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HUD FHA Section 232 New Construction for Healthcare Properties

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HUD FHA Section 232 Construction or Substantial Rehab for Healthcare Properties Program Overview

Section 232 provides rehabilitation and construction loans for healthcare properties collectively referred to as Residential Care Facilities. Property types include, skilled nursing, intermediate care, assisted living facilities and other special care properties.
  • Up to 40 year fixed rate terms
  • Up to 90% of estimated cost
  • One closing with permanent rate lock prior to commencement of construction loan
  • Available for licensed nursing home, assisted living, intermediate and memory care and skilled nursing
  • Non-recourse
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HUD FHA Section 232 Construction Program Guidelines

Eligible Properties Section 232 provides construction loans for assisted living facilities, skilled nursing, skilled nursing and intermediate and memory care properties meeting the following requirements:
  • Must provide continuous care.
  • Must offer three meals per day.
  • Facility must be licensed by appropriate government entity.
  • Non-resident day care not to exceed 20% of gross area and 20% of gross income.
  • May include up to 25% non-licensed independent living units.
  • 20 bed minimum.
  • Operating leases to qualified facility operators are permissible, subject to HUD approval.
  • Major movable equipment, day-care facilities, and fire safety equipment may be financed.
  • If a state has a Certificate of Need program, a CON must be obtained prior to filing for Pre-Application.
Medicaid Rule Medicaid rates, regardless of the composition of the project's actual or proposed occupancy, will be used to establish the income estimate of 67% of skilled nursing facility/intermediate care beds. Medicare rates will be used for no more than 3% of the beds. This rule does not apply to board and care or assisted living facilities.
Commercial Space Commercial space is limited to 10% of gross floor area and commercial income is limited to 15% of gross income.
Prevailing Wage Standards Contractors for new construction and substantial rehabilitation projects must comply with prevailing wage standards under the Davis-Bacon Act. Section 221(d)(3) mortgages require appropriated credit subsidy, which is limited.
Maximum Construction Loan Amount (LTV) Maximum loan amount will be the lesser of:

1. 90% of the HUD eligible Replacement Cost of the facility (hard costs, soft costs and land value);
2. 80% of the market value for Skilled Nursing Facilities (up to 85% of market value for qualified Non-Profit borrowers) and 75% of market value for Assisted Living and Memory Care facilities (up to 80% of market value for qualified Non-Profit borrowers);
3. Minimum Debt Service Coverage of 1.45x.

Substantial Renovation Loan amount is determined in the same manner as new construction, unless the mortgagor already owns the property. If the mortgagor owns the property, the cost criterion equals the redevelopment cost plus the lesser of the existing indebtedness before rehabilitation or 90% of the estimated value of the project before rehabilitation.

 

Cost of improvements must exceed 15% of the “as rehabbed” appraised value. A property can also qualify if two or more major building components are replaced, regardless of cost.

Eligible Locations All 50 states, Puerto Rico, U.S. Virgin Islands, and Guam.
Fixed Rate Term Actual construction period plus 40 years (fully amortizing with interest only payable during construction period).
Minimum DSCR 1.45.
Maximum Processing Occupancy Underwritten to a maximum of 95% occupancy.
Prepayment Penalty Negotiable - typically a two-year lock out followed by a step down premium (e.g. 8,7,6,5,4,3,2,1).
Guarantee Non-recourse for most loans subject to standard carve-outs.
Assumable Yes, subject to lender approval.
Escrows 1. Replacement reserves required in accordance with HUD guidelines;
2. Taxes and Insurance escrowed monthly (post construction);
3. Working Capital Reserve equal to 2% of loan amount (post in cash or LOC);
4. Typically equal to 12-18 months of debt service and released upon property maintaining 1.45x debt service coverage for 3 consecutive months;

5. Debt service reserve is required and ranges from 6-12 months of principal, interest and MIP payments; will be held until an average debt service coverage of 1.45x is met for 12 consecutive months (no month can be below 1.25x).

Mortgage Insurance Premium Payable at closing in an amount equal to 0.77% of the loan amount for each year of construction.
Fees and Expenses 1. HUD Fees - Application Fee and Inspection Fee;
2. FHA Mortgage Insurance Premium due at closing;
3. Lender Financing and Placement fee up to 3.5% payable at closing;
4. Actual cost of Third Party Reports.
Third Party Reports Appraisal, Market Study, Phase I Construction Cost Review, and Plans and Specs Review are required.
Sponsor Requirements
  • Experienced owner operators.
  • Minimum credit and financial capacity requirements.
  • HUD experienced development team highly recommended.
Application Process The first step of the process (Pre-Application) is to complete an initial due diligence package to be submitted to HUD. HUD reviews the Pre-Application package and will either invite the lender to apply for a Firm Commitment for mortgage insurance, or decline to consider the application further. If HUD determines that the Pre-Application package meets its minimum underwriting and eligibility requirements, a full underwriting package is completed and submitted along with a Firm Commitment application to the local Multifamily Hub or Program Center for review. The application package is reviewed to determine whether the proposed loan is an acceptable risk. HUD will consider market need, zoning, architectural merits, strength of sponsorship, availability of community resources, etc. If the proposed project meets program requirements and is determined to be of acceptable risk, the local Multifamily Hub or Program Center issues a commitment to the lender for mortgage insurance.
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What You Need to Know About Section 232

Program descriptions, highlights and underwriting guidelines are helpful when considering if commercial mortgage program is right for you and your property. However, they don't always tell the whole story. Below is what you need to know about Section 232 Healthcare Construction Loan program that program guidelines and highlights don't tell you.
  • The general contractor must execute a guaranteed maximum price contract, provide a 100% performance and payment bond (or cash or letter of credit acceptable to FHA), and have liquid net worth equal to at least 5% of the project construction contract plus all other uncompleted construction work.
  • The mortgagor must retain a qualified arms-length supervisory architect during construction.
  • The property will be required to submit an annual audit of operations to HUD and lender.
  • Surplus cash may be distributed two times per year.
  • Full or partial compliance with ADA and UFAS requirements may be required.
  • A post-construction certification of actual costs will be required.
  • HUD requires that healthcare facilities maintain adequate liability insurance.
  • Any “off site” construction costs or demolition costs require separate funding by the mortgagor.
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