HUD Hospital Program Overview

Program History

  • 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.

Eligibility Requirements

  • 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 (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.

Loan Structure

  • 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.

HUD Fees

  • 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).
  • Mortgage Reserve Fund requirement: 2-years debt service funded over first 10-years of amortization, returned over last 10-years of amortization.
  • 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.

Construction Considerations

  • 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.

Refunding Options

  • 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:
      1. The refinancing will reduce operating expenses by at least 0.25%,
      2. The interest rate will be reduced at least 0.50%,
      3. 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,
      4. The Hospital’s total debt service > 3.40% of operating revenues,
      5. The existing credit enhancement vehicle has been cancelled or downgraded or such is imminent,
      6. The existing debt has overly restrictive or onerous covenants,
      7. Other circumstances that show a refinancing is essential to the viability of the hospital.

Advantages

  • 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)
EBIDA $20,000,000 $20,000,000
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

Disadvantages

  • 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.