An “alarming” legal opinion affecting a federal loan program popular with senior living and care organizations could have a “detrimental” effect on maintaining senior living communities and other types of long-term care facilities, according to a coalition of business groups.
The American Seniors Housing Association, Argentum and the American Health Care Association / National Center for Assisted Living this week joined banking, mortgage and business groups in sending a letter to the Department of Housing and Urban Development regarding an “immediately alarming” legal opinion affecting the Section 232 loan program.
Section 232 is a Federal Housing Authority loan program that provides mortgage insurance for residential care facilities such as assisted living communities and nursing homes. The program can be used to finance the purchase, refinance, new construction or substantial rehabilitation of a property. It provides long-term financing for 15% of all skilled nursing facilities in the country.
The legal opinion, circulated internally from the HUD Office of General Counsel to the HUD Office of Residential Care Facilities, or ORCF, and the HUD Office of Healthcare Programs, states that the current Section 232 handbook guidelines and program regulations that allow for non-critical repairs to be mortgageable costs conflict with the National Housing Act.
“The determination that non-critical repairs should not be considered mortgageable will ultimately deter borrowers from completing work that will enhance the long-term marketability and viability of the asset, which negatively impacts the housing and care of seniors, a major focus of the current administration,” the letter read.
According to the coalition, the ORCF is advising lenders that firm commitments cannot be issued for loans unless non-critical repairs are removed as a mortgageable cost of refinancing — something the group calls a “significant” change from long-standing policy.
The coalition maintains that transactions with firm commitments and locked-in rates are in jeopardy of not closing, and that the uncertainty created by the internal memorandum is “unprecedented and extremely detrimental” to the program.
The coalition further stated that removing costs associated with non-critical repairs from rate-locked transactions could make borrowers, lenders and HUD “probable targets” of litigation. In addition, according to the letter, the legal opinion places borrowers in a situation in which repairs must be made under program regulations, but those repairs no longer can be financed.
“If this internal memorandum is allowed to upend 30-plus years of practice, it would open the door to continued reinterpretation of statute language and create an inability to rely on published rules, which would ultimately damage the program beyond repair,” the letter read.
Although repairs are routinely mortgaged as a standard lending practice, the coalition said, the 232 program’s fixed rate and the ability to spread the cost of those repairs over a long time period at a fixed amount make it attractive to facility owners and operators as a way to fund long-term property improvements.
“For many healthcare facilities, in particular those who care for a higher percentage of Medicaid residents where the reimbursement they receive may not provide much cover over cost, the Section 232 program is the best option available to fund repairs and improvements,” the letter read. “This fits squarely within HUD’s mission to promote and preserve well-maintained and appealing affordable housing options.”
