On July 1, 2009, the U.S. Department of Housing and Urban Development (HUD) issued a notice1 announcing the expansion of its hospital mortgage insurance program. HUD will now permit refinancing of hospital mortgage debt with federally guaranteed loans under Sections 242 and 223(f) of the National Housing Act.

Under Section 242 of the National Housing Act, HUD, through the Federal Housing Administration (FHA), may provide certain qualified lenders with insurance against loss on defaults under loans to for-profit, not-for-profit and government-owned hospitals. Through the Section 242 program, hospitals can obtain better access to long-term, low-interest, fixed rate, and non-recourse loans.

Pursuant to Section 223(f)(1) of the National Housing Act, the FHA is authorized to insure 100% refinancing and acquisition loans for existing hospitals (as well as existing nursing homes, assisted living facilities, or other types of health care facilities). However, to date, HUD has not exercised this authority with respect to the refinance of debt for existing hospitals. HUD believed that private capital was sufficiently available to assist hospitals in the refinance of their debt, and that demand was not as great as was the need for new construction, renovation and rehabilitation and equipment purchases. However, as a result of the downturn in the economy and increased demand for health care services, the lack of access to capital has made it difficult for hospitals to obtain financing. Accordingly, HUD is expanding its hospital mortgage insurance program to allow for refinancing of existing debt without conditioning such refinancing on new construction or renovation.

To be eligible, a hospital must have maintained an aggregate operating margin of at least 0.33% and an average debt service coverage ratio of at least 1.80% for the last three years. In addition, the hospital must have experienced an increase in its interest rate of at least 1% since January 1, 2008 as a result of the credit crisis or must demonstrate that such an increase is imminent. The maximum mortgage loan amount permitted under the new Section 242/223(f) program cannot exceed the cost to refinance the existing indebtedness, which includes the payoff amount, reasonable and customary legal fees, title and recording expenses, costs of any repairs totaling less than 20% of the new mortgage amount, fees paid to the HUD-approved lender and inspection fees. The new proposed amendments to the regulations contemplate that an insured loan may also be used to finance the costs of acquiring a hospital.

HUD is publishing official amendments to its Section 242 program regulations implementing this expansion. The proposed amendments will be subject to public comment upon publication in the Federal Register.