You can’t blame owner/operators of smaller, independently-owned senior care properties for feeling picked on from time to time. It happens that rules sometimes appear to be stacked against them.
For example, in Florida, the owner of a 55-bed assisted living property wanted to refinance his property with a $4 million HUD 232 mortgage loan. But he immediately ran afoul of HUD’s professional liability insurance requirements.
Cambridge Realty Capital Company Assistant Vice President Zachary Scardina explains that HUD requires a borrower to purchase liability coverage of $1 million per occurrence and $3 million in aggregate. However, in this case, the borrower‘s existing coverage was only $60,000 per occurrence and $100,000 in aggregate.
The owner balked at the higher cost of coverage but also worried that the larger coverage amount might “put a target on his back” in a very litigious state. Cambridge thoroughly reviewed the borrower’s claims and clinical performance history and established the owner’s bono fides. With this work done, the lender was able to negotiate and obtain a waiver from HUD that enabled the borrower to purchase liability insurance for $250,000 per occurrence and $750,000 in aggregate, which was greater than the amount he currently had but far below the usual coverage amount required by HUD.
Insurance wasn’t the only potential deal breaker. Whereas the state of Florida requires only one full bathroom for every six residents, HUD requires one for every four. Unless a waiver could be obtained from HUD in advance, the borrower was looking at significant new construction costs. However, Mr. Scardina said Cambridge anticipated this potential problem and was able to present the owner’s arguments and obtain a waiver from HUD early in the process.
Another potential roadblock was created by the bank that proffered the owner’s operating account. HUD requires these banks to jointly sign a Deposit Account Control Agreement (DACA) with the owner and the lender refinancing the mortgage. Unfortunately, in this case, the owner’s bank was unwilling to sign a DACA for anything less than $10 million, which ruled out the much smaller $4 million mortgage loan the owner was seeking to refinance with HUD.
Mr. Scardina says Cambridge regrouped and was able to find a new, conveniently located bank in South Florida that was willing to sign the DACA Agreement. But the owner’s problems were not over yet. It was 2013 and the HUD funding process suddenly came to a screeching halt throughout the nation when the U.S. Congress elected to shut down the government. When the government later reopened again for business, many borrowers needed to start the underwriting process all over again from scratch.
“The owner deserves a lot of credit for having the patience and determination needed to overcome the problems that emerged. The reward was closing the HUD 232 loan with a historically low rate.