HUD Hospital Program Overview
Insurance Programs – Numbers Reference Sections of National Housing Act
- 242 – for loans with > 20% of proceeds used for new project costs.
- 223(f) – for the refinancing of non HUD-insured debt where new project costs are < 20% of the loan amount.
- 223(a)(7) – for refinancing of existing HUD-insured debt (permits maturity extension and loan increase).
- 241 – for supplemental loans for facilities with existing HUD loans.
HUD insures 99% of the mortgage principal to lender in event of a hospital default replacing hospital credit with that of Federal Government.
- Insured mortgage can be pledged as collateral for tax-exempt or taxable securities.
- Loan funded by: Tax-exempt Bonds, Taxable GNMA Collateralized Bonds, GNMA Securities, or Mortgage Participation Certificates (MPCs).
- Rate and prepayment provisions of loan to hospital a function of which funding source is used.
- Letters of Credit (LOCs) supplement shortfall in HUD Insurance Payout:
- Tax-Exempt Bonds: 1% Note + 1 month ‘s Note interest + 30 Days’ Bond Interest.
- MPCs: 1% Note + 1 month’s Note interest + 6 months’ difference between Note rate and debenture rate.
- GNMA’s: no LOCs required.
- Interim and permanent financing – up to 25 year amortization following construction period.
- Tax-exempt bond structure funds entire loan up front producing negative arbitrage in certain markets.
- Taxable GNMA options fund monthly as advances are made — no negative arbitrage.
- Cash or FHA debenture payout for insurance claims:
- Debenture Lock used primarily in refinancings in 1990s.
- Cash Lock replaced commercial insurance on new money deals in recent years.
- Events of Insurance Cancellation – Failure to pay HUD mortgage insurance premium or hazard insurance premiums.
Loan Amount, Equity and Letter of Credit Requirements
- Loan limited to 90% of appraised value – net book value of PP&E can be used as proxy for appraised value.
- All project costs eligible, including working capital allowance.
- Interest capitalized for two months longer than construction period with commencement of amortization on the first day of the third month following construction completion.
- Refinancing of non HUD-insured debt allowed under 223(f).
- Cost of issuance allowance of up to 3.5% for taxable funding and 5.5% for tax exempt funding.
- All legal and consulting fees allowed other than Certificate of Need fees.
- Not for profit hospitals can post a Letter of Credit evidencing equity allowing equity in after loan proceeds.
- 0.30% Application fee.
- 0.50% Inspection fee.
- 0.70% Annual Mortgage Insurance Premium for 242 Loans, 0.65% for 241 and 223(f) Loans, 0.55% for 223(a)(7) Loans.
- For-profit, not-for-profit and municipally owned hospitals are eligible.
- Must be licensed and regulated by the state or another political subdivision of the state.
- CON required in States where CONs exist except for critical access hospitals.
- Acute Care Only – greater than 50% patient days in acute categories.
- Ability to grant first lien on assets and accounts receivable – land can be leased.
- First and only lien requires refinancing of existing secured debt.
- 90% loan to value limit.
- Three year average operating margin of 0 or better – turnaround exception; will accept application with 1 year positive margin but 2 years positive margin required for approval.
- Three year average historical debt coverage of 1.25x – turnaround exception with 1.4x most recent year and can assume refinancing has occurred when calculating maximum annual debt service.
- Projects already under construction generally not allowed – though HUD will approve almost immediate start after application is submitted.
Application Process Overview
- Preliminary review package submitted for screening applicants.
- Pre-application meeting with HUD staff allows HUD to tell client if loan meets approval criteria.
- Preparation of application – long lead time items are feasibility study, environmental review, CON, reliable construction cost estimates.
- Initial HUD approval based on estimated costs within 60-90 days of submission of complete application.
- Final HUD approval based on availability of Guaranteed Maximum Price Contract (“GMP”) (based on 80% architectural drawings) being less than amount in initial application.
- Approximately 30 days from receipt of GMP to receive HUD Insurance Commitment.
- Availability of GMP at end of process generally determines overall timing.
- No projects where construction has already begun.
- Once application is received by HUD, site work can commence with HUD’s approval.
- Once application is deemed complete, limited construction can begin with HUD’s approval: “Pre-Commitment Work”.
- Once commitment is received, full construction allowed: “Early Start”.
- HUD must approve contracts to be used with CM and architect.
- CM, Lump sum, or Design/Build are permitted.
- Specific requirements for liquidated damages, retainage and payment and performance bonds.
- Wages must be in compliance with Davis Bacon requirements.
