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Tips For Preparing For Financing Through HudBy Chris Fenton and Mark Dellonte Seeking financing through the U.S. Housing and Urban Development office (HUD) can be a daunting task for a borrower. Significant documentation needs, requirements regarding the structure of the transaction, a lengthy review process and other aspects of these deals can cause some borrowers to avoid the challenge altogether as they seek out alternative sources of financing. Today, however, those alternatives are very limited, and the terms available through HUD have never been more attractive. The combination is leading more borrowers to take a closer look at the possibility of pursuing HUD financing. There is no doubt the process of securing HUD financing requires the fusion of a lot of variables to produce a successful outcome. What many borrowers don't realize is how much easier the process can be if approached the right way. The following tips will help to guide you through the process. CHOOSE THE RIGHT LENDING PARTNER Securing the best financing available requires the right partner -- a lender that knows how to navigate the system and work through the challenges that can arise during the process. To find an experienced lender, a borrower can check out www.hud.com for a current listing of HUD-232 (senior housing and healthcare) approved lenders. Then, review those lenders to find the one that seems most qualified to provide guidance in this arena. Look for a lender who has a skilled staff of originators and underwriters who understand the inner workings of senior housing finance and whose knowledge can help to expedite the process. Your lender also should have solid relationships with qualified third party affiliates, such as appraisers and market study analysts, to ensure that each has experience in senior housing finance. Once an experienced team is in place, the borrower will begin working with the lender to prepare the proper elements of the financing transaction. STRUCTURING THE TRANSACTION Structuring the transaction as a single asset entity is necessary to receive financing. The borrower can only have one asset, which is the property being financed. If a borrower owns several properties it will be necessary to develop a separate single entity for the property being financed in order to qualify for HUD financing. Your lender should serve as a guide through this process to ensure that the structure of the borrowing entity meets the requirements set by HUD. ASSEMBLE THE DOCUMENTATION One of the most crucial, yet tedious, components of senior housing finance is the documentation. A knowledgeable lender will encourage a borrower to have all the paperwork organized in advance to help accelerate the process and should be able to help you develop a list of documents to be assembled. First and foremost, for HUD 232 loans, borrowers need to demonstrate that they have professional liability insurance through a rated insurance carrier. If not, it is important to secure the appropriate insurance before moving forward. The borrower must also provide information about policy limitations and premiums related to the insurance coverage. Other documentation that must be in order includes a three-year operating history, title and survey, resumes of the principals involved in the transaction and appropriate licensing and information about the operator or manager of the proposed facility. Additional information that will help the lender is a list all of the major movable equipment for the property. This should be itemized according to room and include number of beds, chairs, etc. Also, knowledge of competitive markets to add to the market analysis will help to reduce the amount of research done by the lending team, which in turn helps the transaction move forward in a more timely manner. BE PATIENT At this point in the process, it is important for a borrower to remain patient. Remember, it takes the lender time to analyze all of the documentation and work with the local HUD office for review. Often times, choosing a lender who has already established good relationships with a local HUD office can help move things along more quickly because they understand exactly what the agency requires. Even with an experienced lender at your side, a borrower can typically expect the underwriting process to take about 60 days from start to finish. This time includes getting the third parties on board, compiling reports and applications, reviewing all of the documentation and submitting the information to the HUD office. Once the paperwork is with HUD, the agency has five days to review and accept or reject the application. If the HUD office in question deems the application incomplete, it will provide the borrower with a list of deficiencies that will need to be met within five days in order to complete the transaction. Once the application is accepted in for processing, the HUD office has 60 days (in the case of a refinance) to commit to insuring the loan. In some cases, certain offices have responded in far less than 60 days. THE BENEFITS Although the process may seem complex and lengthy, the end result makes it well worthwhile for the borrower. Once HUD has committed to insure the loan the borrower will reap the benefits of having a non-recourse loan for up to 35-years, self-amortizing at a fixed rate of approximately 7 percent in today's market. While the legal team must be brought on board to finalize the details of the agreement, within 45 days of commitment, the borrower can have the funding in place. The challenges facing borrowers seeking healthcare financing are more prevalent than a decade ago and show no sign of diminishing in the near future. Nervous capital markets, industry turmoil and, particularly, changes in Medicare and Medicaid reimbursement, are all dynamics that continue to impede the industry. The traditional financing that was once readily available for this industry sector is no longer easy to find, and even if pursued, can come with terms that impact the profitability of a development. For those borrowers looking for healthcare financing today, the opportunities available through HUD may be well worth exploring, especially if you pursue them with an experienced lender at your side. Chris Fenton is director of senior housing care for Love Funding Corporation, a national mortgage-banking firm offering funding programs for healthcare, multifamily, retail, office, industrial and hospitality properties. He can be reached at (413) 637-2993 or via e-mail at chris@lovefunding.com. Mark Dellante is chief underwriter for Love Funding Corporation and has twelve years of experience in the commercial real estate financing industry. He can be contacted at (202) 887-8475 or at mark@lovefunding.com.
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