Coming out of the financial crisis, cash-out financing became a term that virtually no commercial real estate sponsor dared utter. Lenders and regulators took a dim view of the practice, which, as a product of lax underwriting standards that helped fuel the crisis, too often allowed borrowers to retain only a sliver of equity in their properties. And few landlords had the capacity to strike cash-out deals anyway, given the drop in commercial property values.
As commercial real estate values have recovered, however, lenders have become agreeable to making cash-out loans in cases where borrowers retain a robust amount of skin in the game. But investors in residential care facilities (RCFs), such as skilled nursing, assisted living, and memory care, have largely been unable to pull equity out of their properties. Regulations adopted years ago by the U.S. Department of Housing and Urban Development (HUD), which plays a pivotal role in providing liquidity to RCFs by insuring mortgages, prohibit the agency from providing cash-out loans to the healthcare sector.
By utilizing bridge loans, however, RCF sponsors have a route to cash-out transactions while still complying with HUD regulations, and M&T Bank’s Healthcare Banking group has capitalized on this structure for its clients. The group, which has committed more than $8 billion to the healthcare sector, has created a “bridge-to-HUD” program in partnership with M&T Realty Capital Corporation, M&T Bank’s commercial mortgage banking subsidiary. The bridge-to-HUD solution can free up equity that sponsors can deploy for acquisitions, partner buyouts or other projects.
Under the program, M&T Bank uses its balance sheet to provide a short-term, cash-out bridge loan to borrowers that meet certain financial criteria. The bridge loan is designed to be taken out by HUD’s attractive 232/223(f) program, which offers non-recourse debt at a fixed interest rate that’s generally lower than other types of financing, loan amounts of up to 85 percent of property value, and amortization schedules of up to 35 years. Proper structuring of the bridge loan can also speed up the HUD loan origination, sometimes shaving three to five months off of an application process that can take up to a year.
“Leveraging M&T’s balance sheet with bridge loan structures provides our clients with the flexibility they need to acquire, refinance, renovate, and/or stabilize facilities prior to a HUD permanent execution with M&T Realty Capital Corporation,” says Jack Lewin, a Group Vice President within M&T’s Healthcare Banking group. “We often find that our clients benefit from accelerated acquisition financing, potentially higher proceeds, and the ability to cash out through this bridge-to-HUD program.”
Adds James Schneider, a managing director for M&T Realty Capital in Seattle: “The M&T bridge product is user-friendly in regards to structure, cost, and timing. It can enhance the client’s overall satisfaction with the results of the ultimate HUD permanent placement.”
Borrowers that use the bridge-to-HUD program need to be aware of how the bridge loan’s structure will affect their HUD execution, says Paula Quigley, FHA/HUD program manager for M&T Realty Capital. For property owners that maximize cash-out proceeds in the bridge loan as well as the amount of leverage in the HUD loan, HUD requires the bridge loan to be in place – or “seasoned” – for two years before the borrowers can apply for the HUD loan. Considering it can take up to a year to go through the application process, that would require a bridge loan with a three-year term, she adds.
Borrowers can reduce the length of seasoning required under the following scenarios:
- The cash-out portion of the bridge loan is less than half of the total bridge loan amount, and the HUD loan makes up 70 percent or less of the property’s value.
- The cash-out portion of the bridge loan is more than half of the total bridge loan amount, and the HUD loan makes up 60 percent or less of the property’s value.
Case in point: One of M&T’s customers recently took advantage of a bridge-to-HUD transaction to tap $17.7 million in trapped equity through an M&T Bank bridge loan. Since the amount of debt was less than 70 percent of the property’s value, the bridge loan was immediately eligible for HUD refinancing, and M&T Realty Capital’s team processed the new HUD application while the bridge loan was being closed. Less than a year later, the HUD loan provided the borrower with $1.7 million more in proceeds than the bridge loan.
It is important that borrowers keep HUD underwriting nuances in mind when structuring the bridge loan to capitalize on the reduced seasoning requirements, Quigley cautions. Borrowers need to balance the amount of debt related to project costs with the equity being withdrawn in order to stay within HUD rules, she explains, and HUD also requires properties to have three years of stabilized cash flow.
In general, borrowers that accumulate HUD loans of $90 million or more can expect HUD to conduct a deep and time-consuming review of their credit quality. “This could add months to the approval process,” Quigley advises. “So borrowers need to make sure that they’re managing their exposure to HUD.”
In addition to extracting capital to buy out partners or make acquisitions, borrowers that satisfy the requirements of the bridge-to-HUD program can reap the following benefits:
- Achieve a higher internal rate of return on development and lease-up by recapitalizing equity.
- Gain quick access to capital to exercise time-sensitive purchase options.
- Refinance working capital used for lease-up and stabilization purposes.
- Balance loan portfolios of floating and fixed interest rates.
While the bridge-to-HUD program is tailored specifically for RCF sponsors, M&T Realty Capital also offers bridge financing programs for private pay seniors housing, including independent and assisted living and memory care, as well as multifamily properties. Multiple permanent loan options are available once properties are stabilized.
“DUS®” is a registered trademark of Fannie Mae. “OptigoSM” is a registered trademark of Freddie Mac.
M&T Realty Capital Corporation is a wholly-owned commercial mortgage banking subsidiary of M&T Bank, Member FDIC. Equal Housing Lender. Bank NMLS #381076. All loans and all terms referenced herein are subject to receipt of a complete application, credit approval, and other conditions.