Program offers wider variety of financing options
By Josh Rosen, Capital One
Recent changes to the Federal Housing Administration’s (FHA) Lean 232 program provide owners with more options, all of which a lender offering a full suite of financing options can act upon. Owners able to plan when it comes to future cash-out needs are in a good position to benefit from these changes.
For owners of residential healthcare facilities that offer services like skilled nursing or memory care, FHA Lean 232 loans are an exceptionally good value. Because the FHA is committed to ensuring that there is an adequate supply of affordable beds for seniors, nursing home borrowers can secure terms that are unheard of in other commercial real estate markets.
Early this year, the FHA made changes in its official Section 232 Handbook that make these loans even more attractive, especially for owners who wish to take cash out of their properties.
In order to understand the significance of these changes, it helps to see them in context of baseline Lean 232 loans. These FHA-insured loans are nonrecourse and assumable, offer maturities of up to 35 years, loan parameters of up to 80 percent loan-to-value (LTV) and 1.45 debt service ratio coverage. Best of all, they feature low, fixed interest rates, which are currently in the neighborhood of 3.5 percent.
Although providing the necessary documentation can be time-consuming, owners clearly find the effort well worth it, as figures for the FHA’s 2016 fiscal year (ending Sep. 30, 2016) demonstrate. The Department of Housing and Urban Development, of which the FHA is a part, reported that its FHA Lean 232 program closed $2.84 billion in loans, an increase of 5 percent over 2015. This comprised 287 loans covering more than 32,000 beds.
Eliminating seasoning on cash-out bridge loans
However, the program does have one important limitation. Owners do not have the option to use Lean 232 proceeds for a cash out.
Owners who want to re-leverage their facilities and take out a portion of their equity, whether to purchase additional property or for other uses, must secure a bridge loan. In the past, owners had to season bridge loans with a cash-out component for at least two years before they were eligible for refinancing under Lean 232. The FHA’s rationale for this rule was that it required the two-year interval to ensure that the facility could generate adequate cash flow to pay debt service.
This was not a burning issue for owners as long as interest rates were both stable and at historic lows. But when the Fed began raising its benchmark rate at the end of 2015, owners — and the FHA — took note. In May 2016, the FHA announced that it was modifying this regulation. These changes were codified in its Section 232 Handbook in January 2017. Under the revised rules, the two-year seasoning period is waived under the following conditions:
- If more than 50 percent of the existing indebtedness was used for project purposes, lenders can immediately request a loan with up to 70 percent LTV.
- If less than 50 percent of the existing indebtedness was used for project purposes, the lenders can immediately request a loan with up to 60 percent LTV.
In other words, owners should think ahead to the amount of leverage they desire when determining how much they cash out. Owners who want 80 LTV can still wait two years.
The result: owners can enjoy the best of both worlds. They can recapitalize with a private lender and then roll the loan over into the Lean 232 program. In many cases, lenders can provide both loans, in which case these lenders can structure the bridge loan in ways that streamline the process of securing Lean 232 financing.
Adjusting Lean 232 to market norms
As part of its latest revisions to the Section 232 Handbook, the FHA also did some housekeeping, addressing a few minor issues that were problematic for both operators and owners.
Previously, the debt incurred by a licensed operator was not eligible for refinancing. Now, project-related debt associated with the purchase of furniture, fixtures, equipment, capital expenditures and working capital related to lease-up and stabilization qualifies for refinancing with a Lean 232 loan.
The FHA also revised the Lean 232 provisions that governed identity of interest (IOI) purchases. An example of this is when a single family member in a family-owned facility wants to divest ownership, or when a third-party equity partner who helped develop a property desires to exit during the refinancing of a construction loan.
Previously the FHA would not refinance the bridge loan used in either case until at least two years had passed. Now acquisition debt associated with IOI purchases are immediately eligible for Lean 232 refinancing if the seller has no residual control of the project.
Taken together, these three changes are indicative of the FHA’s responsive approach to the residential healthcare market. The agency has made it a point to understand the financing challenges that owners and operators face, especially in a market in which interest rates have been steadily rising. And it has used the occasion to demonstrate its willingness to adjust to market norms and change guidelines accordingly.
Joshua Rosen is senior vice president of Originations with Capital One Multifamily Finance.