Alternative Financing and HUD 242

Posted on December 28, 2011


When I started my career as an architect, it never occurred to me I would need to know much about access to capital. Indeed, times have changed.

On the contrary, architects need to know quite a bit about how hospitals function fiscally.  Historically, hospitals’ three main sources of construction project funding have been municipal (tax-free) bonds, private borrowing and donor money. When the subprime lending debacle hit a few years ago, leading to the tar pit economy of today, it induced very conservative lending standards.  Both the bond market, a traditionally reliable way to raise project capital, and private lending, except for the most well-positioned hospitals, dried up.

Since the traditional avenues of bonds and borrowing are largely closed, and access to capital has become quite a challenge for hospitals, many other creative ideas and alternatives are being considered.

It is no secret the alternative has become the norm in many areas of healthcare. For hospitals seeking project funding, this means considerations such as:

  • Federal grants and loans (HUD 242, USDA, state programs for rural)
  • Small business loans (SBA 504)
  • Lease instead of own (developer-led ventures:  off-balance sheet financing, triple-net, sale-leaseback)
  • Private investors.  This year the AIA initiated a program to help stalled projects start back up again, with the help of investor money.

Recently I spoke with Armadale Capital’s Stephen Pack, one of the nation’s leading HUD 242 mortgage lenders about the HUD 242 program. The FHA’s Section 242 program “helps hospitals access affordable capital with mortgage insurance” and is administered by HUD, thus the term HUD 242.  I wanted to find out ‘the straight dope’ on this program I heard many rumors about; I wanted to determine fact from fiction.

Here are five myths I discovered, which may help hospitals consider HUD 242 for a future project:

Myth #1My bond credit rating is too poor for the HUD 242 program.  HUD 242 thresholds for debt capacity are different than the private lending market.  A hospital with a BBB rating may qualify under the FHA. Other factors such as project size and scope determine program eligibility.

Myth #2HUD 242 is only for small dollar amount projects. On the contrary, HUD 242 can secure funds in the several hundreds of millions of dollars. In fact, there is a project size (~$20-25 million) below which the fees may be cost prohibitive to the project. The FHA wants to enable the right type of projects for the right reasons, regardless of dollar amount.

Myth #3Unless I’m poor, small and rural, I can’t qualify for HUD 242. Sure, the FHA does have a target profile for its partners, and it gives preference to sole community providers and critical access hospitals. However, HUD 242 is built for hospitals with substantial capital needs rated “A” or below, wherever they are located. And, the program accepts for-profits as well as non-profit ownership models.

Myth #4I can’t wait 180 days for a bureaucratic process like HUD 242. Historically federal programs, especially those involving money, have been known for red tape and delay; but the HUD 242 program of today is dedicated to streamlined processing through an easier application process, increased staffing, and in-house quality improvement initiatives like Six Sigma.

Myth #5HUD 242 is useless because it only guarantees a loan, and I have no lender to begin with. True, the FHA and HUD do not provide money directly, but you don’t need a lender on board. Only a small handful of individuals qualify to administer the HUD 242 program nationally, and only another small group are qualified FHA / HUD lenders. Your partner in the HUD 242 program plays an important role in both qualifying and navigating the requirements for the FHA, and also linking the applicant (hospital) to funding sources.

The long-term effects of our current economy on lending and access to capital may not be fully known for years. For example, there is talk the federal government will begin eliminating tax exemptions on some investments as a way to increase revenue. Some believe this will effectively kill the market for tax-free municipal bonds, a major source of capital for hospitals as noted above.

To predict the future may not be possible. But planning for it is prudent, and to know what is available if your tried-and-true funding method were to vanish one day might just might save your project and your hospital.