Financing Capital Projects at Your Hospital with FHA Mortgage Insurance

October 3rd, 2012 4:15 – 5:15

Presenter F. Nick Bacqué Account Executive Department of Housing and Urban Development Federal Housing Administration Office of Healthcare Programs Office of Hospital Facilities

WWW.HUD.GOV/HEALTHCARE

Learning Objectives • Learn how FHA 242 Mortgage Insurance can help lower the

cost of capital for Hospitals looking to finance construction projects

• Understand the programmatic eligibility determinants • Know how to start the process • Establish a general understanding of what healthcare

projects might be a fit for FHA programs

Definition of Terms • HUD – U.S Department of Housing and Urban Development • FHA – Federal Housing Administration • 242 – Section 242 of the National Housing Act (NHA) gives HUD/FHA the authority to insure

mortgages for acute care hospitals. • 232 – Section 232 of the National Housing Act (NHA) gives HUD/FHA the authority to insure

mortgages for nursing homes, assisted living, and other long-term care residential facilities • 223 (f) – Section 223 (f) of the NHA Act gives HUD/FHA the authority to insure mortgages for 100 %

refinancing loans pursuant to 242 and 232 • 241 – Section 241 of the NHA gives HUD/FHA the authority to insure mortgages for supplemental

loan for HUD portfolio hospitals.

Who We Are • FHA Office of Healthcare Programs

– Section 242 Hospital Facilities – Section 232 Residential Care Facilities – Office of Architecture and Engineering

• Programs provide FHA mortgage insurance to

back the mortgage on healthcare capital projects

• Healthcare principal balance of $27 billion with 2,740 loans (as of 12/31/11)

Willow Towers Assisted Living Facility New Rochelle NY

What We Do • Enable the affordable financing of needed healthcare facilities

• Improve access to quality healthcare nationwide

• Reduce cost of care

• Strengthen communities - healthcare facilities are economic engines

– Healthcare facilities employ millions of Americans and support trillions in economic activity – FY10 and FY11 hospital projects (new Section 242 commitments) create an estimated 19,130

new jobs during construction and $4.7 billion overall economic benefit*

How Does FHA Do This?

Healthcare Project

Bank

Investor (Optional)

FHA

Mortgage Insurance

How Does FHA Benefit My Project?

• Provide Access to Capital

• Allow Flexible Funding Options

• Enhanced Credit Rating/Reduced Cost of Capital

Use of FHA-Insured Loans • Construction Financing • Refinancing • Replacement Facilities • Expansion • Modernization • Equipment • Remodeling

Capital Health System. Trenton NJ $755.9 million mortgage

Healthcare Facilities that Utilize FHA

• FHA serves healthcare facilities in all 50 states and territories • For-profit, not-for-profit, and government-owned health care

facilities • No limit on size – big or small

– From a $500K nursing home refinance – To a $700+ million large urban teaching hospital construction

Lakeway Regional Medical Center Lakeway, TX

FHA Offers Attractive Loan Terms • No maximum loan amount • No cash required at closing, with sufficient equity • FHA insures 99% of the loan amount • Loan term can be up to 25 years • Fixed annual premium of 0.7% of remaining

balance (for new construction hospitals) • Upfront fees: 0.15% Application, 0.3%

Commitment, 0.5% Inspection

Is Your Project Eligible for FHA Mortgage Insurance?

• Eligibility

• Market need

• Financial feasibility

University of New Mexico,

Albuquerque, NM $183 million mortgage

General Eligibility Requirements (1/2)

• Both Section 242 and Section 232 Programs: – Mortgage must be on real estate held

• In fee simple, or • Under a long-term lease

• Section 242 Hospitals:

– 0% (at minimum) Average Operating Margin for the past 3 years

– 1.25 DSC (at minimum) for the past 3 years – 50% of Patient Days must be Acute Care – 90% Loan to Value

General Eligibility Requirements (2/2)

• Section 232 Residential Care Facilities: Type of Facility Loan-to-

Value Debt Service

Coverage

SNF/ILU – For-Profit 80% 1.45

SNF/ILU – Non-Profit 85% 1.45

New Assisted Living Unit – For-Profit 75% 1.45

New Assisted Living Unit – Non-Profit 80% 1.45

Existing Assisted Living Unit – For-Profit 80% 1.45

Existing Assisted Living Unit – Non-Profit 85% 1.45

Other Program Requirements • Borrower must have sufficient equity and

working capital on hand to be considered for 242 mortgage insurance.

