There are about 75 million people in the baby-boomer generation and about 3 million of them will reach retirement age each year for the next two decades. Many may eventually end up in a senior-housing facility, such as an assisted-living, memory-care or skilled-nursing home.
A commercial mortgage broker advising the owner of a senior-housing facility about financing should know the industry is strong in terms of profitability and that the broker can play a key role in assuring excellent financing terms. The U.S. Department of Housing and Urban Development (HUD) 232 loan program, for example, offers what many believe to be one of the best health care financing vehicles for both refinances and new-construction loans.
The HUD 232 223(f) program is for refinance and acquisition loans, but is most readily used on a refinance. The lending constraints on 223(f) refinancing include the greater of 80 percent loan-to-value (LTV) or 100 percent of the total cost of refinancing the existing debt, and a minimum 1.45 debt-service coverage ratio (DCSR), which is usually based on a 35-year term.
With HUD — more aptly the Federal Housing Administration (FHA) under HUD — insuring a loan for up to 35 years, value is created based on a cash-on-cash equation and an internal-rate-of-return model, and ultimately the amount of net cash flow an owner can take home. In fact, it may be wise to explore two amortization schedules, one using a 30-year loan term and one using a 35-year term.
The amount of upfront savings using a 35-year term loan are staggering. Throw in the fact that rates on HUD/FHA loans are often 75 to 100 basis points lower than other conventional financing, and you’ve added substantial value with additional dollars your clients can put toward the bottom line, just by advising them on the correct program.
The HUD 232 loan term and amortization are based on a property-condition report. A rule of thumb is that the term of the loan can be up to 75 percent of the remaining useful life of the property. Therefore, the loan term can be up to 35 years so long as the remaining useful life of the property is 47 years. With capital improvements, the useful life of the property also can be extended.
In order to maintain credibility and add value to the process, mortgage brokers should understand what condition their client’s property is in for its vintage, and what is needed to extend the asset’s useful life. Oftentimes, these improvements can bolster the marketability and performance of the property, raising its value.
Additionally, within the past year, HUD revamped the health care financing rules for 223(f). It’s now possible to take out equity from a property without carrying debt for a full two years. To be clear, HUD still does not directly provide cash-out loans, but it will allow less-seasoned debt refinances, and refinances of intermediate bridge loans.
Essentially, the new rules state that 60 percent LTV refinances will be allowed with less than two years of seasoned debt when less than 50 percent of the mortgage proceeds are used for the benefit of the project and repayment of seasoned debt. A 70 percent LTV refinance will be allowed with less than two years of seasoned debt when more than 50 percent of the mortgage proceeds are used for the benefit of the project and repayment of seasoned debt.
To receive a full 80 percent LTV loan, debt on the facility must be seasoned for a full two years and other 223(f) criteria must be met. Experienced owner-operators with multiple facilities are typically sitting on a portfolio that has a large amount of equity tied up in the assets, which can be recouped through HUD refinancing, if processed correctly and managed appropriately with the right lender.
The HUD 232 New Construction and Substantial Rehabilitation program also is an attractive financing option for health care property developers and owners with the requisite amount of experience and financial wherewithal. The HUD program allows for a new-construction loan for a profit-motivated entity that includes the following limits based on a maximum 40-year amortization period: up to 90 percent of replacement cost; 75 percent LTV for an assisted-living building and 80 percent for a skilled-nursing facility; and a 1.45 DSCR.
The HUD construction loan can take some time to close. It’s a construction loan with an interest-only period of typically 18 to 22 months that rolls into an amortizing loan upon cost certification.
As banks continue to get direction from regulators to reduce risk, they have reacted accordingly by limiting new-construction loans and/or leverage levels. This is making the HUD 232 construction-loan program more attractive every day, even with the challenge of time to close. It would be prudent to get together with a solid HUD 232 lender to understand the benefits and drawbacks of this program compared with traditional bank products.
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Commercial mortgage brokers seeking to add value for their clients should contact a HUD expert to better understand the financing terms available for its various products, and help advise their clients on how to maximize the value of their properties in order to achieve the best financing execution.