Senior Housing Deal Fatigue – How to Survive?

Patience is a virtue. That timeless adage can be equal parts comforting and frustrating. Yes, taking a deep breath and staying the course can often lead to the best of results. But alternatively, waiting for things to unfold can leave one feeling powerless and anxious. Such is the dilemma often faced by those waiting for their loan application to make it through the HUD LEAN backlog and to the closing table. However, when it comes to maneuvering a loan application through HUD’s crowded queue and enduring the fatigue of a lengthy deal process, patience is paramount. So too, are accuracy, attention to detail, thoroughness, and an understanding of health care credit characteristics and the HUD loan process.

HUD loans can offer attractive rates and some of the longest, most financially beneficial terms available. But borrowers should keep in mind that the HUD process is just that—a process. As such, the wait involved in a HUD loan can be difficult for a borrower to endure unless they are prepared for it.

HUD’s process consists of putting applications in waiting areas, or queues, before the agency assigns them to an underwriter for processing and review. The queues consist of:

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Sec. 223(f) Regular Queue: All 232/223(f) projects not part of a large or midsize portfolio, or that do not pass the general risk assessment

Sec. 223(f) Green Lane Queue: All 232/223(f) not part of a large or midsize portfolio, projects that pass the risk assessment

Sec. 223(f) Portfolio Queue: Projects that are a part of a previously approved large or midsize Portfolio

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Other Program Queue: Sec. 232 new construction, substantial rehabilitation, 232/241(a) and 232 blended rate applications

Section 223(a)(7) Queue + Green Lane Queue

The Section 232 program finances the construction or substantial rehabilitation of skilled nursing, assisted living, and board and care facilities with limited independent living units. The Section 223f program is for refinancing or purchasing such properties. The Section 223a7 program is used to refinance existing HUD-insured loans. The lender will help the borrower determine which program and which queue is most appropriate if the borrower’s project has the potential to be adapted to more than one program.

Each queue moves at a slightly different pace, but all follow the same basic process. Depending on the transaction type, a HUD loan application can take approximately eight to 14 months to get to the closing table. With the current high demand for HUD financing, that is a best case scenario. To prevent an application from getting stalled in the queue, or, worst case scenario, sent to the back of the line, preparation and thoroughness are crucial.

Preparing the loan application is a long process, often taking up to three months. Most of this process will be coordinated by the lender, and the quality of its execution will determine how smoothly the application makes its way through HUD’s various evaluations. Credit strengths and weaknesses must be carefully detailed, making a lender’s familiarity with HUD, health care reimbursement and market issues of paramount importance.

Experience with HUD is also an important consideration when retaining legal counsel, appraisers, engineers, the title agent and land surveyors. Familiarity with the HUD loan process can keep all these parties on track and help avoid application omissions that could cause the project to lose its place in line.

In anticipation of a project being assigned to a HUD underwriter, the borrower and lender should update all financial information, census data, and any other items that may have changed since the original submission. Since HUD will request this information anyway, this will ensure the update is ready to be submitted and no time is lost. Weekly discussions between the borrower and the lender are a good way of ensuring this due diligence proceeds as quickly as possible.

Once a HUD underwriter is assigned, the application’s thoroughness comes into play. The more accurate and clean an application is, the less likely it is to be flagged. An open line of communication with the HUD underwriter is critical, as underwriter experience with certain credit and application nuances varies: Although all underwriters operate under the same guidelines, inevitably some will have more experience with certain deal circumstances than others. Keeping them abreast of the nuances of one’s particular deal is vital. A good lender will work with its client and the assigned HUD underwriter to head off as many potential issues as possible.

One potential problem that may strain one’s patience is perception of a project’s value. When a loan application is in the appraisal review process, it is possible that the committee will view the project’s value differently from the lender presenting it. Here, again, communication and experience are crucial because a lender that understands HUD’s expectations has the best chance of living up to them.

The next step in the process is the transition from underwriting to loan committee. The HUD underwriter will prepare a detailed loan memo that will be presented to the bi-weekly loan committee meetings. These meetings are conducted by the senior LEAN staff, and result in either the issuance of a firm commitment, a rejection of the loan request or further questions that need to be answered before proceeding. The clearer the HUD underwriter’s understanding of the key strengths and weaknesses of a transaction, the better able he or she will be in preparing the memo for loan committee, and securing the desired outcome.

It is important that the HUD underwriter has a complete understanding of the credit before he or she brings it before HUD’s loan committee. If that means an extra week or two is added to the wait that is acceptable: The last thing one wants is to have a deal rejected because it was rushed to committee prematurely. Both the borrower and the lender should be prepared to respond quickly and completely to any queries posed by the HUD underwriter at this time.

Once the underwriter makes it through all of the documents and approves them, a firm closing date can be set. Closing can then take up to two months.

The HUD backlog is expected to ease with new hires approved in 2011 and as other financing becomes viable again when market conditions ease. Nine new account executives are expected to begin processing HUD LEAN health care loan applications, and additional hires have been made in asset management and closing coordination.

There is no secret path that leads one through the HUD queue faster than others. No financial firm or lender can move a HUD loan to the front of the line, though an experienced lender will know which queues typically move faster and whether a client qualifies to be placed in them. Nor should one expect a call to a congressperson to help in moving up the queue. The checks and balances built into the system are designed to keep it autonomous and free from influence. The best advantage a borrower can have is a lender with ample HUD experience, one that understands health care credit characteristics and how to qualify a loan application for the various queues, and who provides regular updates and stays in touch with timely information. Assuring the right team members are on board will help ensure an application starts smoothly and keeps moving through the queue as fast as possible and will help ensure that one’s patience pays off.

Reprinted with permission from Lancaster Pollard’s ‘The Capital Issue’ at www.lancasterpollard.com.