Whether cash-strapped or eager to reinvest as a means to drive census, more skilled nursing owners are investigating HUD-backed loans as alternatives to traditional commercial products.
Already, skilled nursing providers account for more than two-thirds of loans issued through the Department of Housing and Urban Development’s Section 232 program, which supports financing, refinancing, construction, improvement and operating loss loans. Currently, the program is supplying just over $37 billion of lending across 3,823 mortgages in the residential care sector, according to an agency presentation made last week.
Jeffrey Davis, chairman of Cambridge Realty Capital Companies, believes skilled nursing’s interest in HUD options could continue to boom.
Providers’ increased operating costs, particularly for staffing, are outpacing the rate of inflation, a trend that Davis said is unlikely to wane over the next few years. What remains to be seen, however, is how many eligible borrowers might have already refinanced during the pandemic.
“HUD has been very, very active over the last couple years,” said Davis, whose company is among the nation’s 15 largest HUD lenders. “It’s a very important program for bringing money to nursing homes, which, clearly, keeping these properties in business is a huge, huge imperative for the government.”
Sarah Schumann, co-chair of the American Health Care Association’s independent owners council, presented on HUD-backed lending at the association’s annual conference earlier this month. A former HUD loan recipient, she wants others to know about the variety of services, and requirements, HUD has.
“With interest rates at an all-time low and with increased expenses in other areas, it’s really important for providers to have options,” Schumann, director of operations at Brookside Inn in Castle Rock, CO, told McKnight’s. “As an individual operator, we don’t usually have a big finance department. It’s usually just the owner….HUD has worked really well with providers during the pandemic.”
Cutting through the bias
Some providers have long eschewed HUD loans, viewing them as loaded with bureaucracy that adds another layer of government oversight to operations and finances. The agency requires periodic physical inspections, a process it is in the midst of overhauling, as well as additional financial reporting to qualify for a loan and draw some optional benefits.
Time in underwriting also can be lengthy, acknowledges Don Pelligrino, CEO and owner of Bridgeway Senior Healthcare with four properties in New Jersey, one of which he refinanced through HUD. But finding the right loan is about knowing the lending environment and balancing rates, risks and regulatory oversight, Pelligrino noted.
When he built his newest skilled nursing facility in 2012, Pelligrino said he decided against HUD financing because of a prevailing wage clause governing construction. But he added that he’ll likely look to the agency again if he wants to refinance. He enjoyed a helpful relationship with Lument, his previous HUD lender, which conducted a thorough analysis to prove out cost benefits even with HUD’s mortgage insurance and cash reserve requirements.
Davis said it often falls to lenders experienced in the sector to help first-time HUD borrowers see past old biases and navigate a new qualification and compliance environment.
Cambridge has facilitated $802 million in debt financing since the pandemic’s start. More than 80% of its business has been with HUD over the last 18 months, Davis told McKnight’s, and the company shifted resources to help clients navigate.
Some he geared toward HUD refinancing options, including the interest rate reset and the 232 (a)(7) program, that require less underwriting. He predicted those options would remain attractive in the current environment — often undercutting commercial interest rates by 1% to 2% — unless rates start to climb overall.
Paperwork for partnership
As for added compliance and documentation concerns, HUD officials are quick to point out why they and their lending partners so carefully track financials and ask for meaningful plans if performance slips. The residential care facilities program had a 0.22% net claim rate last fiscal year, Philip Head, director of HUD’s Office of Residential Care Facilities Asset Management, said during a Thursday webinar.
“Our team is committed to avoiding claims, mitigating losses to ensure the integrity of the insurance fund, but there is more to it than just the financial bottom line,” Head said. “Ultimately when a facility fails, the losers are all of us, the operators, the borrowers, the lender and HUD, and more importantly, so are the patients and residents that these programs serve as well as the communities that surround them.”
Schumann said the compliance tradeoffs can be worthwhile if it means providers have a willing lending partner when commercial banks show disinterest or simply charge too much.
“At a time of unprecedented stress, financial loss and challenges, if there’s a way we can get tools into providers’ hands to help them save resources that they can then spend on staffing or supplies … (they need) any way possible to have cash to be able to serve their elders and their staff,” Schumann said.
