A HUD representative, requesting anonymity, submitted written answers to HCF managing editor A.J. Daulerio's questions about some of the concerns surrounding the Section 242 program.
HCF: How long does the application process take for hospitals to enter into 242?
HUD: Once HUD receives a complete application, including a state CON - or an alternative study of market need and financial feasibility - it is usually able to complete the process within four to six months. One of the most important factors for assuring a smooth application process is early contact and discussion between the project sponsors and HUD to identify and resolve any issues before the hospital goes to the time and expense of preparing a formal application.
HCF: Are there any hidden caveats with the program that hospitals should know about?
HUD: There are no hidden caveats. However, there are some program requirements that hospitals should be aware of. In addition to the items listed on the Web page, here are some of the issues that frequently come up:
HUD requires a first-lien position on the entire plant, property, and equipment, as well as accounts receivable. What this means is that current long-term debt must be refinanced under the FHA-insured mortgage. Accounts receivable financing programs must be eliminated or severely limited.
HUD cannot insure ancillary projects, such as medical office buildings or outpatient surgery centers, except as part of insuring the debt of the entire hospital. However, once a hospital has FHA-insured financing, HUD can approve supplementary insurance for additional projects.
Because of the first-lien requirement, hospitals that are owned by cities or counties have initially not been able to qualify. However, this problem has been overcome when the local jurisdiction has created a special-purpose corporation to own the facility.
Section 242 was conceived as a bricks-and-mortar program to support construction or modernization projects. While existing debt may be refinanced, it must be done in conjunction with such a project. Straight refinancings are not possible under current regulations.
HCF: I know HUD 232 had instituted a MAP program to help it run more effectively. Will 242 see something similar any time soon?
HUD: There are no plans to institute MAP processing for Section 242 hospital loans. A specialized office at HUD headquarters, the Office of Insured Health Care Facilities, processes hospital loans, which is under the assistant secretary for housing (and the) federal housing commissioner. The Department of Health and Human Services provides support under an interagency agreement. HUD has chosen not to assign hospital program responsibilities to its field offices because of the highly specialized nature of hospital financing. Although HUD is not using MAP processing for insured hospital loans, we have significantly streamlined the application and review processes, making them less burdensome, faster, and more customer-friendly.
HCF: Are there underwriting restrictions?
HUD: There are no restrictions on who does the bond underwriting, because HUD is not involved on the bond side of hospital deals. Only lenders who are approved as FHA multifamily mortgages can submit applications for hospital mortgage insurance, and HUD can only issue hospital mortgage insurance commitments to such lenders.
HCF: Have you seen an increased demand for 242 programs in recent years, given the wintry economic climate facing some not-for-profit hospitals?
HUD: We see the "wintry economic climate" improving for many hospitals that have learned how to adjust to the challenges posed by HMOs, the movement away from inpatient care, and the Medicare cuts in the Balanced Budget Amendment. Demand has increased for four reasons: One, private insurers have sought to reduce their exposure to a sector in which they felt overexposed. Two, there is a wide spread between insured and uninsured rates, making insurance more valuable. Three, as mentioned earlier, HUD has streamlined its application process to reduce time and expense. Four, states without CON programs are increasingly willing to commission the studies of need and feasibility required by federal statute.
