HUD Hospital Program Overview
- 400+ loans insured since 1968 in excess of $20 billion. Loans done in 43 states and Puerto Rico.
Insurance Programs – Numbers Reference Sections of National Housing Act
- 242 – for loans with > 20% of proceeds used for capital costs.
- 223(f) – for the refinancing of non HUD-insured debt where capital costs are < 20% of the loan amount.
- 223(a)(7) – for the refinancing of existing HUD-insured debt (permits maturity extension and loan increase).
- 241 – supplemental loans for facilities with existing HUD-insured loans.
- For-profit, not-for-profit and municipally owned hospitals are eligible.
- Must be licensed and regulated by the state or a 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).
- 3-year average operating margin of $0 or better (will accept an application with 1-year positive margin, but 2-years required for approval).
- 3-year average historical debt coverage of 1.25x or better (can use proposed debt service for refinancing transactions).
- Projects already under construction generally not permitted.
Application Process Overview
- Preliminary Review Package – 14-21 days to prepare.
- Pre-Application Meeting – 30 days after Preliminary Review Package submitted.
- Mortgage Insurance Application – insurance commitment received 90-120 days after submission.
- Loan closing – 30-60 days after receipt of insurance commitment (depending on loan funding source).
- HUD insures 99% of the loan amount, replacing the credit of the Hospital with that of the Federal Government.
- Insured loan can be pledged as collateral for Tax-exempt Bonds, Taxable Bonds, GNMA Securities, or Mortgage Participation Certificates.
- Interest rate and prepayment provisions a function of which funding source is used.
- Interim and permanent financing – up to 25-year amortization following the construction period.
- Tax-exempt bond structure funds entire loan up-front producing negative arbitrage in certain markets.
- Taxable GNMA structure funds loan monthly – no negative arbitrage.
- 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 (except for Certificate of Need fees).
- Cost of issuance allowance of up to 3.5% for taxable financing and 5.5% for tax-exempt financing.
- 0.30% Application Fee.
- 0.50% Inspection Fee (0.10% for Refinancings).
- 0.70% Annual Mortgage Insurance Premium for 242 Loans, 0.65% for 241 and 223(f) Loans, 0.55% for 223(a)(7) Loans.
Security Provisions / Covenants
- First and only lien on hospital property and accounts receivable (after acquired clause covers future property). Carve out permitted for Lines of Credit secured by accounts receivable.
- Mortgage Reserve Fund requirement: 2-years debt service funded over first 10-years of amortization, returned over last 10-years of amortization. Potential for 1-year requirement for Hospital’s that meet certain financial metrics.
- Standardized covenants:
- Current and future 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 if certain financial metrics are met.
- No projects where construction has already begun.
- Once HUD mortgage insurance application is received by HUD, limited work can commence with HUD’s approval.
- Once HUD insurance commitment is received, full construction can commence with HUD’s approval.
- 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.
- Construction wages must be in compliance with Davis Bacon requirements.
- Section 223 (a)(7):
- For the refinancing of existing HUD-insured debt.
- Up to 12-year maturity extension.
- Loan principal can be increased up to original amount.
- Section 242 insured financings require at least 20% of mortgage proceeds to be used for capital expenditures. The Section 223(f) program allows hospitals to refinance non HUD-insured debt, without a requirement for a capital component.
- Most eligibility criteria for a 223(f) refinancing are the same as for a 242 financing, except that a section 223(f) refinancing requires a 3-year historical average debt service coverage ratio of 1.40x (instead of 1.25x). In addition, the Hospital 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 3 of the following 7 criteria:
- The refinancing will reduce operating expenses by at least 0.25%,
- The interest rate will be reduced at least 0.50%,
- The rate on existing debt has increased at least 1% since January 2008 or will likely increase by 1.00% within one year of refinancing application,
- The Hospital’s total debt service > 3.40% 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 the viability of the hospital.
- 90% interim and permanent financing at AAA/AA rates.
- Supplemental loans through the 241 program. Future capacity based on hospital’s performance, not market changes (unlimited Federal capacity).
- Workout loans through 223(a)(7) program.
- Changes or waiver of covenants can be renegotiated with a single party – HUD.
- Maximizes debt capacity per dollar of EBIDA:
|BBB Rating (2.5X DSCR)||HUD (1.4X DSCR)|
|Maximum Annual Debt Service||$8,000,000||$14,285,714|
|Debt Capacity (30 yrs at 5.0% for BBB; 25yrs at 4.5% for HUD)||$123,634,626||$214,178,955|
- Approval timeframe and prohibition against projects that have started construction make it noncompetitive in certain situations.
- No variable rate debt.
- Davis Bacon Act wage requirement for construction projects can be expensive in certain markets.
- Insurance premium can be expensive, particularly in markets with compressed rates between rating categories.