HUD Tightens Its Purse Strings.

INTERVIEW WITH RICHARD PRICE, PRESIDENT, ZIEGLER FINANCING CORP.

With private capital all but fleeing from the long-term care market, it's not surprising that the federal Department of Housing and Urban Development (HUD) has seen a marked upswing in applications for its underwriting programs, most particularly HUD Section 232 for senior care facilities. Recently, however, HUD responded with a set of proposed new rules, significantly tightening access to Section 232. Richard Price, president of Ziegler Financing Corp., one of the more heavily involved lenders in HUD-supported building and renovation (and a former board member of the National Investment Center for the Seniors Housing & Care Industries [NIC]), discussed the new proposals and what they mean to would-be borrowers in an interview with Nursing Homes/Long Term Care Management Editor Richard L. Peck.

Peck: How is HUD proposing to tighten up on those underwriting programs so popular with long-term care borrowers?

Price: None of this is official as yet (late March), but here is how it is likely to go. I should add, by the way, that HUD has the broad general support of lenders such as ourselves, who take these programs seriously and want to see them work. To begin with, HUD wants to categorize borrowers into three tiers:

Tier One would include those providers who want to initiate 10 or fewer projects over the next 18 months. Here HUD is, in fact, trying to be a little less restrictive. In the past if a provider planned more than five projects aggregating more than $30 million, HUD field officers were required to submit these cases to HUD headquarters in Washington for review. HUD is also discussing less restrictive dollar limits on project financing at this level, as well, although the details haven't been worked out as yet.

Tier Two providers, applying to develop 11 to 49 projects over 18 months, would now be required to receive a credit report from one of the three major rating agencies: Fitch IBCA, Standard & Poor's or Moody's. There would be some cost involved in getting this report, but HUD has said that this would be a mortgageable item, and there would be no dollar limit to the cost of the project.

Tier Three providers, of which there would not likely be very many, i.e., those developing 50 or more projects over 18 months, would be required to undergo the credit review plus a detailed review of the company's financials by one of those rating agencies.

Peck: What about the proposal that any company that's undergone a bankruptcy within the past five years would be ineligible for HUD underwriting?

Price: That's probably the most controversial of all the proposals. You can argue two ways on this. On one hand, you can argue that these companies are taxpayers after all, and have a constitutional right to access their government, as would any entity in this country. Some of these companies also have excellent assets in their inventories, and it could be said that if the Federal Housing Administration (FHA) could step in sooner with HUD-backed financing assistance, some of these bankruptcies would be cured faster. On the other hand, HUD assumes that it can and should act as any prudent lender would act in the open marketplace. As would any private investor, HUD wants to see its portfolio grow and improve; it wants to make money for the FHA insurance fund; and it wants to minimize its losses. HUD does not want to be seen as the "lender of last resort," as a place to dump all problems and expect the government to perform. Those days are far behind us.

Peck: While considering all these restrictions, isn't HUD at the same time attempting to speed up the processing of loan applications with its Multifamily Accelerated Processing (MAP) program?

Price: Yes it is. It's all part of a balance that needs to be struck. And MAP is working. I know that, in our situation, we've cut two or three months off the process for refinancing loans, and have recently concluded a complex new construction loan in less than five months. I'd say the HUD field offices seem genuinely dedicated to making the MAP program work. This is a good thing, because MAP puts the responsibility for sound underwriting practices squarely on the backs of the lenders, where it belongs.

Peck: The fact that loan applications are, in fact, moving through the MAP process indicates that at least some long-term care facilities still qualify for financing consideration, doesn't it?

Price: There's no question that there's still a lot of good real estate and well-functioning businesses out there in the field. Unfortunately, the entire industry has been painted into a corner by the private capital markets having the inaccurate but general perception that the industry is flat on its face. This is not the case.

Peck: What are some of the types of facilities that are still doing well from a financing standpoint?

Price: With assisted living, it more and more has to be those facilities that have sound ties to the continuum of care. Stand-alone assisted living facilities are in for increasing difficulty. As I mentioned, some skilled nursing organizations have very well-performing assets that are good candidates for refinancing. And HUD helped to make such refinancing easier in 1995, when for the first time it was permitted to refinance projects for which it had not been the original underwriter.

Among other senior care sectors, independent living and active adult are still strong and viable. But they remain a challenge both to lenders and developers. Developers must decide on the balance of "shelter vs services" they wish to provide--i.e., how can they realistically cost out aging-in-place services? How will they support the debt incurred in providing them, given that a certain percentage of residents will actually be paying for them? There are interesting challenges for developers in these senior housing sectors today.