From accessing equity to wider refinancing choices, the industry has a wealth of new finance options
By Lee Delaveris
Owners of senior care facilities have heard from more than a few bankers and brokers in recent years as the industry has attracted an increasing amount of capital from a variety of sources. Among these capital sources, the FHA/HUD 232 programs have maintained their widespread appeal as a permanent financing solution for assisted living, memory care and skilled nursing facilities.
With HUD’s recent announcement proposing changes to these programs, owners will be hearing about even more financing options — and with good reason, since the anticipated HUD policies will create new opportunities for many prospective borrowers.
Anyone who has experience with the HUD programs knows there are regulations, guidelines and a few quirks that need to be navigated. To understand some of the proposed changes to the programs, let’s just review the most significant and practical opportunities these changes present to borrowers.
HUD’s proposed policy changes will provide owners with the ability to immediately refinance existing loans that provided cash-out proceeds, up to 70 percent loan-to-value, if less than half of the existing debt provided cash-out; or up to 60 percent loan-to-value if half or more of the existing debt provided cash-out. This new policy will replace the existing restriction that requires all cash-out loans to season for two years before refinancing with HUD.
The result is that HUD is minimizing the trade-offs of timing and interest rate risks that borrowers have had to consider when wanting to maximize leverage on their properties while moving to permanent, non-recourse financing.
Many owners, seeking the most efficient mix of low-cost debt versus equity, are rightly concerned about being “stuck” in a long-term financing structure at low leverage, so they defer their permanent financing for years. These borrowers will now have a better solution.
For example, following the surge of construction activity in recent years, coupled with declining cap rates, many developers found themselves well in-the-money with newly built facilities. Value creation far exceeded their development costs in a short period of time. For a facility that was built over three years ago, this new HUD policy will provide an opportunity to quickly access the equity they have in their new projects. This can also be done without risking as much exposure to market changes, before being able to lock in permanent financing via a fixed-rate, non-recourse HUD loan.
Additionally, many independent owners, family businesses and long-term seniors housing investors who avoided the temptation to sell have built up equity through a combination of debt amortization and increasing valuations. These owners could benefit by re-leveraging to support new growth or just to take out some equity.
The HUD program is an especially good fit for owners who have long-term ownership horizons or are building portfolios to be inherited by their children. Now these borrowers will have a better opportunity to recapitalize, in conjunction with moving into the HUD program.
Under current HUD rules, debt incurred by an operating company that leases a facility is not eligible for refinancing. HUD’s newly proposed policy will be more flexible on this issue.
The new rules will allow for the refinancing of loans held by the operator/lessee associated with the purchase of FF&E (furniture, fixtures and equipment), capital improvements and working capital for the facility. As many operating leases assign responsibility to the tenant for certain capital improvements, this change will simplify things considerably.
HUD will also allow the refinancing of loans that provided working capital related to the lease-up and stabilization of a project.
Identity of Interest (IOI) Purchases
IOI purchases — where the buyer and seller have a pre-existing relationship that could lead to price collusion — have always been challenging issues for HUD borrowers and lenders alike. Now HUD is proposing some relief.
Under the proposed rules, the acquisition debt associated with IOI purchases will be immediately eligible for HUD refinancing, as long as the seller has no residual control of the project and no right to reacquire the project within five years. This also applies to the buy-out of partners from the current ownership group.
Consider a scenario which comes up frequently with recently constructed projects: A sponsor developed a facility with a third-party equity partner and this partner wants to exit from the project in conjunction with the refinancing of the construction loan. Under the proposed HUD program changes, a bridge loan could be used to refinance the construction loan, buy-out the partner and even provide some cash-out to the sponsor. This bridge loan could then be immediately refinanced with the HUD program.
We can look to the example of a family-owned facility as another scenario. Perhaps a family member wants to retire and divest ownership, but the remaining owners want to retain their interests. Under the proposed HUD program changes, after funding this buy-out and potentially a recapitalization with a short-term bridge loan, the remaining owners will be able to quickly access low-cost, non-recourse, permanent financing.
Prospective HUD borrowers should note that an interim financing source will be needed to access the benefits of many of these proposed HUD program changes. Borrowers should consider working simultaneously with a HUD lender, while structuring bridge financing to overlay the processes and minimize the time the bridge loan is outstanding before closing on the HUD refinancing.
Although these proposed HUD program changes are in draft form and remain subject to final approval, owners can begin planning and consulting with a HUD lender to identify the new financing opportunities they will have with the FHA/HUD 232 programs.
Lee Delaveris is director of seniors housing & healthcare for RED Capital Group. He is an expert in the financing of senior care facilities utilizing the FHA/HUD mortgage insurance programs. RED Capital Group was the nation’s #1 ranked FHA MAP and Lean lender by loans closed for HUD Fiscal Year 2015, is a leading Fannie Mae DUS lender, and provides other financing solutions for the seniors housing and healthcare industry.