The long wait is over! Through a final rule published in the Federal Register on February 5, the U.S Department of Housing and Urban Development (HUD) has at last announced the opening of the Federal Housing Administration’s new Mortgage Insurance Program, FHA Section 242/223(f), for purchasing and refinancing acute care hospitals.
The program will go live on March 7, 2013, when HUD’s Office of Healthcare Programs will begin accepting pre-applications from potential borrowers. This new refinancing program will benefit many hospitals nationwide by lowering their interest rates, cutting interest expenses and improving bottom lines – making more funds available to meet community needs.
The new program will complement HUD’s Section 242 Hospital Mortgage Insurance Program, which has been in operation since 1968 and has insured over 400 hospital construction projects totaling nearly $17 billion. Unlike the Section 242 Program, which requires that at least 20 percent of the amount borrowed be for new capital projects (including equipment), the new FHA 242/223(f) Program can be used for “pure” 100% refinancing of a hospital’s capital debt or the acquisition of an existing hospital. While the FHA 242/223(f) Program does not require the undertaking of new capital projects, it will permit limited financing of new capital projects, provided they are less than 20 percent of the amount borrowed.
The FHA 242/223(f) Program promises to be more streamlined than the traditional 242 Program, particularly if the financing does not involve new capital projects.
Hospitals that Benefit: Historically, a wide range of acute care hospitals across the county have benefited from the FHA 242 Program, including critical access hospitals, sole community providers, stand-alone community hospitals, large urban teaching hospitals, safety net hospitals, public and district hospitals. Any hospital burdened with high debt payments or risky variable rate debt should be exploring this new refinance program to lock in a low, long-term, fixed long-term interest rate.
Advantages of FHA 242 Financing
In today’s marketplace, FHA 242 financing is a more attractive alternative than traditional tax exempt bond financing.
- Affordable Financing: With FHA mortgage insurance, hospitals will have the full backing of the U.S. Government in obtaining affordable capital funding to execute your strategic plan, meet your community’s health care needs, and face the challenges of health reform.
- Interest Rates for FHA Insured Loans at an All-Time Low: Lowest interest rate available in the marketplace, more attractive than traditional tax-exempt bonds, which have high reserve requirements and issuance costs.
- Access to Capital for Future Projects: FHA has a special supplemental loan program (Section 241) with a streamlined application process for portfolio hospitals. Several hospitals in the FHA portfolio have multiple FHA loans, which enable the hospitals to stay competitive and to continue to grow and modernize to meet future patient demand.
- Less Risky: An FHA 242 mortgage loan provides a low, fixed interest rate for the full 25-year term of the loan, and is fully amortizing following completion of the construction period. FHA Section 242 mortgage loans assist hospitals in avoiding future interest rate risk, bank risk, renewal risk, and acceleration risk associated with some variable-rate bond transactions.
- No Credit Rating Required: Since the FHA 242 insured debt will be backed by the full faith and credit of the federal government, no credit rating of the underlying hospital is required. Your hospital will not need to stress about maintaining a certain investment grade credit rating to stay compliant with loan covenants, which will be even more challenging given looming health reform cuts to reimbursement and uncertain economic recovery.
- FHA Insured Loans are Non-Recourse: No personal guarantees are required to secure the loan.
- No County or City Debt Capacity Impact: For public hospitals, since the credit enhancement will be provided for the federal government, your hospital’s financing will not impact the debt capacity of your municipality or county.