• FHA cannot insure a mortgage for a project in progress

• Hospital must agree to contribute to a Mortgage Reserve Fund

Steps to Obtaining your FHA-Insured Mortgage

1. Self assessment 2. Choose an FHA Lender 3. Initial contact with HUD 4. HUD conducts Preliminary Review (242 Projects Only) 5. Pre-application meeting (242 Projects Only) 6. Application 7. Application review 8. HUD decision 9. Insurance commitment 10. Initial closing 11. Construction 12. Final closing

Case Study of Hospital That Utilized FHA Mortgage Insurance

Rio Grande Hospital Del Norte, CO

Basic Hospital Facts (Pre-Financing) • Name: Valley Citizens’ Foundation for Health Care, Inc.

d/b/a Rio Grande Hospital • Location: Del Norte, CO • Designation: Critical Access Hospital • Beds (pre-242): 12 beds (6 acute, 6 swing) • Old Facility: 15,000 sq/ft leased facility, shared with nursing home. Obsolete

infrastructure, asbestos in building, ER is cramped one room that is poorly equipped. Landlord/owner will not upgrade or sell facility.

Phase 1: Rio Grande Receives Commitment for FHA 242 Financing

• Date Commitment from FHA Received: May 15, 2003

• Construction Begins: July, 2003

• Project Cost: $11,533,263

• Amount of Mortgage: $10,000,000

• Mortgage Interest Rate: 5.375%

Result: New Stand Alone Rio Grande Hospital

Grand Opening: August , 2004

New Facility Details: • 35,000 sq/ft Critical Access Hospital

• 14 beds (10 acute, 4 swing)

• Expanded Emergency Room

• Updated Imaging Center including X-Ray, fluoroscopy, ultrasound, mammography, and CT Scanner

• New Laboratory • New Pharmacy

Phase 2: Rio Grande Receives Commitment for FHA Section 241 Mortgage Insurance Addition

• Date Commitment from FHA Received: September 28, 2007

• Construction Begins: December 2007

• Project Cost: $2,380,491

• Amount of Mortgage: $1,950,000

• Mortgage Interest Rate: 6.75%

Result: New Medical Office Building for Rio Grande Hospital

• Grand Opening: October, 2008 New MOB Details:

•7,500 sq/ft Outpatient Clinic

• 14 Exam Rooms

• 6 Offices

• New Conference Room

• Adjacent to Rio Grande Hospital

• Expanded Emergency Room

Phase 3: Rio Grande Refinances Existing FHA Mortgages at Lower Interest Rate

• Date Commitment to Refinance from FHA Received:

• Original Interest Rates on FHA Mortgages: 5.375% $8,268,971 6.75% $1,841,144

• Total Unpaid Principal Balance on Mortgages: $10,110,115

• New Refinanced Interest Rate: 3.4%

• Cost Savings from Refinancing: Per Year $168,258 Life of Mortgage $1,627,657 (NPV)

Final Result

Initial Contact with HUD • Describe project • Ask questions • Provide additional information • Receive pre-application list

HUD Washington, DC (202) 402-2221 1-877-HLTH-FHA

Email inquiries: Frank.N.Bacque@HUD.gov

Contact Info:

THANK YOU

www.hud.gov/healthcare

HUD Washington, DC (202) 402-2221 1-877-HLTH-FHA

Email inquiries: Frank.N.Bacque@HUD.gov

Einstein Medical Center Montgomery East Norriton, PA