Long Term Loans Insured by HUD for Certain Real Estate

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By: Karen S. McGinley, Esq., and Rebecca S. Kane, Esq.

Whether seeking to acquire, construct, rehabilitate or refinance certain commercial property, one of the most underutilized financing options for non-profit or for-profit owners of certain healthcare facilities or multifamily properties with affordable units is a mortgage loan insured by the Department of Housing and Urban Development (“HUD”) through the Federal Housing Administration (“FHA”).  The multifamily properties affordable units must meet very specific requirements for rental rates (which vary based upon the city or town).

Because the loans are insured by HUD, which means that HUD will pay the lender in the event of a default by the borrower, lenders are able to offer borrowers terms that are typically well below market rates for long term loans (30-40 years), which are fixed, because the risk to the lender is reduced by the HUD insurance.

These terms include competitive fixed interest rates, longer terms, a higher loan to value ratio and other more favorable financial covenants.  In the current market, where there is significant speculation regarding the interest rates and when they will rise, advising clients that there are loans available at fixed interest rates of less than four percent (4%) for terms of up to forty (40) years with a maximum loan to value ratio of ninety-five percent (95%) helps to provide borrowers with necessary stability in an otherwise ever-changing market.

Similar to traditional commercial lending, the application process includes detailing the historical and current success of the business operations, showing a solid financial track record and providing the credentials and experience of the management team.  The application process will also require the submission of a market study, appraisal, environmental study and a survey of the property to be mortgaged.  If there is to be new construction or significant rehabilitation, the application must also include the plans and specifications for the project, the architects and contractors to be used and a pro forma setting out all costs associated with the design and construction of the project, and these additional submissions will have to be finalized by the borrower and approved by HUD before it will issue a commitment.

The principal asset secured by these loans is the real estate and the income stream from operations.  For tax and liability purposes, multiple facilities frequently have different land owners and/or different operators.  In these loans, HUD will require that the properties be “tied” together to insure that the income from each property is available to support another of the properties in the event that the income stream is reduced in a property.  Commercial lenders will require cross guaranties among the parties.  HUD’s requirements are more complicated.

For multiple properties, the only acceptable structure is all land owners/borrowers shall lease to one new single purpose entity, referred to as a “Master Tenant,” which will lease ALL of the real properties from the land owners/borrowers, using a HUD approved form, for a term which is 5-10 years longer than the term of the loan.  The Master Tenant then, in turn, leases the real properties to the operator(s).  This structure enables the lender to apply rent paid by one of the operators to service the debt of a land owner/borrower if the income from a property is reduced and is not sufficient to pay the debt service.  This structure enables the holder of the HUD insured loan to use funds which are generated by one property to pay the portion of the debt associated with another property.

Due to the intricacy of these loans and the borrower’s obligation to ensure that the properties are or will be compliant with all HUD requirements, the closing costs for these loans can be quite high, but HUD allows for these costs to be rolled into the principal of the loan and, therefore, amortized over the term of the loan.  As a result, borrowers will not need to deplete their operating accounts to pay for these costs, and even with these higher than average closing costs, borrowers will still see significant decreases in their monthly payments.  HUD loans will also typically take longer to close than traditional institutional lending, and so it is important to choose a lender and other professionals who are familiar with the intricacies of the process to ensure that the process is as efficient as possible.

Many institutional lenders will not offer these types of loans, either due to their lack of capacity, experience or they are not on the FHA approved lenders list, and for borrowers wishing to maintain their relationships with their current bank, this can be a difficult issue to resolve.  There are some FHA approved lenders who specialize in HUD loans who will partner with the borrower’s current institutional lender to assist in the process, and this partnership allows the institutional lender to maintain the banking relationship with its customer while at the same time providing its customer with below market credit facilities.

HUD loans can be incredibly beneficial for borrowers seeking commercial loans.  They provide very long terms with a fixed rate of interest which are not available in the commercial loan market.  The benefits outweigh the difficulties of the application, approval and closing processes of a HUD insured loan.


This is not a legal document nor is it intended to serve as legal advice or a legal opinion. Devine Millimet & Branch, P.A. makes no representations that this is a complete or final description or procedure that would ensure legal compliance and does not intend that the reader should rely on it as such.

Copyright © 2015 Devine Millimet & Branch, Professional Association