FHA SECTIONS 242 and 242/223(f) – Office of Hospital Facilities (OHF) Processing

Section 242 – Loans for new construction or substantial rehabilitation of hospitals

Section 242/223(f) – Loans for acquiring or refinancing hospitals that may require moderate repair or capital needs not exceeding 20% of the loan amount.

PROGRAM FEATURES

• Borrowers can be non-profit, for-profit or publicly owned facilities.
• At least 50% of patient days must be attributable to acute care; non-acute patient days include skilled nursing, rehabilitation, psychiatric and other related services. HUD will allow adjustment of the patient day calculation based on revenues.
• Section 242 combines construction and permanent financing approved at the same time; Section 242/223(f) loans are generally considered permanent loans in that they are disbursed in full at closing, although loans with construction components can have post-closing distributions.
• Construction and rehabilitation costs for Section 242 projects are subject to Davis-Bacon Prevailing Wage Requirements; repairs and improvements under Section 242/223(f) are not subject to Davis-Bacon requirements.
• Section 242 transactions involving the refinance of existing capital debt must have a construction/capital equipment component of at least 20% of the loan; of the 20% component, no more than 50% can be used to purchase equipment. Hospitals seeking to refinance existing capital debt without a 20% or greater construction/capital component can qualify under Section 242/223(f).
• Under Section 242, hospitals must have an average operating margin of at least 0.00% and an average debt service coverage ratio of at least 1.25 X for the past three years.
• To qualify under Section 242/223(f), hospitals must have an average operating margin of at least 0.00% and an average debt service coverage ratio of at least 1.40 X for the past three years and meet at least three of the following criteria:
  • Total operating expenses will decrease as a result of the financing by at least .25%
  • The new interest rate will be at least .50% lower than the current rate.
  • The current interest rate increased by at least 1% since January 1, 2008 or will likely increase by that amount within a year of filing the application.
  • Annual total debt service for the most recent audited year is at least 3.4% of total operating revenue.
  • Credit enhancement on the existing debt has been or will be imminently withdrawn, expire or the provider has been or will be downgraded.
  • The existing financing has overly restrictive or onerous bond covenants.
  • Other circumstances exist that demonstrate that the hospital’s financial health depends upon the refinancing of its existing debt.
• If the three-year average operating margin and debt service coverage test can’t be met, HUD will allow the tests to be recast for the prior three-year period by applying an estimate of the projected interest rate on the HUD-insured loan in lieu of the historical interest rate. Moreover, under Section 242/223(f) if exceptional, one-time events affected the hospital in one of the prior three years, resulting in substantially altered financial performance, HUD will allow a fourth year to be used in determining whether the operating margin and debt service coverage test are met.
• Maximum loan to value (LTV) is 90%, with the value being determined as the total estimated replacement cost + net property, plant and equipment.
• Loans are pre-payable, assumable, and non-recourse; the maximum term is 25 years with full amortization.

FEES

An annual 0.70% Mortgage Insurance Premium (Section 242) and annual .65% (Section 242/223(f)) is paid to FHA as part of the monthly mortgage payment. The Inspection Fee is based on a sliding scale of the hard cost of construction or renovation to a maximum of .50% if the costs are 20% or greater of the loan amount.

ESCROWS

• Full escrows required for property insurance, real estate taxes, and FHA mortgage insurance premium.
• A Mortgage Reserve Fund required equal to one year’s debt service after 5 years and two years debt service after 10 years is required. The Reserve is funded from the hospital’s operations.
• Working Capital Deposit equal to 2% of the mortgage required at closing for Section 242 projects. This deposit may be capitalized in the mortgage at closing for non-profit borrowers.
• A letter of credit may be provided at initial closing to meet project cash requirements under Section 242. This will be drawn upon by the end of the construction period if needed.