Senior housing companies may soon find it easier to obtain financing through the U.S. Department of Housing and Urban Development (HUD), thanks to changes that the agency has proposed in a new draft handbook for the Section 232 Healthcare Mortgage Insurance Program.
Assisted living and other residential care facilities can use Section 232, also known as the LEAN program, for a variety of purposes, including to finance purchases, new construction, or substantial rehabilitation, or for refinancing.
HUD first released a 232 Handbook in May 2014. The new update contains several changes, among the most noteworthy of which reduce seasoning requirements, enabling senior living companies to act more quickly to refinance bridge loans through 232 in certain cases.
“Before, you had to make a decision, do I wait two years and [hope] interest rates don’t rise,” Mike Gehl, chief investment officer for Washington, D.C.-based Housing & Healthcare Finance LLC (HHC Finance), tells Senior Housing News. “Now, depending on your bridge loans, you can go to HUD a little quicker and lock-in your long-term financing.”
This positive message for senior housing is echoed by other prominent lenders in the space, including Columbus, Ohio-based Lancaster Pollard.
“I see tremendous opportunity,” says Lancaster Pollard President Kass Matt.
Specifically, the proposed new seasoning requirements maintain high leverage standards, keeping the two-year limit in place if the requested 232 loan is greater than or equal to 71% of loan-to-value (LTV). But if LTV is lower, the borrower now may be able to refinance a bridge loan without waiting the two years, depending on the percent of existing debt used for project purposes.
Another potentially valuable tweak to the program relates to identity of interest (IOI) and partner buy-out scenarios, now enabling these types of transactions to be refinanced without two-year seasoning if they meet certain caveats, such as timelines for buyback provisions.
As for why HUD is making these changes now, one reason could be that the agency was seeing loan volume decline, suggests Gehl. Also, other real estate classes, such as multifamily, allow this type of financing.
The current interest rate environment also comes into play, Gehl and Lancaster Pollard’s Matt pointed out. With interest rates still low at the moment, many organizations are wanting to enter HUD financing.
“Now, you’re getting high-quality assets entering HUD in a favorable interest rate environment,” says Matt. “That’s positive for the HUD portfolio.”
And by keeping the leverage requirements high, HUD can loosen the seasoning requirements while still feeling confident that it can maintain its record of having few defaults in the program and maintaining a strong portfolio overall, Matt and Gehl say.
Lancaster Pollard already is seeing a lot of activity and interest in 232 financing, and Matt expects this now to increase. Similarly, Gehl expects that the changes will open up an “array of new options” that will increase volume.
“We really commend HUD for their ability to react to a market opportunity to further benefit senior housing and long-term care,” says Matt.
The changes are not yet effective, as the draft Handbook now is in a comment period through June 1.
Written by Tim Mullaney
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