Amid growing concerns that interest rates are on an upward trajectory, a leading voice in the seniors housing funding space says skilled nursing and assisted living providers should be aware of the many benefits of the HUD (Department of Housing and Urban Development) Section 232 program, which has made positive changes to its policies that could benefit owners and operators by giving more access to refinancing tools.

Good Tool to Begin With

Even before the changes, Erik Howard, managing director, real estate finance, Capital Funding Group (CFG) in Baltimore, tells Provider the HUD 232/233(f) funding option has been a mainstay for skilled nursing and assisted living market segments for years. So much so that the fundamental business for Capital Funding is bridge-to-HUD loans. These involve providing relatively short-term acquisition financing for a borrower, and eventually taking that out to permanent financing via the HUD 232/233(f) program. The HUD program permits refinancing of existing indebtedness with a Federal Housing Administration-insured loan.

But, what makes the program even more attractive now is the new policy that provides for “a shortened seasoning period for deals that have low leverage, relatively consistent performance, and where there has been an equity recapture for a bridge loan,” he says.

What that means in plainer terms is owners and operators who have little to no debt on their assets now can recapture some of that equity at a lower leverage point, and not have to wait for a prolonged period to refinance that debt through HUD 232/233(f).

“Let’s say that a building has no debt on it, and an owner/operator has had this facility for 20 years so they paid down the mortgage,” Howard says. “Historically, if you recaptured some of that equity and put some of those funds in your pocket, you would have to wait two years before you could go to refinance that debt through HUD.”

Now, with the changes, HUD looks at loan-to-value ratios on the asset as opposed to just the fact there was an equity recapture. “So, again, in that example, if you had no debt (and stable cash flow) you could cash out to up to 60 percent of the loan to value and could go immediately to HUD without having to wait.”

This gives providers an efficient option to redeploy money for capital improvements to a facility, or utilize in any number of ways. “It is really a great opportunity for owners who may want to put capital back into their buildings or use the cash for any number of things and really take advantage of still relatively low interest rates,” he says.

Why Did HUD Make the Change?

“HUD has continued to grow their expertise in terms of overall industry knowledge and underwriting since the LEAN inception in 2008,” Howard says. “So, I think they recognized that the characteristics for these buildings and these owner/operators who have little to no debt have proven them to be strong borrowers thus good candidates for HUD-insured mortgages.”

This positive view of the risk, reward, and changing of HUD’s policies won out in the end. But, have providers and others really taken advantage of the new policy?

Howard doesn’t think so. “It was relatively slow out of the gate” with the components of the plan being worked out, but that seems to be shifting as the months go by, he says. “I would say it is continuing to gain more momentum, but there is definitely an opportunity for further education in the industry to let them know the program exists.”

HUD Has Improved Financing Options for Borrowers

Pulling back a bit, Howard says historically, owners/operators may not have elected to take equity out in refinancing their facilities, in particular if they had no immediate use for the funds. “In the past, if you recapitalized a loan with your bank, you would have been required to wait two years until refinancing the loan with HUD; with that, a borrower would have some level of interest rate risk,”he says.

“In contrast, with the new low-leverage program, a borrower now has relatively good visibility with respect to its refinancing timeline and rates. A bank like CFG can provide a bridge loan to a borrower, and to the extent that the underwriting and debt criteria meet HUD requirements, CFG can submit the application for HUD refinancing almost immediately after that bridge loan has closed. That provides comfort to borrowers that they are able to obtain a fixed-rate HUD-insured mortgage within a reasonable time period.”

HUD and the new policy changes provide a much clearer execution strategy for borrowers and lenders and a clearer path to refinancing, he says.

Marketplace Working Through Issues

In looking at the general marketplace for capital funding in the skilled nursing/assisted living industry, Howard says there is continued talk about potential reimbursement challenges to the Medicare and Medicaid programs, as seen in the recent federal budget and spending talks in Washington, with the financing world trying to gauge the direction of such trends.

As the skilled nursing sector deals with shorter lengths of stay and an ongoing battle with staffing, Howard says owners/operators are working through a number of strategies to mitigate immediate challenges.

“We think that many of the larger operators have worked through their issues with their various landlords or lenders to come up with solutions that hopefully will provide for long-term growth and stability in those operations,” he says.

Beyond the near-term headwinds, there are optimistic expectations in the offing. “We do believe and hope to see the occupancy gains that have been long predicted with baby boomers and are in a cycle where we really expect that to accelerate occupancy within the next handful of years,” he says.

“While there has been some pressure lately as it relates to both revenue and expenses, we are hopeful that those trends will start to turn and create overall positive results for owners and operators around the country.”