A common challenge leased nursing homes encounter is five-year commercial mortgage balloons. This results in significant expenses every five years to extend or replace your mortgage. The Department of Housing and Urban Development ("HUD") offers alternative financing under Section 232.

Advantages

Eligible facilities enjoy the following advantages under a Section 232 loan:

1. The mortgages are fixed rate and non-recourse. The borrower knows the cost and their personal assets are not at risk in case of default.
2. High leverage. The loans allow high loan to value ratios. For existing facilities, the maximum is 85% (90% for nonprofits) of the estimated value of the physical improvements and major moveable equipment.
3. Long-term financing. Section 232 loans usually have a 30-year amortization with no balloon payment.
4. Distributions are generally permitted. Depending on the Regulatory Agreement, borrowers may take distributions based on the project's surplus cash. Surplus Cash is generally defined as operating cash less current liabilities, including accrued interest, and is calculated semiannually. The borrower is in compliance with its Regulatory Agreement as long as Surplus Cash is positive. To the extent Surplus Cash is negative, the borrower needs to repay the project any distributions taken in the previous six month. The borrower should always reference its Regulatory Agreement before taking distributions to ensure HUD compliance.

Disadvantages

While the loans have significant advantages, potential borrowers need to consider the following:

1. Upfront costs. The initial fees can be substantial, including application fees, inspections, and legal expenses. However, we find our clients with Section 232 loans find the additional costs are offset by interest rate savings and lower long-term costs from not having to obtain new financing every five years.
2. Lengthy approval process. The approval process for a Section 232 loan can be lengthy as there are significant regulatory requirements and extensive underwriting.
3. Annual audits. HUD requires the borrower submit audited financial statements within 90 days of year-end. Extension are typically not granted.
4. Regulatory Agreements for the Borrower and Operator. Both the borrower and operator consent to various HUD requirements.

Eligibility Requirements

A broad range of properties can apply for obtain Section 232 financing:

1. Eligible properties must offer ongoing, continuous care for individuals requiring long-term care or medical attention. Eligible facilities include nursing homes, intermediate care facilities, and assisted living facilities. These facilities can be combined in one facility.
2. Facilities must be licensed or regulated by an appropriate state or local government agency.
3. Facilities must accommodate 20 or more residents who require skilled nursing care and related medical services. Alternatively, they can serve individuals who, while not needing nursing home care, require minimum but continuous care provided by licensed or trained personnel.

Eligible Borrowers Investors, builders, developers, and private nonprofit corporations and associations are eligible mortgagors. For nursing homes specifically, applicants may also be public agencies licensed or regulated by a State to care for convalescents and people in need of nursing or intermediate care
Contact our HUD team to find out more about Section 232 loans.