Senior living providers long have considered the bond market to be a primary vehicle for financing. However, not all transactions are a good fit for tax-exempt bonds. State law issuer considerations, transaction and borrower size, and equity contribution requirements are a few factors that may make a public bond issue unfeasible.

The U.S. Department of Housing and Urban Development (HUD)/Federal Housing Administration’s (FHA) Section 232 program (used for skilled nursing and assisted living facilities) may provide a more user friendly alternative.

What is a Section 232 Loan?

HUD/FHA provides mortgage insurance on loans that cover residential care facilities. Known as Section 232 loans, these loans help finance nursing homes, assisted living facilities, and board and care facilities. FHA mortgage insurance provides lenders with protection against losses as the result of borrowers defaulting on their mortgage loans. Proposed projects are evaluated on the basis of whether the proposal is an acceptable insurance risk for the FHA Insurance Fund. It is not a competitive process.

An Alternative to Bond Financing

Section 232 may be used to finance the purchase, refinance, new construction, or substantial rehabilitation of a project. A combination of these uses is acceptable - e.g. refinance of a nursing home coupled with new construction of an assisted living facility.

The Section 232 program has various parameters and limits that will apply to borrowers—namely, limits on the amount of loan amounts (which will vary depending on whether the borrower is a for-profit or not-for-profit entity); loan term; and prepayment options.

As borrowers consider financing and refinancing senior living facilities, the Section 232 program may provide a reasonable alternative to traditional bond financing.