HUD released a new draft handbook for the Section 232 Healthcare Mortgage Insurance Programs that will offer new financing opportunities for healthcare borrowers. Some of the more noteworthy changes proposed in the new handbook include:
Improved Debt Seasoning RequirementsThe new debt seasoning requirements focus exclusively on the period of time needed for a project to demonstrate its ability to generate a sufficient level of cash flow to support the value and pay the debt service. What this means is that there is no longer an automatic two-year seasoning requirement, but rather tiered leverage depending on the use of the existing debt.
% of Existing Debt Used for Project Purposes
(vs. equity out)HUD Loan Amount
≤60% LTVHUD Loan Amount
61-70% LTVHUD Loan Amount
≥71% LTV>50%No seasoning requiredNo seasoning required2-year seasoning required≤50%No seasoning required2-year seasoning required2-year seasoning required
In order for the two-year seasoning requirement to not apply, value must be supported by 3+ years of stabilized historical cash flow which supports the market value.
Operator Debt Now EligiblePreviously, all operator debt was considered ineligible for refinancing with HUD. Now, any operator debt tied directly to the project is considered eligible, including costs related to FF&E purchases, working capital related to lease-up and stabilization, and capital expenditures. Costs associated with AR lines of credit, acquiring beds or CON’s are still not eligible.
Identity of Interest (IOI) Purchase DebtExisting indebtedness related to the purchase of partnership interests are now immediately eligible for refinancing through HUD without the two-year seasoning period, so long as the seller has no residual rights to the project control and no residual rights to reacquire the project within 5 years of the HUD closing. The purchase must have occurred prior to date of the HUD firm commitment.
These are only a few of the exciting changes that are part of the revised 232 Handbook – there are many more! HUD has clearly demonstrated their ability to listen to the lender and borrower community in order to provide financing solutions that are more in line with market occurrences. These proposed changes will not go into effect until after the comment period has closed next month, but now is the best time to start exploring what these exciting changes could mean for you and your investments.