By Gary Alex
More than ever before, providers are taking advantage of the
Federal Housing Administration's (FHA's) Section 232 loan
program. These loans offer many benefits to those planning new
construction or substantial rehabilitation of existing healthcare
facilities.
Rates and Terms Are Superior
These loans are competitively priced at around 140 basis
points over the 30-year U.S. Treasury index. Most conduit loans,
by contrast, are priced at a minimum of 250 basis points over the
corresponding U.S. Treasury.
Also, section 232 loans feature the longest loan terms
available in the market, and are fully amortizing over 40 years.
That's in addition to the construction-loan term. Borrowers can
simultaneously lock in a low, permanent interest rate at the time
of construction loan closing, eliminating interest-rate risk on
the permanent loan. This feature is particularly important when
long-term rates are at a 15-year low. Not only that, but
borrowers save a major step when they lock in both rates at once.
Another distinguishing feature of the Section 232 program is
that it is non-recourse during the construction and
permanent-loan terms to the borrower. This is distinctly better
than conventional loan programs.
For providers utilizing tax-exempt bonds, the 232 loan program
offers additional advantages. Specifically, FHA insurance
provides credit enhancement for the bonds. This, coupled with
Ginnie Mae-backed securities, enables borrowers to benefit from
AAA credit rating. This is the highest credit rating that can be
obtained for tax-exempt bond financing. Therefore, due to less
investor risk, it provides the lowest possible cost of funds.
Another advantage of Section 232 loans is equally compelling:
The program has a high loan-to-value (LTV) ratio and a low debt,
service-coverage requirement. Debt service coverage is 1.1 to 1,
and the LTV is 90 percent. The cash equity required ranges from a
low of about 3 percent to an average of around 7 percent,
depending on the market.
Who Is Eligible for Section 232 Financing?
For-profit and non-profit borrowers must be individuals or
single-asset mortgagor entities. Most to-be-built nursing,
assisted-living and personal-care homes are eligible. Also,
existing properties in need of substantial rehabilitation may be
refinanced or acquired using this program. Nursing homes or
intermediate-care facilities must have a state Certificate of
Need (CON). If the state does not issue CONs, owners must present
an alternate market study.
Putting the Program to Work
Many examples of successful financing through Section 232
already exist. For instance, WMF Huntoon Paige provided
FHA-insured financing under the 232 program for several
facilities in 1997. One example is Windsor House Florence, a new
41-bed assisted-living facility in Florence, S.C. The transaction
involved a 40-year, fully amortizing $1.8 million FHA-insured
loan at 7.875 percent.
Another to-be-built project, in Greenburgh, N.Y., qualified
for $18.5 million in FHA-insured financing under the Section 232
program. Owners used the 40-year, self-amortizing loan at 6.8
percent to finance 160-bed Hebrew Hospital Home of Westchester,
N.Y.
In Arvada, Colo., Huntoon provided a Section 232 loan of $3.7
million for Oberon House, an existing 13-bed assisted-living
facility. The 40-year, fully amortizing loan at 6.8 percent is
being used to rehabilitate and expand the facility to 59 beds.
What Are the Program Parameters?
Section 232 loans must be at least $1 million, but no maximum
is imposed. However, FHA does limit the amount it will insure.
Maximum insured mortgages for new-construction loans are set at
the lesser of three amounts:
- The amount that can be supported with debt service,
calculated at 90 percent of the remaining net annual
operating income (after an allowance for proprietary
income).
- Ninety percent of eligible replacement cost, which
includes major moveable equipment, subject to cost
certification.
- Ninety percent of the value of the project upon
completion.
Insurance limits differ slightly for rehabilitation projects.
Maximum insured mortgages will be the lesser of the following:
- The amount that can be supported with debt service,
calculated in the same way as new construction loans.
- The lesser of 90 percent of the sum of the estimated
eligible rehabilitation costs plus project value prior to
rehabilitation, or 100 percent of existing debt or
purchase price, whichever is less.
- Ninety percent of the value of the project upon
completion.
In some locales, Section 232 loans can now be processed faster
than ever. Many FHA field offices have implemented "Fast
Track" procedures designed to ensure a firm commitment will
be issued on an expedited basis. An additional improvement to the
process that has been created and implemented by Huntoon is known
as the Processed Origination Program (POP). Together, these
procedures increase the predictability of FHA commitment results
and further expedite issuance of FHA firm commitments. Borrowers
using Fast Track or POP must pay additional front-end costs for
appraisal, environmental review, architectural plans,
construction cost reviews and a mortgage credit analysis.
However, these costs are normally included in mortgage proceeds.
Although these loans carry 40-year terms, prepayment is
negotiable, depending on the market conditions and interest
rates. Typically, loans may not be repaid during the first five
years of the loan term. Beginning with the sixth year and
continuing through the 10th year, prepayment is permissible under
a schedule where penalties decline from 5 percent to 1 percent.
Thereafter, prepayment at par is permitted. The loans are
assumable at very little expense with prior FHA approval.
As more providers learn the advantages of the Section 232
program, more healthcare facilities can be created to fill the
nation's growing need for assisted-living and long-term-care
beds.
Gary Alex is executive vice president and FHA national
production manager of WMF Huntoon Paige, an originator of
FHA-insured multifamily and healthcare loans. Mr. Alex can be
reached at (404) 240-4308.
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