated with that. And and we always get asked the question, so you guys who do senior living and people always associate it with that kind of skilled nursing like no, no, no. We do senior living, traditional apartment style. That's really what we see the most of. Also, I mean, we get requests for senior living all day, every day, even just today.

We went to committee this morning on a senior living deal in Minnesota, ground up construction, credit union again. And that one was, I believe the total loan to cost was roughly 80% LTC, and the LTV was about 66% LTV. And so this was a great example of the sponsor using C-PACE to effectuate pretty high leverage from an LTC perspective, but still hitting the the mandate from an LTV perspective with the credit union and being under 70%.

And again, like you said, probably a great replacement of equity or preferred equity or mez for sure. And the other advantage to senior lenders that by us coming in. We are a non-recourse lender. So it strengthens the sponsors profile at the senior lender because they're typically a recourse lender, and the borrower basically doesn't have to put up as much of a guarantee for that senior lender as they otherwise would if we weren't in the deal.

So I was in in senior living deals, as with other deals, some senior lenders really like that we can help sort of de-risk their position. They don't have to lend to their highest top dollar. They can lend where they feel most comfortable and have us fill the rest of the risk position. From a dollars out the door perspective.

Yes, I mean, maybe it's worthwhile even just thinking about forget the C-PACE for a minute. Just senior living as an asset class. Like what? What are the things to consider from a lenders perspective, whether it's the mortgage lender or a lender or even an equity investor? Like what are the risks you kind of think that come along with senior living?

What makes it hard to put together the capstack? Why do people love it so much? Just kind of curious for both your thoughts on, you know, why is it such a popular product type? Well, I think from a demographic standpoint, you have an aging population, so you have kind of built in demand for the product and demand that is projected to increase pretty consistently for the next decade plus.

So that would be the first factor. The second factor is the sponsor expertise. You'll have the property side. So Prop Co that owns the property. And then you have the Op Co or the operating company that actually is bringing in the expertise to run a day to day. So often you'll see those two pair up to capitalize the equity side of a project, and then fill out the rest of the capstack with debt.

And I think a little bit also about sponsor expertise and sponsor business plan. I think a lot of sponsors don't want to just build one. They have concepts of building multiples, and so they think a lot about I think a lot about can you actually do multiples and how have your multiples performed and are you paying off loans to then take out more financing or just accruing more and more and more debt, which to me signals like there could be a huge problem coming soon.

And how do you guys think about revenue mix in terms of private pay, public pay, especially sort of in the context of, you know, federal slashing of funds that would potentially go to Medicare and Medicaid. From my standpoint in vacuum, the more private pay, the better, just because you've got a more certain, more certainty around collections because of of the disconnects right now, federal level.

It's I think it's kind of a jump ball as to the Medicare reimbursements when they'll come and how much they'll actually reimburse. So all else being equal private, the more private paid, the better. But then there's also a cap to how many people can afford private pay. So then in in my credit brain, I think a little bit about how big is this facility.

So if you're building multiples, especially if you're building multiple small ones and they're all private pay, that could work. But if you're building massive ones and they're all private pay, you think like, are you going to be able to fill these seats? You know, what's the market study on all that? And the city may have an opinion like our Oregon deal.

The city mandated a certain percentage of that property to be affordable senior living care. And I forgot how it worked, exactly with the mix of, you know, public subsidy versus capping rents. But like, that was how they got their zoning done, it was like 10% of the property had to be deemed affordable. And that just may be part of the part of the gig.

I think that's generally a trend that certainly we're seeing on the West Coast and perhaps in other markets where whether it's senior living or even conventional multifamily, they still have to set aside X number of units or X percent of units for the affordable tenants. Right? So as long as the pro forma works, it works, right. That's very optimistic.

So we have like tailwinds because we have an aging population and people are getting older. They got to go somewhere to live. Kids are like I don't want to take care of my parents. It's a pain in the ass. So they got to go somewhere. But from the lending perspective, we also have some headwinds because people are like, it's a nuanced asset class.

