HUD 223(d) Operating Loss Financing
If you have a HUD 232 or HUD 232/223(f) loan on a healthcare property, but you’ve experienced unexpected financial complications leading to an operating loss, a HUD 223(d) Operating Loss Loan may be able to help. Two types of HUD 223(d) operating loss loans are available: HUD 223(d)(2) loans and HUD 223(d)(3) loans. Each of these has slightly different requirements, which we will detail below.
Qualifications for HUD 223(d) Operating Loss Loans
In general, there are a few qualifications for HUD 223(d) operating loss loans, which include:
The loss is considered ‘allowable’ and can be “evidenced by audited financials”
The lender for the original HUD loan needs to consent to the HUD 223(d) loan
The lender also needs to affirm that they believe that the owner/management of the facility is competent and responsible.
The loss period cannot be any longer than two years.
The current borrower owned the property during the loss period
The project is at ‘break even’ occupancy or can be projected in an “approved workout strategy”
The project has used all the funds in the original operating deficit escrow accounts
The property meets all cost certification requirements
Plus, if the borrower has any other risk factors, such as owning or participating in other businesses, is delinquent on any federal debt, or if any of the principals of the borrower have changed, these risk factors must be disclosed to HUD and the lender during the loan application process. Also, there must be evidence that the risk factor will be mitigated.
In addition, the application process for HUD 223(d) loans will review other factors, such as the project’s state inspection rating, its Medicare star rating, the project’s facility license, the project’s liability insurance policy, any recent liability claims against the facility, and any outstanding repairs that may remain from the project’s last HUD Real Estate Assessment Center (REAC) inspection.
HUD 223(d) Loan Sizing
HUD 223(d) operating loss loans are constrained by the lesser of:
The Requested Loan Amount: The amount requested in the borrower’s firm application.
Amount Based on Debt Service Coverage Ratio (DSCR): Underwritten net operating income (NOI), minus the annual debt service of the property (principal, interest, and MIP), divided by 1.45. Subtract the annual ground rent and the annual special assessment. Then, “divide the difference by the sum of the interest rate, MIP rate and initial curtail rate,” while adding any annual tax abatement savings.
Amount Based on 100% of Operating Loss: This amount can be determined by an independent, CPA-certified audit.
HUD 223(d)(2) loans vs. HUD 223(d)(3) loans
For HUD 223(d)(2) loans:
The loss must have occurred within the first 2 years of the cost cut-off date
The loan must be applied for within 3 years of the end of the loss period.
In comparison, for HUD 223(d)(3) loans:
The operating loss must have happened during a consecutive 2-year period
The loss period needs to be within the first 10 years of the cost cut-off date
HUD 223(d)(3) applications must be submitted within 10 years of the end of the loss period
HUD 223(d)(3) loans are not permitted for use with Section 8 properties (though this is not a concern for properties using HUD 232 or HUD 232/223(f) financing.)