One result of the pandemic that we are sure of will be a rise in the number of sales for distressed assets in the next couple of years. Many communities that were already struggling before COVID-19, because of overbuilding, increased labor costs and other factors, will certainly have difficulty generating the cash flow necessary to service their debt or lease obligations, especially if the occupancy recovery is as slow as some at the NIC Conference are estimating. One company, McFarlin Group, has already announced that they will be committing $100 million to the purchase of distressed loans for seniors housing communities and has so far closed on two deals.
McFarlin Group, which was founded by Matt Johnson in 2008, is a fully integrated real estate investment firm focused on the seniors housing industry with investments across the country. After going through a difficult time filling up a new community in the San Antonio market, one of the many MSAs affected by overdevelopment, the company hit the pause button on new development, switching course for value-add and distressed loan acquisitions instead. More often, McFarlin Group would target distressed loans where the borrower was in monetary default.
So, starting in January, they focused efforts to raise $100 million in capital for its Opportunistic Senior Living Fund, with the goal to acquire these distressed assets at deep discounts (as much as 50% of par value of the loan), hold them for a period of roughly five years and then selling. In most cases, the existing operator will remain in place, but McFarlin Group also has the option of bringing in its operating arm, Surpass Senior Living. The firm will also focus on states where overdevelopment was most pernicious, but given the nationwide impact of COVID-19, they will look at opportunities across the country.
Communities with a mix of assisted living and memory care, which were the most common projects during the recent building boom, are the ideal community type for the fund. Already, McFarlin Group has closed on the acquisition of a stand-alone memory care community, purchasing the loan for well under par value. In that transaction, McFarlin Group acquired the loan directly from the bank, but the company expects to also pick up other opportunities from auctions and through investment sales brokers. When the value makes sense, McFarlin Group will also acquire properties, but we imagine the discounts seen in the distressed debt market right now are too good to pass up.