Someone's got to operate it. It's not like a typical apartment building. There's federal concerns about source of funding, even though you might also have mandated, you know, necessity for low income or federal public, you know, beds. And so I think you sort of have this perfect storm of, we need this product. But banks instinctively are like, it's just kind of weird, scary product, and it's a little bit riskier than your average bear.

And so on an apartment complex, they may want to lend 70% loan to cost and senior living they may want to be 60% loan to cost. And so there is just lower leverage available for it traditionally, which is, I think, where we come in and why we do so much of it is we really filled the gap and there's a huge demand from sponsors.

I need to get my leverage up. I don't think it's a cost of capital issue. I think it's really a leverage issue in senior living. I would agree that if you put senior living up against conventional multifamily, you'll have a much higher advance rate on multifamily than senior house from a senior lender. Trying to think of some some deals we've done recently.

So we talked about the Oregon deal that was us plus a credit union. We just did this deal, we went to committee today on the deal that was us and a credit union. We did a large senior living deal in Austin, Texas. That was us, plus a bank. And that was basically it was a mezzanine replacement and the sponsor had a great relationship with the bank.

They are very reputable developers. You know, they've been there, done that, like kind of the gold standard of sponsor. And sometimes when you have that kind of gold standard of sponsor, your lenders will allow certain things that they wouldn't otherwise allow for more novice developers. And in this case, it was yeah, you want to use some C-PACE. That's cool with us.

We're okay with that. Like and so I think we did an 8 or $9 million C-PACE assessment on that property and ultimately just, you know, replaced what otherwise would have been LP equity. And that worked out super well for those guys. I can't speak highly enough about a sponsor that has a strong relationship with their bankers. Lender consent is obviously the biggest boogeyman in PACE land, and it is so helpful when a sponsor can just call up their banker and say, listen, I need you to just do this for me.

Like we need to get to yes. And then that really primes it for us to help them get to yes, as opposed to someone who is maybe a first time developer or, you know, doesn't have that many deposits with a bank or that strong of a relationship that ask falls a lot flatter. I think it bothered also in the context of, hey, you are my go to lender.

We're going to have a lending limit cap soon. And so the way that we're going to get around the limit cap is by allowing C-PACE to come in as a participant and reduce this banks exposure to me. So now you can go land on my next 2 or 3 projects. And that typically resonates pretty well with the banks. And I think it's important for sponsors and developers to kind of remember, you know, using C-PACE a participant to free up their other bank capital for future projects.

Yeah, even as I say, even retroactively, that's. Yes, at the other end of the construction cycle, if they haven't used PACE  up front and the projects now completed and they want to go on to the next one, but they may be up against a relationship cap with their bank, we can come in retroactively, generally 2 to 3 years after certificate of occupancy, and essentially refinance the bank either partially or entirely out of the deal and freeing up their capacity to make the next loan to the borrower versus them having to tell the borrower, I'm sorry we're loaned up to you, and you're going to have to go find another bank.

Borrowers happy, banks happy. We're happy. Yeah, we just signed up a deal with not senior living with actually an office deal, which I know is, you know, people don't love talking about office, but we signed up an office deal, and that is the exact use case. I mean, it's a class B office building, suburban MSA. It is about 180,000ft², and it's stable like it's performed.

Well, it has no issues, but it's still class B office. The sponsor is looking for a return of like effectively a special distribution. The bank set their lending limit. And so they're allowing C-PACE to come in and effectively partially pay down the mortgage lender and then return equity to the sponsor, which is reducing the banks exposure to the client so they can go redeploy that money somewhere else.

And in this case, they're actually it's a net lease building. So they're actually passing the PACE assessment through to the tenants as a cam charge. And so the bank was comfortable as well because it's not dollar for dollar hitting their NOI and DSCR but yeah the retroactive piece is huge for reducing and freeing up bank capacity to to their clients.

