Why HUD Funding May Be the Vehicle to Drive Skilled Nursing Innovation

If there is one source of financial support that has become a favorite among retirement home owners, it is funding from the US Department of Housing and Urban Development (HUD).

Even still, it may come with some limitations.

HUD loans can be used to buy, build, refinance or renovate retirement homes, among other health care facilities, and their use in the long-term care sector continues to grow, according to recent analysis by ATI Advisory. .

HUD insured more than 2,300 active mortgages in 2019, up from about 800 in 1995.

While HUD’s “longstanding dominance” in the nursing home industry proves its reliability as a source of long-term funding, the program could better serve residents by encouraging innovation, the researchers noted.

The analysis, commissioned by the National Investment Center for Housing and Aged Care (NIC), specifically noted that HUD has been an “ineffective vehicle” for pursuing growth and innovative investments in the sector.

Although HUD’s stability is what makes it an attractive option for so many providers, such financing typically takes up to a year to obtain due to a lengthy administrative process – often longer than traditional debt financing. or equity investments.

Additionally, HUD loans are geared toward the real estate side of the nursing home business, which has led to a relatively prescriptive underwriting process. However, this does not necessarily incentivize innovative investments, such as communications and technology upgrades, which would benefit the operational side of the business, according to the ATI researchers.

Bob Kramer, NIC’s founder and strategic adviser, said while he wasn’t surprised by the increase in HUD loans, he thinks its focus is more on getting reimbursed than quality of care.

“There is no incentive given for upgrades, upgrades, like 5G, or the air quality and purification system, let alone moving three and four bedroom rooms to semi-private and private rooms. , creating neighborhoods, as opposed to long hallways,” he said.

Kramer thinks more should be done to make the program a tool used to drive innovation and modernization in the sector.

Conner Esworthy, a researcher with ATI Advisory and one of the report’s authors, told SNN that “at best the program [currently] is growth-incentive neutral, as both innovative and non-innovative borrowers can access loans at the same rate.

“There are many operators today who are already investing in innovative projects (eg, I-SNP, technology upgrades) and an updated HUD program that rewards these operators could accelerate those investments,” Esworthy said.

However, not everyone agrees with these points.

Steve Kennedy, executive managing director of VIUM Capital, “pushed back” against the idea that the HUD is not driving innovation within the industry.

“Earlier this year [HUD started] allowing owner-operators to access reduced mortgage insurance premiums if certain building energy efficiency thresholds are met,” Kennedy told Skilled Nursing News. “I think it’s a good way to emphasize improving the energy efficiency of projects by combining it with an economic incentive.”

The reality is that HUD remains one of the strongest sources of capital for the skilled nursing industry, and ATI researchers believe that with a few tweaks and tweaks, HUD could be well positioned to drive growth. growth and innovation in the industry.

“This would imply a more direct approach to influencing operators’ capital choices, compared to some payment policy changes (such as reduced refunds) that indirectly aim to discourage some investors and ultimately penalize operators,” the authors wrote. researchers in the report.

HUD limitations

Operators must be stabilized as a property before going to HUD for funding or they will not meet the criteria.

“HUD’s health care leadership is very focused on not only the last 12 months of cash flow, but also the last three months that will cover the proposed debt service,” Kennedy explained.

He said a number of closures had been suspended as the Covid recovery continued. Meanwhile, interest rates have only gone up, which is not helping that ability to cover the debt.

He said the program is aimed at successful operators and facilities that are already performing well.

“You don’t see HUD funding as a way to save nursing homes, you see HUD funding as a way to best help relatively successful facilities with proven operators,” he said.

Timing has always been the biggest challenge with HUD funding.

“It just takes longer to complete a HUD deal than bank financing or finance company financing or fulfillment through other agency alternatives like Fannie or Freddie, who are active in the world of assisted living, memory care and independent living,” Kennedy said. “When rates are rising and your margins are as thin as they are, the day-to-day matters.”

Therefore, VIUM operates as a bridge lender to ensure that there is flexibility in the bridge product so that owners/operators have the time they need to operate these projects in a way that they finally be “HUD compatible”.

Has HUD Funding Peaked for Retirement Home Owners?

It’s easy to see why the HUD program has become an integral part of the skilled nursing space given its long-term, fixed-rate, non-recourse guarantees, according to Esworthy.

Although the program has been a vital lifeline for steady-state operators, HUD loan amounts are based on the “estimated value of major physical upgrades and mobile equipment,” Esworthy added.

“Many innovative investments – such as an air purification system or 5G infrastructure – could be made without changing the exterior of a facility, but they tend to fall into a gray area where they are not. eligible for separate HUD funding, or difficult to fund within HUD’s substantial rehabilitation needs,” he said.

For some single-installation rural operators, HUD remains the only affordable and feasible debt option and a consistent and important source of capital, even for operators who have not used the program before, according to Esworthy.

“The continued high volumes of HUD loans during the first half of the pandemic – when other private lenders remained on the sidelines – suggest that HUD funding was a reliable lifeline for operators during a very precarious time,” did he declare.

After booming in recent years, Kramer thinks HUD funding may have peaked.

“There’s so much uncertainty right now about interest rates,” he said. “I think the height of the HUD rush probably happened in the last couple of years when everyone said these historically low interest rates wouldn’t last forever. Now we see there , they don’t last forever.

Kramer thinks the federal government will continue to raise interest rates as a tool to try to control inflation.

Kennedy is also seeing a decrease in the number of deals approved and closed because HUD is very careful in how it underwrites projects.

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