A s the population in Colorado and across the country ages, there has been a sharp increase in the demand for senior housing facilities. In response to that demand, more real estate investors and senior housing operators are seeking to build, own and operate senior-centered housing. As with other market segments, senior housing facilities are typically financed through a combination of equity investment and debt. Below we discuss a few unique considerations that apply to loans for senior housing projects. To start, there is often additional upfront due diligence that a lender financing the construction or acquisition of a senior housing facility may require due to the unique nature of the asset class. For example, for new construction, some lenders will require an in-depth market study to ensure that the market is not oversaturated with senior housing facilities and can support an additional project. This is highly relevant to the senior housing sector because demand for the product fluctuates with demographics. Most lenders will also engage in a deep dive into the facility manager to ensure that the operator is experienced, with a track record of successful operations. Some lenders also will require a consultant’s report on management and operations, and a regulatory compliance report for senior housing properties that are subject to licensing requirements. Borrowers in the senior housing space can also expect to see unique terms in the loan documents. The following issues should be considered when negotiating loan documents secured by senior housing facilities: • Licensing. Borrowers should ensure that the licenses are classified appropriately based on materiality to the facility. In other words, the loan documents should treat different types of licenses differently based on whether the loss of the license poses a serious threat to the lender’s security for the loan. For example, the loan documents may prohibit a material modification to the licenses for the facility without the lender’s consent. While it is appropriate to include such a prohibition for a license that is required to provide assisted living or memory care services, it is not appropriate with respect to a less material license such as an elevator permit. Additionally, the loan documents may provide for a default if the facility licenses are revoked or suspended. Again, this is appropriate with respect to the licenses required to provide regulated health care services that are necessary to provide services to residents, but not for immaterial licenses that have minimal impact on the cash flow from the property. Accordingly, the borrower should carefully examine how the loan documents treat the facilities licenses, and make sure to consider this concept in all places that licenses are addressed throughout the documents. • Reporting violations of law. A lender also may require the borrower to notify the lender if it receives notice of a violation of health care laws associated with the facility or its operator. To minimize administrative burdens and the potential for inadvertent defaults, a borrower should try to limit its notice obligation to those violations that pose a risk of loss of a material license for the facility’s operations or which, if decided adversely, would otherwise have a material adverse effect on the facility. • Reporting resident information. Lenders also will likely require that the borrower provide periodic reports concerning the facility and its operations. To the extent these reports implicate information about the occupants of the facility, borrowers should ensure that their reporting obligations do not run contrary to privacy laws that prohibit disclosure of personal information, such as the Health Insurance Portability and Accountability Act and the newly enacted Colorado Privacy Law, which goes into effect Sept. 1. • HIPAA. A borrower that is not a “covered entity” under HIPAA and similar laws should ensure that the loan agreement does not obligate the borrower to comply with the requirements of such laws (i.e., any covenant of the borrower to comply with HIPPA and similar laws should only apply only if the borrower is a “covered entity”). Indeed, many operators of assisted living facilities may not constitute a “covered entity” because the services that they provide are considered “activities of daily living” rather than “health care services” under HIPAA. • Medicaid and Medicare. For private-pay facilities, the loan agreement may prohibit the borrower from accepting payments from Medicaid or Medicare or any other third parties. It is important to ensure that the acceptance of payments from private insurers is not prohibited. Also, attorneys negotiating the loan documents should discuss this issue with their client to confirm that this prohibition does not conflict with current operations and that there is no need to retain flexibility to accept these types of payments in the future. Lenders providing financing for licensed senior housing facilities will also frequently require a legal opinion from the borrower’s counsel with respect to the licensing of the facility and its operations. The scope of the requested legal opinions typically includes: (1) whether a certificate of need is required for the operation of the facility and, if so, whether a certificate of need has been issued; (2) the status of licensing for the facility; and (3) whether there are any administrative or legal actions against the facility, its operators or the license. Real estate attorneys that are not familiar with senior housing facilities may be reluctant to provide such opinions (and would be ill-advised in doing so without consulting a health care attorney). Accordingly, borrowers should ensure that their counsel either has experience and ability to issue such an opinion, or has engaged separate counsel to issue the opinion. The counsel issuing the legal opinion will need to conduct extensive due diligence on the license and the facility, so this should be addressed as early in the process as possible to avoid closing delays. Financing is a key factor in planning any development or acquisition. For senior housing projects, the additional aspects of the financing process discussed above can add both time and cost. Further, if the unique terms applicable to the senior housing space are not carefully considered and negotiated, it can create problems during the life of the loan. Accordingly, these issues should be considered at the outset of the loan, with adequate time built in to address the nuances of these types of facilities.