You heard it here first PACE reduces DSCR. Oh God. That's, edit that one out. What else can you tell us about senior living? Peter, will you live in a senior living facility in the future? Wow. That's. Wow. Well, it depends on which facility. If they meet my needs, which means I'm going to have to have multiple parking spaces, you know, but more, you know, more than one because he got the daily driver.

Then you got the fun wheels. Obviously. Assuming you're still allowed to drive. Yes. Right. Yeah. Okay. Key fact or key question and you know, would I it's possible that I would. But you know, it would really have to be for me an amenity rich facility, I think. And I'm kind of with you and we're dealing with my in-laws right now, a similar question.

And we're moving them to an apartment. But the, the rollout of even sort of continuum of care and where you start off with just true apartments and then you can sort of have the add on services of, of the AL component is great. And I think that really does serve a need and a purpose.

And we love seeing and doing deals in major metro areas. So you still feel like you're actually, you know, in the community and you know, you can be around and get around. And let me clarify, I won't even be age eligible for 20 years. So yeah, so we're talking really far. I'm just giving you a hard time.

Yeah, I'm a family member. We recently moved her into a senior living facility. And what I found interesting, I mean, obviously I know how the performers work, so I knew what the costs were going to look like is how pinpoint they are with the level of care and the cost. She went in from basically from the hospital. But the concept that she could rehabilitate herself to the point where her monthly payment would go down because she would need less care, is what we're all sort of driving toward.

And then, you know, eventually, as time takes its toll, like she may need more care is really heartening. How do you think this has nothing to do with C-PACE but just more, you know, as a as an asset class? How do you guys think about the cost? I mean, these are expensive to live in, and certainly with the a la carte care levels that increase, I mean, it is cost prohibitive for a lot of folks to be able to afford, you know, a high quality assisted living facility.

Yeah, I would question that a little bit based on probably metro area and what your alternative cost of living is. So if you look at, say, New York or a lot of the large cities on the West Coast, you're unless you've been in your place for a long time, you've got a pretty heavy nut to carry from a mortgage standpoint.

And then there's the service what's your alternative as your needs become more acute, then you start to look at having to hire a private caregiver. And if you haven't bought long term care insurance, it's going to be a boatload of money out of your pocket. Yeah, a ton of money out of your pocket. Yeah.

We price it out for my aunt, and we said she could stay in her unit and we could hire people to come in for essentially 24 hour care, and it was double the cost of what we pay now. So it's an unfortunate reality, I think. Right. So as we see the income gap increase over time, the necessity for truly, actually affordable senior living is going to become super critical because those that can afford it can afford it, but those that don't own a house and don't have the equity embedded and don't have a defined benefit pension.

Yeah, right. Those are going away. And when you have, you know, six, seven, eight, nine, ten grand coming in every month for pension, it really offsets the high cost of senior living. But if you don't have that then I don't know how you can pay ten, 12, 14 grand a month. Yeah. I don't think you can. So you're going to have to have more affordable senior living.

And then the question of how do you finance that? And that is even an even more specialty asset class dealing, whether it is via, you know, federal credits or any other sort of rent control provision, I mean, that's going to have to get built pretty quickly. And I do see C-PACE having a role in that as we do every sort of creative capital structure.

But to me, like, yes, there's a huge demand for senior living market rate. But I think about what comes next as the next generation of folks that don't have the pensions or the homes need a spot to go. If you wanted to end on an uplifting note.

Everybody you know, if you think about the the day to day experience in one of these, one of these facilities, you've got meals if you want, you've got you want to play poker with some with people. You can get a poker game there. You know, if you're not driving, they will. They have their shuttles that take you around. And if you're single, you're going to have a heck of a social life. So. Please, plenty of trees from. So that's the happy ending right there. Okay.

So you've been speaking at a ton of senior living conferences over the past couple of years. What have you seen that's changed in terms of sentiment or sort of what folks are talking about when it comes to senior living? Really the there's much more bullishness on the sector than there was say 12, 18 months ago. I think a lot of that is driven by capital availability.

