How to do it ... Mortgage financing
FHA-backed mortgages are becoming popular with long-term care facilities as conventional banks are increasingly uncertain about the impact healthcare reform and financing will have on providers' stability. That doesn't mean Federal Housing Administration loans are a slam dunk. Do your homework, watch your bottom line and understand the potential pitfalls, experts advise.
FHA financing is generally a safe bet if you aren't planning big expansions and prefer long-term, fixed-rate debt, says Imran Javaid, managing director, healthcare, for Capital One Bank.
“FHA financing is right for properties with stabilized operations, and the affordable leverage represented by a HUD loan will inevitably increase the value of the property to most purchasers,” adds Michael Vaughn, senior vice president, FHA finance, Walker & Dunlop.2: But be mindful of limitations.
“Providers have to decide if they like the distribution, capital expenditures and other restrictions that come with a FHA loan,” Javaid adds.
Upcoming expansions “can be restrictive and constraining with respect to construction activities, imposing standards that are onerous and costly,” says Joseph McCarron Jr., principal and founder of Capital Care Associates.
Avoid FHA financing if you plan on selling your property soon.“The assumption of FHA financing is not the preferred route to finance an acquisition for some prospective buyers,” cautions Jeff Binder, principal and managing director for Senior Living Investment Brokerage Inc.
3: Ensure your bottom line is healthy enough and keep your eye on the ball throughout the HUD processing.
“If the property is still in the process of improving its operational performance, it's probably too early for HUD,” adds Vaughn. Providers should keep an impressive, clear record through closing, says Bill Mulligan, president of Ziegler Financing Corp“Poor results a few months before closing can cause issues with final approval,” he says. Mulligan also advises having a dedicated staffer manage the process.
4: Complete transparency with your HUD lender also will ensure no surprises during the process. This includes survey results and recent citations. “Tell us up front if there's a potential problem,” says Mulligan. “We're a full disclosure lender and we like our clients to be full disclosure borrowers.”
Be realistic with your income projections based on historical performance, adds Vaughn.5: Choose a lender with HUD experience and have a comfort level before proceeding.
“Avoid any lender whose originator won't warn you of stumbling blocks ahead of time while they're taking your expense deposit,” adds Mulligan. “A good HUD lender will do a very detailed preliminary loan analysis and ask a lot of questions.”And don't underestimate the value of your lender's underwriter, advises Jason Dopoulos, vice president, Lancaster Pollard.
Dopoulos says he values “extensive underwriting upfront so the fees and costs to get into the HUD program are not wasted by setting initial unrealistic expectations.”
6: Keep your options open and don't overlook alternative financing. Some providers might opt for small-term “bridge” loans, for example, as a path toward FHA financing down the road.“Just because FHA financing may be appropriate for one project doesn't mean it is appropriate, or even available, for another project,” says Steve Kennedy, senior vice president and regional manager, Lancaster Pollard.
Matt Lindsay, one of that firm's vice presidents, agrees, with added advice.
“It's always prudent to explore alternative financing options, especially in more volatile market environments where interest rates and financing terms can change quickly.”
It's just another way of reminding that many decisions depend on whether or not you have done your homework. Providers who investigate well and then request assistance after getting properly prepared will fare best.
Mistakes to avoid
1. Applying for FHA financing when near-term expansions are planned
2. Forgetting to be transparent about potential negatives
3. Taking your eye off your facility's performance during the application process