Chad Ricks

The recent downturn in the economy, coupled with ever-changing loan programs and the distinct lack of financing sources, has commercial owners and developers turning to new and unfamiliar places for their mortgage banking needs. The only constant in the world of finance seems to be change itself. Most conventional lenders are increasing loan qualifications, decreasing leverage limits, increasing rates, requiring additional collateral or exiting the business altogether. This is especially the case when it comes to the financing of senior-housing facilities, leaving Fannie Mae, Freddie Mac and the U.S. Department of Housing and the Urban Development to pick up the slack. Agency lenders are able to provide funds for multifamily and healthcare properties, while conventional sources sort out their risk tolerance.

Although HUD, as the administrator of the Federal Housing Administration mortgage insurance programs, is not exempt from changes in the industry, it is at least changing in a positive direction. The agency is allowing terms to stay the same and is shortening the processing times. Historically a HUD-insured mortgage was processed according to the Multifamily Accelerated Processing Guide. On March 1st, MAP processing became obsolete for HUD healthcare loans and was replaced by the LEAN program. It could not come at a better time for our industry. But, even though the program has been the only type of processing available through HUD for the past several months now, many are still left wondering what exactly the LEAN program is and how it will affect the health care industry.

The LEAN program was established by HUD in July 2008 after the agency transferred its Section 232 program from its Office of Multifamily Housing to its Office of Insured Healthcare Facilities. The new program applies to any facilities that are eligible for FHA insurance under HUD’s Section 232 program, including nursing homes, intermediate-care facilities, board-and-care homes and assisted-living facilities.

The LEAN application process makes the HUD healthcare program process much more efficient and easier for all parties involved. It promises a processing timeframe of 30 to 60 days from application submission to closing, which is much shorter than previous processing through MAP. Other highlights include:
* Valuation methodology for HUD’s healthcare programs is now the same as that used by the rest of the senior-housing/healthcare finance industry. This means that HUD underwriters will now underwrite with a management fee expense and will not make downward adjustments to net operating income for proprietary earnings.
* Valuation includes market replacement reserves and a market management fee.
* LEAN provides a central method of processing and a central set of rules, eliminating underwriting differences between regional offices.
* HUD no longer requires a market study separate from the appraisal for acquisition/refinance loans. This represents a third-party cost savings of $8,000 to $12,000.
* HUD-assigned LEAN underwriters review the program’s applications, rather than the previously employed method of using a group of technical reviewers.
* A land value is determined by the highest and best use, instead of proposed use.
* HUD loan-to-value and debt service coverage ratio sizing restraints remain unchanged.

Historically, HUD has been associated with a lack of consistency, bureaucratic paperwork and long processing and closing timeframes. Since the LEAN program is relatively new, the industry is still determining if the changes the program has instilled will solve the aforementioned issues. However, even with the staffing shortages the agency is currently experiencing, the timing has greatly improved. The typical Section 232 application, which took 120 to 150 days to get to closing, is now averaging closer to a 60-day timeframe. Ideally, the LEAN staff has set a goal to achieve 30-day turnarounds by the second year of the program. Although the program is still plagued with paperwork, having a national, centralized reviewer for each deal, instead of each regional office reviewing their region’s transactions, will ensure conformity across the country.

To date, the LEAN refinance and acquisition program has had reasonable success. Since inception and through July 17th, it has seen 136 applications, 99 commitments and 67 closings. For new construction, substantial rehabilitation and Section 241(a) supplemental loans, as of July 17th, the program has seen 36 applications, 19 market-acceptance letters, two commitments and one closing.

With the program’s inception and early success, approved lenders have seen their pipelines increase. The promises of new staffing at HUD should drastically improve the production in the program as well. As conventional financing becomes harder to obtain, it is easy to understand why many investors are turning to a program that can provide loan-to-value ratios up to 85 and 90 percent with long-term, non-recourse, fixed-rate debt.

Owners, operators and developers need to research a potential lender thoroughly. There are many FHA-licensed lenders; however, there are only 10 to 12 firms that perform 90 percent of the FHA-insured lending. There is even a smaller subset that deals with healthcare projects. One cannot stress enough the importance of using an experienced team. The typical HUD transaction involves a team consisting of lenders, appraisers, environmental engineers and property conditions need assessments analysts. For new construction projects, there are also market study analysts, cost reviewers, architects, general contractors and cost/plan reviewers. Using a team that is rich in experience and familiar with the composition of a HUD package will make the LEAN team’s review much cleaner, reducing concerns and hopefully timing.

At no obligation, most lenders will be able to qualify for a refinance or acquisition loan when provided a short executive summary, 12-month financials and the historical census numbers. For new construction projects, a construction budget and proforma will be needed as well. This initial sizing of a transaction only takes a couple days and will provide the borrower with a good understanding of how a HUD-insured mortgage pencils out. This first step should be the beginning of a strong working partnership with the owner’s FHA lender, and the potential borrower should not just see the lender as a firm bidding a loan.

Since the credit market collapse has left mortgage owners and developers with few financing options, more and more are considering this type of agency financing. Although these building owners and investors have looked down on the Section 232 in the past, the revamped LEAN process, which represents a dramatic shift from the old program, is something for them to consider.

— Chad Ricks is a first vice president and loan originator in Love Funding’s Dallas office.

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