So while the realm of senior lenders that will lend into the space is still more limited than other asset classes. The fact is that those that are lending are opening up their their spigots. More so they may be lowering interest rates. They're spread. They are, I think, gently increasing their advance rates. So maybe from a 55 to 60% advance rate on their side.

So I see more liquidity there. But there's from our perspective, there's still a significant gap in the capital stack that we can fill. Yeah. And I agree with you. And I think one nuance to that that's important to thread the needle with is banks are definitely more aggressive than they were 18 months ago, to your point. Higher leverage, lower interest rates, more interest only perhaps less recourse.

But I think where they're still sensitive is like they will they will move that credit box up a bit, but they're still very sensitive to actual dollars deployed. And they'll say, yeah, we can increase your LTV, but we really don't want to write a check bigger than $20 million. And, you know, that might create the void right there. And that's why we come in as participants.

Yeah. No, I think from a from a perception standpoint, you're exactly right. They can say, you know, we've relaxed our credit box or we've increased our, our loosened our credit parameters. But there's a catch. And the catch is we're dollar limited. So yeah. So that's yeah. So we that's where we step in a ton. Yeah I mean I hate to say but like it's kind of it's kind of basic.

I mean it just it kind of just works in the capital stack super well. And I'd like to say it's more complicated than it is, but it isn't like it's, you know, I think once you get it, you get it and you do it over and over again. Right? And then with clients of ours that are repeat borrowers it is helping them kind of aggregate a portfolio for what's likely to be a wholesale disposition.

And it creates wealth for them. Yeah. We have one client. I think we have financed 19 of his 21 facilities, and he's aggregating probably to an exit. Yeah. And it seems to work in every PACE use case. Right. It works for new construction. It works for refinancing. Theoretically it also works for someone who just has a big CapEx need on an existing building. So, Peter, a couple of quick questions for you. Yeah. You're from New Jersey. You live in San Diego. How'd that happen? No, it's going to be more random than that. I'm going to give you a couple of scenarios. You just tell me your your favorite, okay? Sure.

What do you what do you prefer more? To pump your own gas or to have a pump for you? Well, new Jersey is one of two states in the country where you are not allowed to. I asked the question. Well, that's a that's a great fact. Do you know the other state? No. Is it Oregon? It is. My grandmother used to live in Oregon, so I had memories of someone pumping our gas, and it was super weird. You know, I kind of liked to pump my own gas.

Okay, okay. You're out. Okay. Next question. I you know, I'll think about it. It gives me the chance to stand up, get about 30 steps in that I otherwise wouldn't have gotten if I'm just sitting on my butt in the car. So I'm so glad we have your workout routine on camera now. Okay, 30 steps once a week, right?

What happens when you get an electric car? You're toast. Well, then you have to walk. I have to go to the charger, so I still get the 30 steps, you know. All right, well, what do you prefer, pizza or bagels? Well, you know, until recently, you've not been able to get a what I would say is a good bagel in San Diego.

That's changing now because now we have all the esoteric bagel companies that are opening up. I still am the purest, and I'd say that I find better pizza in San Diego than bagels. So I'm going to go with pizza. Okay. And then I know again, because you're from Jersey, you've seen Springsteen many times. Do you want to share just about how many that has been?

Probably 50. I mean, for example, when he when he would play like New York and Philadelphia, he, you know, he do like six shows in each place and but a buddy of mine and I would get, we'd buy tickets for each one and then we'd either decide, well, we'll go to all 12 or we'll sell off couples. So it was just fanaticism.

Did you ever get arrested at a Springsteen show? No. Unfortunately, no. Bruce doesn't attract that kind of crowd Rafi. I don't know what sort of concert you're going to, but people don't get busted at Bruce shows. Good answer. That jives with your credit, your search we ran on you. Right. All right. Yeah. Bruce is still rocking it at age 77.

So he's my hero. I may be still be here when I'm 77 years old, so no senior living facility for Bruce. That's what I'm hearing. You know, he can well afford all the private care that he needs. Cool. Well, Peter, thank you for joining us to talk about senior living. Thanks for having me in. Appreciate it.