Owners and operators of skilled nursing facilities, assisted living communities and memory care properties have fewer financing options than apartment owners, and most of them are shorter, recourse, and covenant heavy. HUD Section 232 is the exception.
What Section 232 finances
- Skilled nursing facilities
- Assisted living facilities
- Board and care and residential care facilities
- Memory care
- Independent living units, subject to a percentage limit within the project
The executions
232/223(f) refinances or acquires an existing facility. 232/223(a)(7) is a streamline refinance of a loan already FHA insured. 232 new construction and substantial rehabilitation funds building. 241(a) adds a supplemental loan behind an existing insured first for capital improvements.
Terms
| Maximum LTV | 80% for profit, 85% for a qualifying non profit, on skilled nursing |
|---|---|
| Minimum DSCR | 1.45x on 232/223(f); 1.11x on 232/223(a)(7) |
| Term | Up to 35 years, fully amortising, fixed |
| Recourse | Non recourse with standard carve outs |
| Mortgage insurance | 1.00% upfront and 0.65% annually on 232/223(f) |
| Cash out | Not available |
| Processing | LEAN, under Handbook 4232.1 |
The coverage requirement is the thing to plan around. At 1.45x, the coverage test usually binds well before the leverage ceiling, which is why experienced healthcare borrowers talk about their deals in coverage terms rather than loan to value.
What else gets reviewed
Unlike an apartment building, the collateral here is an operating business. HUD reviews the operator's qualifications, licensure history and financial capacity alongside the borrower's. Where borrower and operator are separate, the operator file is often what sets the pace of underwriting.
Portfolio owners should also know about the master lease requirement, which attaches once a borrower crosses roughly three properties or $15 million within 18 months and binds the facilities together for credit purposes.
Seasoning
Existing debt generally needs two years of seasoning before HUD will refinance it, with exceptions where the money went into the facility through an arm's length acquisition, capital improvements or funding operating losses. Facilities bought within the last three years face tighter treatment.
Why owners do it anyway
Thirty five years, fully amortising, fixed, non recourse and assumable is a package that simply does not exist elsewhere for an operating healthcare asset. The premium and the coverage requirement are the cost of that structure.
If you own or operate a facility and want to know what it would size to, send us the census, payer mix and trailing financials.
Primary sources for this article
HUD revises mortgagee letters and handbooks frequently; where a provision is a draft rather than operative guidance we say so on the page. This is general information, not legal, tax or financial advice, and not a commitment to lend.
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