How to do it ... HUD LEAN mortgages

1. Realize there are limitations. For example, fees and the cost of the loan are set by HUD, says Josh Rosen, senior vice president and team leader at Capital One Multifamily Finance. 

Except for expansions in certain situations, there's also a three-year wait on new projects, adds Brendan Healy, vice president at Lancaster Pollard. 

Moreover, as Michael Gehl, chief investment officer at Housing & Healthcare Finance, LLC, says, criteria such as projected performance won't qualify because it is not solid evidence of performance. 

One major limitation, according to many: Borrowers are disallowed from using HUD LEAN mortgages for extra cash.

But overall, it's a great time to refinance. 

“While capitalization rates for assisted living and skilled nursing facilities have declined a little, they remain historically high in comparison to the debt rates that can be locked in for 35 years,” says Michael Vaughn, senior vice president of FHA Finance at Walker Dunlop.

2. Alternate financing may work better in certain situations like new construction, flipping, “turnaround” situations, purchases with short closing windows, operational improvements and capital investments, says Imran Javaid, managing director of BMO Harris Bank's commercial real estate healthcare practice. 

Other scenarios calling for “strategic financing alternatives” include new buildings less than three years old, acquisitions and low leverage, adds Healy and Matt Lindsay, senior vice president at Lancaster Pollard. 

A popular alternative is short-term bridge financing from sources other than HUD-insured debt, adds Jeremy Frankel, senior vice president at Ziegler.

3. Do your homework. As Frankel points out: Understand your debt requirements, have clean financial data and reliable timelines on upcoming capital work and improvements.

Because HUD distributions occur only at specific times, ensure that your equity sources are fully on board, adds Javaid.

Lindsay notes that designating a point person internally to handle lender requests for due diligence items is a good idea.

Know your facility's trailing 12-month adjusted net operating income, or NOI, says Steve Kennedy, senior managing director at Lancaster Pollard. 

“Adjustments include a replacement reserve deposit and a 5% management fee,” he explains.

4. Meanwhile, it's best to postpone plans if you are in the midst of sluggish financial performance or a spate of negative surveys, as Gehl advises.

“HUD is not going to lend into a falling knife, so to speak, so performance needs to stabilize beforehand,” he cautions.

According to Vaughn, the average CMS star rating for SNFs that received HUD loans last year was “a little over three.”

5. One thing all prospective borrowers should have is patience. 

“HUD still takes longer than conventional debt so if you are in a pinch and need to refinance a loan coming due, it can be difficult to be successful,” warns Jason Dopoulos, managing director at Lancaster Pollard.

To make the wait more bearable, Kennedy advises borrowers have their lender provide a timetable outlining the major events in the process.

6. Finally, it pays to remember that HUD financing is not the time to be a crafty negotiator. Complete transparency is in order.

“The biggest mistakes I've seen some borrowers make is thinking they can hide potential risks or assuming something isn't important enough to divulge,” says Rosen. “It always comes out eventually. A lot of times there's a workaround but if we don't know what it is upfront, we can't help.”