Get the 411 on Section 232
This HUD program for senior housing may be even more attractive in 2012
It has been a busy year for the U.S. Department of Housing and Urban Development’s (HUD) multifamily-insurance programs, and its Section
No. 232 program is no exception. After
accepting a record 787 applications in
fiscal-year 2010, the 232 program may
eclipse that mark this year, with 692
applications approved by the end of
August and a month still left in fiscal
2011 at press time.
For commercial mortgage brokers
working with senior-housing developers, Section 232 loans are likely to be
at least as popular in 2012 as they have
been this past year, thanks to HUD’s aggressive efforts to accelerate approvals.
Among its efforts, HUD hired 30 full-time
staffers and contracted with a third-party under writer this past July to help it
get through the backlog of applications.
Even with the extra manpower, there
is every reason to believe that the two
bottom all year, with minor fluctuations.
“All signs point to rates staying
suppressed in the coming year,
with the economy still facing major
headwinds and the Fed committed to
maintaining a low-rate environment.”
in Medicare rates, effective this past
Oct. 1. The purpose of the reduction is
to correct an error made the previous
year that resulted in what CMS claims
were overpayments to skilled-nursing
owners. Although the cut still leaves
Medicare rates above fiscal 2010 levels, HUD is taking a cautious approach
by adjusting current trailing 12-month
revenues to the new lower rates, leading to lower EBITDAR.
HUD is also focusing on borrowers
who submit multiple simultaneous loan
applications. Unlike conventional lenders, HUD is not a true portfolio lender.
Statutory constraints prevent HUD from
cross-collateralizing loans. Also, the
agency cannot allow a high-performing
facility to carry a lesser-performing facility that doesn’t underwrite to minimum statutory requirements.
HUD is about to impose a master-lease requirement for transactions
involving three or more facilities to protect against borrowers who may opt to
allow a lesser-performing property to
fall into default, rather than support it
with proceeds from other HUD-financed
performers. This solution essentially
creates a cross-default mechanism designed to mimic the cross-collateraliza-tion conventional lenders require.
primary drivers for Section 232 demand
— low interest rates and a dearth of alternative funding sources — will remain
in place going into next year. Commercial brokers who want to keep pace
with the times would be wise to brush
up on the recent history of Section 232
and how it will affect their business.
are even more cautious today given
concerns about the state and federal
governments’ ability to continue funding these entitlement programs at past
levels. This is a significant concern,
given that these programs represent
more than 90 percent of revenue at the
average skilled-nursing facility.
Low rates, few alternatives
HUD’s Section 232 program provides
acquisition, refinance and construction
loans for licensed senior-housing and
health-care facilities, such as assisted-living and skilled-nursing properties.
The program offers mortgage insurance on fixed-rate, nonrecourse, self-amortizing loans for 35-year terms for
existing properties and as many as 40
years for new construction.
In the past year, borrowing rates on
232 loans, already the lowest in the sector, hit record lows as long-term interest
rates fell on weak economic data and
moves by the Federal Reserve System
to balance its nearly $3 trillion securities
portfolio. Rates on Ginnie Mae securities,
the capital source for almost all HUD-in-sured loans, hit an all-time low in December 2010 and have bounced around the
What you should know
If you work with developers or owners
of senior-housing and health-care properties, there are a few things to bear in
mind when exploring the 232 program
for new construction and for refinancing existing debt. For new construction,
keep in mind the following:
• strong market demand for the facility
in the local market is a must.
• loans cannot exceed the lower of
90 percent of HUD cost or 75 percent stabilized value (80 percent for
• hud allows borrowers to use equity
in the land toward their equity requirement, so be ready to provide the
lender with land cost and land value.
• Mortgagable costs do not include de-
velopment fees, initial operating defi-
cit escrow, 2 percent working-capital
requirement or an estimated six- to
18-month debt-service reserve.
• • •
Regardless of whether HUD and its
beefed-up staff will reach the goal of re-
ducing the Section 232 backlog in 2012,
it is safe to say that the department is
moving in the right direction and the
worst of the delays is behind us. This
likely will translate into additional appli-
cations in fiscal 2012, as borrowers who
were once turned off by the processing
delays flock to the improved program.
HUD’s moves to eliminate the Section 232 processing queue and to continue to safeguard taxpayers against
loss will likely make a popular financing
option even more attractive in the coming year. Brokers who are new to the
program should educate themselves
on its various requirements, as having
the right expectations going in can be
the difference between a successful
and an unsuccessful transaction. •
What’s new for 2012
Another factor that should affect the
processing of Section 232 applications
next year is HUD’s Office of Healthcare
Programs’ stated goal to stay focused
on careful underwriting. One way the
office is remaining vigilant is by conservatively adjusting revenue estimates to
reflect new Medicare and Medicaid reimbursement rates.
This past summer, the Centers for
Medicare and Medicaid Services (CMS)
announced a dramatic 11.1 percent cut
Leonard A. Lucas, first vice president and senior
loan originator, joined Love Funding in 1998
and has consistently been a top producer. He
originates Federal Housing Administration
multifamily accelerated processing and LEAN
loans. Lucas is an executive board member
of the American Senior Housing Association
and an advisory board member to the National
Investment Center for the Seniors Housing and
Care Industry’s Skilled Nursing Investment
Forum. Reach him at (617) 638-0055 or Llucas@