Security Provisions / Covenants
- First-and-only mortgage on all essential hospital properties and AR lien. After acquired clause covers future property as well.
- Mortgage Reserve Fund requirement: two years debt service funded over ten years following commencement of amortization.
- Mortgage, Note, Regulatory Agreement and operating covenants define limitations on hospital.
- Standardized covenants:
- Problem covenants are:
- Parent non-interference, all current or future property & revenue on or off mortgaged property subject to HUD documents, consultant reports for significant negative variances.
- Certain actions must have HUD permission:
- Mergers, creation of new subsidiaries, changes to organizational documents.
- Affiliate transactions, distribution of assets, additional debt can be done without HUD permission subject to certain limits if certain terms and ratios are met:
- Project complete, mortgage payments are current, MRF is funded, DSC 1.5x, Days AR & AP less than 80, current ratio 1.5X, days’ cash 21 days, positive margin requirement and unrestricted fund balance greater than zero.
- Problem covenants are:
Refunding Provisions of HUD 242 Program
- HUD 223 (a)(7) refunding:
- For the refinancing of existing HUD-insured debt.
- Up to 12 Year maturity extension.
- New HUD loan & debenture rate.
- New loan principal can be increased up to refinanced note’s original principal amount.
- Historically Section 242/241 insured financings for hospitals require at least 20% of mortgage proceeds to be used for new construction, renovation or other capital purchases.
- HUD realized that the markets have made it increasingly difficult for many Hospitals to access traditional forms of capital. In addition many hospitals had existing credit enhancement products which either expired or created situations where an institution was paying substantially more in interest expense with no available means of refinancing.
- The 223(f) program allows Hospitals to obtain HUD insurance for refinancing non HUD-insured debt without a requirement for a new capital component.
- Most eligibility criteria for an HUD 223(f) refinancing are the same as those for an HUD 242/241 financing except that a section 223(f) refinancing requires a 3-year historical average debt service coverage ratio of 1.40X whereas the 242/241 program requires a 3-year historical average debt service coverage ratio of 1.25X. In addition, a Hospital applying for a 223(f) refinancing must also demonstrate:
- That their financial health depends on refinancing their existing debt,
- They provide essential service to the community in which they operate,
- There are few affordable financing vehicles available and,
- The Hospital meets three of the following seven criteria:
- The refinancing will reduce operating expenses by at least .25%,
- The interest rate will be reduced at least .5%,
- The rate on existing debt has increased at least 1% since January 2008 or will likely increase by 1% within one year of refinancing application,
- The Hospital’s total debt service > 3.4% of operating revenues,
- The existing credit enhancement vehicle has been cancelled or downgraded or such is imminent,
- The existing debt has overly restrictive or onerous covenants,
- Other circumstances that show a refinancing is essential to viability of the hospital.
- As a refinancing by definition does not change the essential services a hospital provides, HUD, at its discretion, may ease some of its other requirements such as:
- Institutions with strong historical utilization statistics may not be required to submit a study of market need.
- Advanced architectural drawings may not be required depending on the extent of proposed capital improvements as new capital under HUD 223(f) cannot exceed 20% of the loan amount.
- The HUD up front inspection fee may be reduced from 0.50% to 0.10% of the mortgage if there is no capital component.
- 90% interim and permanent financing at AA rates.
- Supplemental loans via HUD 241 financing.
- Future capacity based on hospital’s performance, not market changes, as with private credit enhancers (unlimited Federal capacity).
- Workout loans via HUD 223(a)(7) refinancing.
- Changes to or waiver of covenants can be renegotiated with a single party – HUD.
- Approval criteria less stringent than for investment grade public market financing options.
- Maximizes debt capacity per dollar of EBIDA.
|3.5X Coverage (A Rating)||1.4X Coverage (HUD)|
|Maximum Annual Debt Service Allowed||$2,857,142||$7,142,857|
|Debt Capacity (30 Yr. @ 5% for A, 25yrs @ 5% for HUD)||$44,155,223||$101,821,456|
- Somewhat cumbersome process – but improvements have been made and continue.
- Approval timeframe plus prohibition against projects that have started construction makes it noncompetitive in certain situations.
- No direct variable rate debt — some swaps allowed with HUD permission.
- Davis Bacon Act wage requirement can be expensive in certain markets.
- Annual mortgage insurance premium can be expensive, particularly in markets with compressed interest rates between rating categories.
Program Underwriting History
- 400+ loans insured since 1968 in excess of $17 billion. Deals done in 43 states and Puerto Rico.
- Many hospitals gained sufficient financial strength to refinance out of the HUD insured portfolio.
- Low claims rate — program is self-sustaining