Section 232: HUD Insured Mortgages for Nursing Homes, Intermediate Care and Assisted Living Facilities

January 9, 2009

With financing options becoming more and more limited for developers, one area developers may want to explore is obtaining a mortgage loan insured by the United States Department of Housing and Urban Development (“HUD”). The Housing Act of 1959 established Section 232 of the National Housing Act. Section 232 insures mortgage loans to facilitate the construction and substantial rehabilitation of nursing homes, intermediate care facilities and assisted living facilities (collectively “residential care facilities”).

The purpose of the Section 232 loan program is to insure lenders against the loss on any mortgage defaults. HUD insures mortgage that covers the construction and rehabilitation of residential care facilities for people who need long term care or medical attention. The program allows for long term, fixed rate financing up to 40 years for new and rehabilitated properties and up to 35 years for existing properties without rehabilitation. The mortgage insurance is available for all HUD-approved lenders.

In order to be eligible under the Section 232 program, facilities must accommodate 20 or more residents who require skilled nursing care and related medical services, or those who while not in need of nursing home care, are in need of minimum but continuous care provided by licensed or trained personnel. Assisted living facilities, nursing homes and intermediate care facilities may be combined in the same project and covered by a single insured mortgage or may be in separate facilities. Insured mortgages may include the cost of major movable equipment, day care facilities and the installation of fire safety equipment. Assisted living facilities, nursing home and intermediate care homes must be licensed or regulated by the appropriate state agency, municipality or other political subdivision where the project is located.

The maximum amount of the loan for new construction and substantial rehabilitation is equal to 90% (95% for a non-profit sponsor) of the estimated value of physical improvements and major movable equipment. For existing projects, the maximum loan amount is 85% (90% for non-profit sponsors) of the estimated value of the physical improvements and major movable equipment.

Recently HUD determined that Section 232 projects are eligible for Multifamily Accelerated Processing (“MAP”). For new construction and substantial rehabilitation loans, the sponsor works with the MAP-approved lender who submits the required documentation for the pre-application stage. If HUD determines that the submission is acceptable, the lender then submits an application for a firm commitment, including a full underwriting package, to HUD.

The local HUD office reviews the application to determine whether the proposal is an acceptable risk. In considering the level of risk, HUD looks at market need, zoning, architectural merits, capabilities of the borrower, availability of community resources and other community interests. If the proposed facility meets the Section 232 program requirements, HUD issues a commitment to the lender for the mortgage insurance. In today’s financial market system, the Section 232 HUD insured mortgage program is an important tool developers can use in the senior housing area.

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