One of the many positive features of HUD-insured loans is their attractive interest rates, even with the recent spike. And when you factor in that they amortize over 35 to 40 years, HUD-insured loans produce some of the lowest debt service requirements in the capital markets.
However, a HUD-insured loan is guaranteed by the Federal government, and as such, it requires the payment of an annual Mortgage Insurance Premium (MIP) on the unpaid principal balance. For healthcare loans without low-income housing tax credits, the MIP ranges from .65% to .77% annually, and is typically 1.00% up-front. The overall cost of capital is still attractive, but the MIP adds to the total debt service. Moreover, there are no provisions for the MIP to burn off after a specified time period or if the property reaches a certain level of financial performance.
Good news is on the way! HUD recently announced that it will be offering lower MIPs for healthcare loans starting on or about October 1, 2022, the start of the new Federal fiscal year. Up front and annual MIPs will be eligible for a reduction to .25%. Refinancing or acquisition loans insured under the Section 232/223(f) program will be eligible for a reduction in annual MIP by .40%; new construction or substantial rehabilitation loans insured under Section 232 will be eligible for a .52% reduction in annual MIP. Up front MIPs could drop by .75%.
What’s the catch? As the title of our story intimates, to obtain the lower MIPs, properties would have to meet certain energy-efficient standards. Although the details are still being worked out, we expect that the overall framework will require lenders to show in the application for mortgage insurance that the property is on a path to achieve green building certification with meaningful, measurable energy and water efficiency improvements. This is likely to mean that properties will have to achieve and keep a minimum 75 out of 100 Energy Star score using the Environmental Protection Agency’s portfolio manager for its “Senior Care Community” building type.
The cost to retrofit to meet and keep the proper score will vary depending upon the age and condition of individual properties, but the potential up-front and annual MIP savings should make it worthwhile to evaluate the financial feasibility of meeting HUD’s green standards. Our experience with HUD’s multifamily programs has been that it is relatively easy to qualify for the green MIPs.
Stay tuned to this space for more information as HUD’s plans develop.