Consider this HUD refinancing opportunity: the continuing low interest rate environment has given HUD-financed LTC borrowers a chance at savings

Nursing Homes, Sept, 2005 by Jeffrey A. Davis

With interest rates near 40-year historic lows, an infrequently used U.S. Department of Housing and Urban Development (HUD) funding program is moving up the charts for senior housing/healthcare borrowers. The funding vehicle, HUD's 223(a)7 program, enables owners and operators of senior housing/healthcare properties to realize substantial savings as the result of refinancing an existing HUD loan. In early July, rates for these loans were in the 5.50% range.

HUD's 223(a)7 program has been on the books for a while, but the program is most appreciated at a time like this when interest rates are low and refinancing can be very economical. Candidates in the current market are borrowers who have existing HUD loans funded with an interest rate of 7% or higher.

Typically, HUD 223(a)7 loans are processed in two to four months, which is a lot less time than it takes to process other HUD loans. Also, borrowers can obtain funds to cover prepayment penalties, closing costs, and approved capital improvements.

To determine if the opportunity makes sense for them, CFOs and/or comptrollers are urged to thoroughly review their records. As long as the original loan is past the lockout period, paying prepayment penalties can make sense with interest rates as low as they are today. Costs associated with the refinancing program can usually be recovered within months.

There's a reason HUD has become a dominant player in today's senior housing/healthcare market. The department offers FHA-insured loans for virtually every senior housing/healthcare category, including skilled and intermediate-care nursing homes, assisted living facilities, board-and-care facilities, and personal care homes. Programs are also available for psychiatric hospitals and other special-use hospitals.

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In addition to refinancing, HUD loans are available for new construction, rehabilitation, and acquisitions that can include rehab. The rewards for borrowers who qualify for loans between $2 million and $100 million are lower rates plus superior terms and conditions.

For example, HUD offers borrowers a 40-year fully amortized loan for new construction, major expansion, or rehab, and a 35-year term and amortization for refinancing. The loan-to-value ratio is 90% for new construction and 85% for refinancing and acquisitions.

When refinancing, HUD borrowers may qualify for up to 100% loan-to-cost funding. All loans are underwritten on a nonrecourse basis, which means the individual borrower is not personally responsible for the debt.

With HUD, the interest rate is fixed and will not change over the life of the loan. Another nice feature is that HUD allows borrowers to process construction and permanent financing simultaneously, eliminating fee duplication.

From the borrower's perspective, it's nice to know that the commitment process follows uniform guidelines. Also, the underwriting process for the 223(a)7 program--and every other funding program offered by HUD--is standardized everywhere in the United States.

Jeffrey A. Davis is Chairman of Chicago-based Cambridge Realty Capital Companies, one of the nation's leading senior housing/healthcare lenders, with more than 275 closed transactions totaling more than $1.75 billion since the 1990s. For further information, phone (312) 521-7600 or visit www.cambridgecap.com. To send your comments to the author and editors, please e-mail davis0905@nursinghomesmagazine.com. To order reprints in quantities of 100 or more, call (866) 377-6454.