Apartment Loans

HUD 232/223(f) Loan

By Terry Painter/Mortgage Banker, Author of The Encyclopedia of Commercial Real Estate Advice – Wiley Publishers, Member of The Forbes Business Council

 

The HUD 232/223(f) loan is for the acquisition or refinance of Senior Independent Living, Intermediate Care, Assisted Living and Licensed Nursing Home facilities. All properties are required to have 20 or more residents who require skilled nursing care and are in continual need of nurses, certified nurse assistants, and other care providers.  All properties must be licensed by the state or other governing agencies. Eligible borrowers can include for profit investors or nonprofit corporations or associations.

 

HUD 232/223(f) Requirements and Guidelines

For Acquisition or Refinance of Senior Independent Living, Intermediate Care, Assisted Living, and Licensed Nursing Homes

  • Loan Sizes:  $3,000,000 – $100,000,000 plus
  • LTV: 80% for Profit, 85% Non-Profit Refinance, 90% for Non-Profit Purchase 
  • Loan Modification Allowed to Lower Rate if Rates Come Down
  • 35-Year Fixed Rate
  • 35-Year Term and Amortization
  • 1.45 DSCR
  • Non-Recourse
  • No Tax Returns
  • No Debt to Income or Global Ratio for Borrower 
  • Assumable with a .50% fee
  • Loan Fee: 1 – 2%
  • HUD Approval Fee: .30%
  • HUD Exam Fee: .40%
  • Mortgage Insurance Monthly: 65% 
  • Replacement Reserves Required Monthly for Future Repairs and Replacements
  • Current Similar Property Ownership Experience Required
  • Any Size Market Okay
  • Good Credit Required
  • No Minimum Net Worth Requirement
  • Declining Prepayment Penalty 1st 10 years
  • Rate Lock at Loan Approval. 
  • 6 Months for Closing

 

Advantages of HUD 232/223(f) Multifamily Loans

From my 24 years making HUD Multifamily Loans, one loan that stands out was for a state licensed memory assisted living center in Medford, Oregon. This was a beautiful 40 room/bed facility that was built with four wings. There was a central nursing station, and then each wing had 10 rooms with private baths for individual residents, a living room, dining room and full kitchen. Each wing was set up for a large family where residents could hang out together or even help in the kitchen if they wanted.  

 

My client was a dentist whose mother lived there. He was so enamored with the place that he decided to buy it as an investment property when it came up for sale. I used HUD 232/223f financing to land this property for him. Although he did not have experience running an assisted care home, he took my advice and hired a health care  management company that did. They also became a minor share partner in the operation which made the loan possible with my clients lack of experience.  

 

This was my first 232/223f loan and the most technical and complex commercial loan I had worked on as a loan officer to date. What made it difficult was that the business had two income streams which were shown on separate spread sheets. One was for the room, or rental business, and one was for the board or services business. The services business charged for meals, assisted living care, room maid services and more. Having 2 businesses in one made this a very profitable business.  

 

I was impressed that my borrower could acquire this property with a 35-year fixed fully amortizing loan at an 80% LTV. That this was a non-recourse loan was the icing on the cake. This meant he did not have to guarantee the loan and risk losing any of his personal assets should the venture fail. This investment was for his retirement and the low HUD Multifamily Loan Rates and 35-year amortization meant his payments would be on the low end for such a high leverage loan.   

 

Actually, my client only put 10% of the total cost of acquiring the property of his own cash in the project. He formed a real estate syndication to bring in 3 passive investors for the balance. It was amazing how user-friendly HUD was when allowing the main key principal to put so little down and raise cash from investors.  

 

Click on this link if you want to view an extensive list of the main Advantages of HUD Multifamily Loans. And this link if you want to read just about everything about HUD Multifamily Loans.

 

And here’s a HUD Multifamily Loan Glossary with 74 terms defined for a fast look up.

 

Disadvantages of HUD 232/223(f) Multifamily Loans

The number one disadvantage of the HUD 232 is that it’s going to take a minimum 6 months to close and it will likely take longer as you coordinate the loan process with approvals from the state. Another con is that the loan has a much higher Debt Service Coverage Ratio (DSCR) than most loan programs at a 1.45. This often constricts the loan size down. HUD mandates this because of the inconsistent income from the services side of the two income streams I mentioned earlier.  

 

Another disadvantage is that these loans have higher closing costs than most commercial loans. There is a loan fee to the lender, HUD and a1% fee at closing to start mortgage insurance premium, which is required because of the high leverage of these loans. Mortgage insurance is the reason why HUD can guarantee these loans. 

 

HUD requires one of the most extensive property condition reports called a Property Capital Needs Assessment (PCNA), which looks at in detail all the major systems including the structure and roofing, electrical, plumbing, HVAC as well as walkways, and parking lots. All properties will need to be brought up to good condition. For older properties it might be cost prohibitive to bring them up to HUD standards.

 

Then the 232 loan doesn’t work for small loans. Because of all the work and time involved, most lenders want a minimum loan of $3 million if not $5 million. And then if this property is going to be one of your main sources of income, it could be inconvenient to only be able to take owner draws twice a year after an annual financial audit is completed and inspected by HUD. Click on this link for much more detail on the Disadvantages of HUD Multifamily Loans.   

 

Eligible Properties

Nursing Homes, Assisted Living Facilities, Intermediate and independent care facilities that offer assisted living and board and care homes are eligible properties. All properties are required to have 20 or more residents who require skilled nursing care and are in continual need of nurses, certified nurse assistants, and other care providers. All properties must be licensed by the state or other governing agencies.

 

HUD requires one of the most extensive property condition reports called a Property Capital Needs Assessment (PCNA), which looks at in detail all the major systems including the structure and roofing, electrical, plumbing, HVAC as well as walkways, and parking lots.  

 

Eligible Borrowers

Eligible borrowers can include for profit investors or nonprofit corporations or associations. The applicant is required to provide a statement from the state licensing agency stating that they are qualified to run the facility. Borrowers who are purchasing must have current experience owning a similar facility. Key principles that don’t meet this criteria can take on an experienced partner that does. Hiring a professional management company that is state licensed and experienced and making them a minority partner can be acceptable.

 

Getting Pre-Qualified

Call one of our friendly highly experienced loan officers to discuss your transaction to see if you and the property are a fit for a HUD 223(f) loan. We will be pleased to size a loan for you that will give you a quote for maximum loan amount, along with loan expenses and projected time involved.

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