The Department of Housing and Urban Development’s Section 232 program provides an important opportunity for senior housing owners and operators to obtain financing to update, acquire, or refinance a long-term care facility. Last year, HUD made $5.8 billion available in insured mortgage loans for skilled nursing facilities, assisted living facilities, and board and care facilities and around $5 billion should be available for these loans this year. The terms that are offered in this program, like a 35-year fixed rate package for non-recourse assumable loans, can be extremely attractive and accordingly, senior housing industry participants should consider using this funding source for their capital needs. The Chicago-based financing firm Cambridge Realty Capital has extensive experience with HUD’s Section 232 program and can assist interested parties in obtaining financing under it.

Section 232’s Underwriting Constraints and Approval Requirements

According to HUD’s Section 232 handbook, the underwriting constraints for a basic loan are fairly straightforward. For example, loans cannot exceed 80% of value, except for non-profit borrowers who are capped at 85%. The appraised value of the community is calculated by dividing stabilized net operating income (NOI) by the market capitalization rate. This value should reflect the community’s historical performance and not a sudden increase in NOI that is based on unproven assumptions. Also, as with any financing program, Section 232 applicants must satisfy certain requirements in order to be approved. These can also be found in Section 232’s handbook and some of the most important requirements include the following:

Experience and History

HUD will evaluate the length of time that the community’s owner and operator have held these roles for the facility and for any other facilities that they own and operate.

Incident Reports

Communities that are insured under Section 232 must have a software-based incident reporting risk management system.

Satisfactory Credit

HUD will evaluate the credit history and financial stability of the borrower and will also consider any previous participation that the borrower has with HUD.

A Physical Inspection

Section 232 applicants must undergo a capital needs assessment that will be administered by HUD. As part of this assessment, a third-party specialist will evaluate the community’s physical components, including its systems. The specialist will also identify critical, non-critical, and future capital improvement projects and will develop a reserve schedule for the community. While HUD does not use an arbitrary age limit in its assessment, it does consider functional obsolescence and the estimated useful life of the building and its systems during the evaluation.

Compliance History

When assessing applicants to the 232 program, HUD will also consider the community’s compliance record, including any state surveys for skilled nursing and assisted living facilities and ratings from the Centers for Medicare & Medicaid Services as well.

These are just a few of the requirements that Section 232 applicants must satisfy in order to be approved for financing from HUD. Parties that are interested in Section 232 financing and would like to know what the other requirements are and learn more about the program should contact the experienced financing firm Cambridge Realty Capital for more information.

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