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This year, the Federal Housing Administration’s Section 232 “Lean” program for senior care facilities celebrates 10 years of loan activity. The program debuted in 2008 at the height of the Great Recession to meet the capital needs of senior housing and long-term-care facilities. The Lean program continues to serve as an important source of debt capital to the senior housing industry, with $3.4B of loan volume closed in the last federal fiscal year.

Demand for the financing program is expected to continue to grow due to rising short-term interest rates, acquisition activity and both new development and repositioning opportunities in the senior care industry.

The Origin of HUD’s Lean Program

Lean was established as a reinvention of the Section 232 program, which provides mortgage insurance to help finance nursing homes, assisted living facilities and board and care facilities. It is not an acronym, but a methodology. Based on Toyota’s model for increasing efficiency by reducing waste, the program employs standardized work products and processes to obtain consistent, timely results.

The Lean concept streamlined the process of obtaining a FHA-insured loan and positioned the 232 program to meet the market’s demand for capital, KeyBank Vice President Lee Delaveris said. KeyBank is one of the nation’s leading FHA 232 program lenders and is a comprehensive provider of capital for healthcare real estate. The company’s clients seek FHA financing for its nonrecourse structure, attractive leverage, long loan terms and amortization periods and fixed interest rates, Delaveris said.

Rising Short-Term Interest Rates

Earlier this month, the Federal Reserve raised interest rates by a quarter of a point to 1.75%, marking the sixth rate hike since it began raising rates from when they were near zero in December 2015. While interest rates remain at historic lows, there are more increases predicted for 2018.

“The changing interest rate environment should have borrowers seeking to lock in long-term financing through the FHA 232 program,” Delaveris said. "Short-term rates have been rising quickly, so if you currently have a variable rate Libor-based loan, you are really feeling the impact of the Fed’s increases right now. In comparison, long-term rates have been rising relatively slower. The time is now to convert variable rate debt to long-term fixed rates through the FHA program.”

HUD also eliminated its two-year debt seasoning rule in certain instances for high-quality projects with stable cash flow. Borrowers can now recapitalize properties and lock in permanent financing quickly with less exposure to interest rate risk, Delaveris said. Working with an integrated bridge and FHA lender like KeyBank can make for a smoother and more reliable process for these borrowers.

Financing a Strong Healthcare Acquisition Market

There are many sources of capital that can finance acquisitions of 232- eligible properties, but finding one like KeyBank that can do both the acquisition financing and the permanent HUD/FHA financing is rare, according to KeyBank Senior Production Analyst Patrick Shearer.

"Acquisition activity has driven demand for the FHA program,” Shearer said. “For skilled nursing facilities, in particular, there are few permanent financing solutions in the market, so the 232 program is very important to owners as industry consolidation continues.”

Development and Repositioning

Beyond acquisitions, new development has been a major driver of capital needs in the senior care industry, as providers seek to meet growing demand for their services from an aging population. Owners of existing senior facilities have had to make upgrades to adapt to changes in their markets, which include changes in the delivery models for care.

“Many older skilled nursing facilities with dated physical structures now find themselves in a changing operating environment,” Shearer said. "More incentives need to be aligned with acute care providers in the market and focus on short-term rehabilitation versus long-term care.

Additionally, assisted living providers have looked for ways to address the increasing health needs of their residents, such as through the addition of memory care programs.”

To position for the changes in their markets, senior care facilities may need physical improvements, renovations, expansions or full replacements of existing facilities. HUD’s financing programs provide the capital to reposition older facilities to meet these needs and remain viable providers of care.

A Section 232 loan may be used to finance the construction of a new facility, or the renovation or expansion of an existing senior care facility.

Having existed through the changes of the economic cycle since 2008, FHA’s Lean program has proven to have features that are attractive in a variety of market conditions, including its nonrecourse structure and long fully amortizing loan terms of up to 35 years for refinances or acquisitions and 40 years for construction projects.

In changing interest rate and healthcare operating environments, FHA 232 should prove to be a source of capital that owners of senior care facilities can continue to depend on.


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