Lenders who make their money on bridge loans will need to change their approach
By Leonard Lucas
Oftentimes, the most interesting aspect about a flurry of activity is what hasn’t changed when all of the dust settles.
Proposed changes to HUD’s Section 232 LEAN Program have captured the attention of owners and operators of skilled nursing, assisted living and memory care facilities — and for good reason. If finalized as proposed, the changes would make it much faster for some to obtain long-term, non-recourse HUD financing after a cash-out refinancing or partner buyout.
Under the proposed changes, healthcare facility borrowers aiming to cash out or finance a partner buyout would no longer have to meet the two-year seasoning requirement under the following scenarios:
- If less than half the bridge debt is cash out, two-year seasoning will be eliminated for a maximum 70 percent loan-to-value HUD-insured loan.
- If greater than half of the bridge debt is cash out, the two-year seasoning will be eliminated for a maximum 60 percent loan-to-value HUD-insured loan.
In either of the above scenarios, cash flow used for underwritten debt service and valuation purposes must be supported by at least three years of strong history.
The two-year seasoning requirement will remain for the refinance of 70 percent to 80 percent loan-to-value cash-out bridge loans, without regard for the amount of the cash out.
In some cases, the elimination of the two-year seasoning period after such transactions could add up to tens of thousands in debt-service savings, particularly if rates start to rise substantially.
But lost in all of the coverage of the promising changes is one constant: borrowers will still require conventional financing in the interim.
Some lenders will take a hit
HUD is not saying they are going to allow borrowers to use the LEAN program to take cash out of their projects or fund partner buyouts. What they are saying is that it will allow the LEAN program to refinance conventional cash-out loans without imposing the two-year seasoning requirement, which has proven to be an obstacle for some facility owners.
Particularly in this rate environment, two years can be a long time to wait. The changes HUD has proposed are laudable because they aim to better meet the needs of borrowers while strengthening the overall profile of healthcare properties in the LEAN portfolio.
The underreported piece of this story is the impact on conventional lenders, many of which do not directly originate HUD loans. As it stands now, they can undertake a bridge loan for a healthcare facility knowing full well they can count on at least two years of interest payments, thanks to the existing seasoning requirement. This is important — underwriting and originating loans is a costly endeavor, both in direct expenses that support the process and time spent on each loan.
Under the new rules, though, a borrower that qualifies could turn around and take out the conventional loan in under six months with a new long-term, HUD-insured loan (assuming the LEAN application is filed simultaneously with the conventional cash-out bridge closing). Unless they do something about it, the conventional lender is probably merely breaking even on all the costs tied to the loan.
And you’d better believe these lenders are going to do something.
Adjusting to the new rules
In most cases, the lender will charge an exit fee to account for the lost interest resulting from a shorter loan term. These added costs may come as a nasty surprise to many healthcare facility owners looking to take advantage of the new LEAN changes.
Thankfully, such moves won’t be uniform across the lending community. In recent years, well-established HUD lenders have worked to build out their conventional bridge financing operations.
These multi-pronged players are much more content to simply let those loans roll off the books in a few months’ time because their HUD lending arm is still actively involved with the project. They don’t need to charge back-end fees because they’re focused on building a mutually beneficial, long-term relationship with the borrower, and not doing so would probably send the borrower elsewhere.
Although the final changes have not been officially implemented, HUD is currently entertaining waivers to allow for the proposed changes to be utilized. This means that borrowers can now work with their lending partners to structure a two-part debt strategy with conventional bridge financing and long-term permanent HUD financing.
The new changes to the LEAN program promise to expand choices and flexibility when it comes to financing healthcare properties. But it’s important to choose your financing partner carefully in order to put yourself in a position to take full advantage.
Leonard Lucas is a senior director with Love Funding, a lender based in Washington, D.C. Lucas joined the company in 1998 and is based out of the Boston office. He originates healthcare and multifamily HUD loans, and advises borrowers in the seniors housing industry.