The advantages of HUD loans detailed.

If anyone wonders why the senior housing/health-care industry "still" needs HUD programs, they have not been paying attention to recent developments in the capital markets, one expert observes.

Jeffrey A. Davis, chairman of Chicago-based Cambridge Realty Capital Companies, says the credit market aberrations that have caused conventional lenders to falter have thrust FHA-insured HUD loans into the forefront as the most viable borrowing options for many owners and operators.

In the current market, interest rates for HUD loans range between 7.75 and 8.5 percent with a 50 percent MIP. And there are HUD loans for every senior housing/health-care category.

In contrast, conventional lenders typically offer prime plus 1 percent to 2 percent floating, or 9 percent to 12.5 percent, and are very selective in the types of properties they are prepared to underwrite, Davis noted.

The favorable comparisons do not end there. Whereas HUD offers borrowers a 40-year fully amortized loan for new construction, major-expansion or rehab, and a 35-year term and amortization for refinanced transactions, conventional loans most typically offer 10-year loans that are amortized over periods of 20 to 25 years with renewal options that may be negotiated later.

For HUD loans, according to Davis, the loan-to-value ratio is 90 percent for new construction and typically 85 percent for refinancing. Additionally, HUD refinancings may qualify for up to 100 percent loan-to-cost funding. For conventional loans, a 75 percent loan-to-value ratio is considered at the higher end, and loans are more typically 65 to 70 percent loan-to-value.

Conventional lenders often require borrowers to assume 100 percent personal liability for their loan, Davis said. However, HUD loans all are underwritten on a non-recourse basis.

With HUD, the interest rate is fixed and will not change for the life of the loan. In contrast, conventional loans typically "float" above a predetermined index and are subject to periodic rate adjustments throughout the life of the loan.

HUD loans are underwritten at a 1.11 debt service coverage on the value of the lease, and the loan is pre-payable with minimum payment penalties. On the other hand, conventional loans are underwritten for a 1.39 to 1.50 debt service coverage on projected net operating income. While the conventional loan is usually pre-payable, high pre-payment penalties normally apply.

With a HUD loan, borrowers are required to have cash equity of 10 percent for new construction, but there is no cash requirement for refinancing. With conventional loans, cash equity requirements typically range between 20 and 35 percent for new construction.

Although HUD is willing to process construction and permanent financing simultaneously, Davis says conventional lenders typically require separate transactions, which results in a duplication of fees.

Another important HUD loan feature is that the loans are assumable, which can't be said for conventional loans. Also, while underwriting for HUD loans is standardized in all 50 states, the process for conventional loans varies from lender to lender.

The underwriting process for both HUD and conventional loans considers the borrower's ability to pay, but conventional lenders tend to place a lot more emphasis on the experience and track record of the borrower, Davis said.

"In the past, HUD's primary role in the senior housing/health-care market was funding single-property, one-at-a-time venues. However, in the current credit crunch, HUD programs are being adapted to meet the needs of borrowers with larger portfolios of assisted living or nursing home properties," he said.

Davis believes HUD programs will remain a predominant funding source for senior housing/ health-care borrowers in the first decade of the new century, but commercial lenders and Wall Street almost certainly will stage a comeback from the fall-back position they currently occupy.