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 HUD Lending Program Paves Way for Refinancing

Known for its low rates and long repayment terms, many health care providers have relied on the agency’s program for years.

 

A leader in the field of capital financing for seniors housing points to the Department of Housing and Urban Development (HUD) and its HUD 232 program offerings as an attractive option for long term and post-acute care (LT/PAC) providers in need of refinancing or other capital funding needs.

Businesses Refinancing

Despite the economic pressures on owners and operators in today’s tight-margin, occupancy-challenged environment, Jeffrey Davis, chairman and president of Chicago-based Cambridge Realty Capital Companies, says his company is seeing a brisk business, notably in refinancing deals utilizing HUD’s low-interest, long-repayment terms, which are among the program’s most attractive features.

“The trick here is at the end of the day, there are lots of ways to acquire a nursing home or build a nursing home or refinance a nursing home, and there is different funding for that,” he says. “But, in terms of a long-term permanent mortgage loan, there is really no other viable option besides HUD.”

Jeffrey DavisDavis says the great thing about HUD from a strategic and operator point of view is that HUD has the equivalent pricing and underwriting that is similar to the agency’s multi-family pricing and underwriting. Also, HUD program loans have performed well and are cash-flow positive.

“The whole dynamic revolves around the fact if the nursing home operator is looking for the best combination loan on cost, term and amortization, personal recourse, no balloon or call, etc., then HUD is the best option,” he says. “Really, every operator and everyone who works with SNFs [skilled nursing facilities] on an ownership basis needs to at the very least explore HUD and see how it fits within their dynamics.”

HUD Process Not Lengthy

Cambridge, which has completed $5.5 billion of seniors housing/health care financing deals for more than 500 properties, provides capital using HUD, but also facilitates conventional financing on an investment banking basis, and performs seniors housing principal acquisition via joint ventures, debt structuring, and by creating operating leases for SNF owner/operators.

For HUD 232 financing, the process works as follows:

1. The borrower submits the data necessary to underwrite the loan.

2. Cambridge (or a like company) issues a preliminary term sheet/loan proposal.

3. The borrower submits additional diligence information as needed to further qualify the transaction for HUD and answer any questions posed by the lender.

4. The lender issues a formal term sheet and engagement agreement.
These first four steps above take an estimated 30 days. Next:

5. The lender engages third-party vendors and completes project level underwriting.

■ An appraisal with an experienced appraiser who understands the HUD 232 Lean requirements is engaged.

■ A Property Condition Assessment Report from a vendor who understands HUD 232 Lean requirements is engaged.

■ A Phase I environmental report (and Phase 2, if applicable) and radon report is ordered from a knowledgeable vendor who is familiar with the HUD 232 Lean requirements.

■ A formal application is submitted to HUD, along with a narrative of loan and opportunity from the lender’s chief underwriter.

This fifth step and its provisions take an estimated 60 to 90 days.

Committing the Loan

The next steps involve submitting the application to HUD and waiting for an agency underwriter to pick up the paperwork. The time frame for this to happen depends on the queue of applications in holding, Davis says. Once reviewed, the process can take around 30 to 60 days, and a further period for a loan committee to decide on the loan application and HUD to issue a firm commitment to ensure the lender’s mortgage.

The final step is for all of the parties—the lender, HUD, and the borrower—to move toward closing, lock the interest rate, finalize loan documentation, and fund the loan. All of this takes an additional 60 to 90 days in length.

Davis says the HUD business has been robust in recent years, and he expects this year to be no different.

“More and more the operators are getting comfortable with the program and understanding the process and time frame. Part of that is a function of some pull-back by conventional lenders,” he says.

Refinancing Is King

On what types of financing are most popular with SNFs, he points to refinancing as far and away the most popular type of lending. Most of the HUD business for Cambridge comes in the skilled space, along with some assisted living and memory care.

“It is really more of a what’s on the need-based  higher level of care versus the higher level of care,” Davis says.

There are also drawbacks with conventional lenders, who generally offer challenges to operators in the form of higher interest rates and balloon payments down the road, along with personal recourse. “There are also variable interest rates lots of times with conventional loans,” he says.

Also speaking on the value of HUD’s financing programs, Mark Parkinson, president and chief executive officer, American Health Care Association/National Center for Assisted Living, says from his previous experience as an owner/operator in the LT/PAC space there definitely is value in the government’s offering.

“Our long-term financing strategy as an owner was always to get to HUD,” he says. “HUD financing combines long repayment, low rates, and, most important, no recourse. If you’re in the profession for the long run, it’s a tremendous financing option.”
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