Hospital or health systems have several financing options when pursuing joint ventures and acquisitions in the post-acute care space. In addition to traditional bond or bank financing, healthcare senior finance leaders might consider the following two government-based financing options.
U.S. Department of Housing and Urban Development (HUD) 232/223(f)
This fixed-rate mortgage insurance is available to both for-profit and not-for-profit borrowers on loans made by lenders approved by the Federal Housing Administration (FHA). The insurance can be used when purchasing, refinancing, or improving/repairing skilled nursing and assisted living facilities. Below are some key features of this option:
- Non-recourse
- Up to 35-year term, 35-year amortization; fixed-rate
- All-in rates near 4.50 percent
- No traditional financial covenants (days cash on hand, debt service coverage, etc.), as with bank financing
- Up to 80 percent loan-to-value or 85 percent of acquisition cost inclusive of fees and reserves
U.S. Department of Agriculture (USDA) Community Facilities Loans
This program provides direct loans and loan guarantees to qualified projects. Qualified projects include not-for-profit borrowers wherein at least 50 percent of debt proceeds are funding new money projects (i.e., new construction, renovation, expansion). Although a USDA Community Facilities loan would not be able to refinance existing debt (if a bank loan was used for acquisition financing), the option is still very attractive given that the current interest rate for the second quarter of 2017 is 3.375 percent. Key features in addition to the favorable interest rate include the following:
- Must be located in rural markets (population less than 20,000)
- Up to 40-year term/40-year amortization
- Non-recourse
- No traditional financial covenants (days cash on hand, debt service coverage, etc.)
- No prepayment penalties
Another consideration for acquisition financing through either HUD or USDA is speed to close. Hospitals looking to move more quickly might pursue traditional bank financing and then look to permanent financing structures such as HUD.
