FHA’s Latest Revisions to Lean 232 Address Owner Issues

Recent changes to the Federal Housing Administration’s (FHA) Lean 232 program provide owners with more options, all of which a lender offering a full suite of financing options can act upon. Owners who anticipate future cash-out needs are in a good position to benefit.

The program was made easier for owners to work with through several additional changes.

For owners of residential healthcare facilities that offer services like skilled living or memory care, FHA Lean 232 loans are of exceptionally high value. Because the FHA is committed to ensuring an adequate supply of affordable beds for seniors, nursing home borrowers can secure terms that are unheard of in other CRE markets. Early this year, the FHA made changes in its official Section 232 Handbook that make these loans even more attractive, especially for owners who wish to take cash out of their properties.

In order to understand the significance of these changes, it helps to see them in the context of baseline Lean 232 loans. These FHA-insured loans are non-recourse and assumable, offer maturity schedules of up to 35 years and loan parameters of up to 80 percent loan-to-value (LTV), as well as 1.45 debt service ratio coverage. Best of all, they feature low, fixed-interest rates currently in the neighborhood of 3.5 percent.

Although providing the necessary documentation can be time-consuming, owners clearly find the effort well worth it, as figures for the FHA’s 2016 fiscal year ending September 30, 2016 demonstrate. The Department of Housing and Urban Development (HUD), which oversees the FHA, reported that its FHA Lean 232 program closed $2.84 billion in loans throughout 2015, an increase of 5 percent. This total comprised 287 loans covering more than 32,000 beds.

Eliminating Seasoning on Cash-Out Bridge Loans

The program does have one important limitation: Owners do not have the option to use Lean 232 proceeds for a cash out. Owners who want to re-leverage their facilities and take out a portion of their equity — whether to purchase additional property or for other uses — must secure a bridge loan.

In the past, owners had to season bridge loans with a cash-out component for at least two years before they were eligible for refinancing under Lean 232. The FHA’s rationale for this rule was that it required a two-year interval to ensure the facility could generate adequate cash flow to pay debt service.

This was not a burning issue for owners as long as interest rates were both stable and at historic lows. But when the Fed began raising its benchmark rate at the end of 2015, owners — and the FHA — took note.

In May 2016, the FHA announced that it was modifying this regulation. These changes were codified in its Section 232 Handbook in January 2017. Under the revised rules, the two-year seasoning period is waived under the following conditions:

  • If more than 50 percent of the existing indebtedness was used for project purposes, lenders can immediately request a loan with up to 70 percent LTV.
  • If less than 50 percent of the existing indebtedness was used for project purposes, lenders can immediately request a loan with up to 60 percent LTV.

In other words, owners should think ahead to the amount of leverage they desire when determining how much they cash out. Owners who want 80 percent LTV can still wait two years.

The result? Owners can enjoy the best of both worlds. They can recapitalize with a private lender and then roll the loan over into the Lean 232 program. In many cases, lenders like Capital One can provide both loans, in which case bridge loan can be structured in ways that streamline the process of securing Lean 232 financing.

Adjusting Lean 232 to Market Norms

As part of its latest revisions to the Section 232 Handbook, the FHA also did some housekeeping, addressing a few minor issues that were problematic for operators and owners.

Previously, the debt incurred by a licensed operator was not eligible for refinancing. Now, project-related debt associated with the purchase of furniture, fixtures and equipment, capital expenditures and working capital related to lease-up and stabilization qualifies for refinancing with a Lean 232 loan.

The FHA also revised the Lean 232 provisions that governed identity of interest (IOI) purchases, such as when a single family member in a family-owned facility wants to divest ownership, or when a third-party equity partner who helped develop a property desires to exit during the refinancing of a construction loan.

Previously, in both cases the FHA would not refinance the bridge loan until at least two years had passed. Now, acquisition debt associated with IOI purchases are immediately eligible for Lean 232 refinancing if the seller has no residual control of the project.

Taken together, these three changes are indicative of the FHA’s responsive approach to the residential healthcare market. The agency has made it a point to understand the financing challenges that owners and operators face, especially in a market in which interest rates have been steadily rising. The FHA has used the occasion to demonstrate its willingness to adjust to market norms and change guidelines accordingly.

By Josh Rosen, Senior Vice President of Originations, Capital One Multifamily Finance

Content Partners
‣ Arbor Realty Trust
‣ Bohler
‣ Lee & Associates
‣ Lument
‣ NAI Global
‣ Northmarq
‣ Walker & Dunlop

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