Are HUD-Insured Mortgage Programs the Right Choice for Your Organization?July 20, 2018
Patrick B. McAssey, CPA
Mortgages insured by the United States Department of Housing and Urban Development (HUD) should be considered as a financing option for providers of long-term care communities. These mortgage programs are offered by HUD to encourage senior care operators to invest in long-term care communities, such as skilled nursing care and memory care facilities. The loans must be used for either elderly or low-income housing and must involve the purchase, financing, building or rehabilitation of a senior care community—and in those instances where these criteria are met, HUD loans can be an effective way of protecting an investment.
HUD-insured loan guarantee programs can provide needed liquidity to multi-family and healthcare communities while reducing the risk for HUD-approved lenders. The mortgage is nonrecourse to the borrower, which means that the borrower does not personally guarantee the debt, and in the case of default HUD would be responsible for making the lender whole. The mortgage term can be up to 40 years, providing interest rate stability and increased cash flow, and there are no loan covenants.
That said, there are several considerations that need to be explored before determining if a HUD loan program is the right avenue to pursue. The borrower will enter into a regulatory agreement with HUD, which is a binding contract that includes program regulatory requirements. For instance, there are restrictions on when distributions can be taken. Additionally, an annual independent audit must be submitted to HUD, there must be compliance with fair housing regulations, and certain escrows must be established for the payment of future repairs, real estate taxes, mortgage insurance premiums and property insurance. In addition, the initial financing costs can be greater than those incurred for conventional financing arrangements. These are some of the considerations that need to be addressed before investors and owners make the decision to seek HUD financing for their projects.
Again, the advantages of obtaining HUD-insured financing for senior/low-income housing are myriad in the right situations. For long-term investments, they bring with them extended payback, favorable fixed interest rates, permanent financing arrangements with higher loan-to-value and loan-to-cost ratios that are nonrecourse to the borrower.
On the other hand, they do come with costly financing fees, regulatory oversight and compliance requirements that require a good understanding of the executed regulatory agreement provisions and the various governing HUD handbooks. Noncompliance with these requirements could result in fines and penalties and default on the mortgage.
An FHA loan may not be right for every situation. The long-term is valuable only if borrowers intend to hold properties for an extended period. Stretching out the amortization period reduces monthly principal payments, which increases cash flow. But for some borrowers this benefit is offset by the limited amount of cash they can take out of the FHA arrangement. These factors must go into the decision-making process before signing onto a HUD-insured loan program.
Patrick B. McAssey, CPA, is a partner with BlumShapiro, the largest regional business advisory firm based in New England, with offices in Connecticut, Massachusetts and Rhode Island. The firm, with a team of over 500, offers a diversity of services, which include auditing, accounting, tax and business advisory services. Blum serves a wide range of privately held companies, government and non-profit organizations and provides non-audit services for publicly traded companies. To learn more visit us at blumshapiro.com.