HUD 242: It's No Housing Tax Credit, But It's Helpful for Some Hospitals' Debts

Karen Minich-Pourshadi, for HealthLeaders Media , April 26, 2010

Here are a few more HUD Section 242 details:

  • Purpose: To help hospitals access affordable financing for capital projects—including new construction, refinancing, and modernization, remodeling, equipment and expansion.
  • Eligibility: Acute care hospitals with no more than 50% of patient days attributable to the following services: chronic convalescence and rest, drug and alcoholic, epileptic, nervous and mental, mental deficiency, and tuberculosis. For Critical Access Hospitals this restriction does not apply. If your state has a Certificate of Need process, a CON must be issued or pending.
    • You must grant the FHA-insured lender a first mortgage on the entire hospital, including property, plant, equipment, and receivables. (Note: Exceptions may include leased equipment, off-site property, capital associated with affiliations, etc.)
    • You must be willing to make monthly payments into a Mortgage Reserve Fund that will build to a balance equal to two years of debt service after ten years.
    • Over the last three full fiscal years, the hospital's average operating margin must have been equal to or greater than 0.00 and the average debt service coverage ratio equal to or greater than 1.25.
  • Funding amount: Loan-to-value may not exceed 90%. Maximum loan term is 25 years. One-time fees total 0.8% of loan amount. Fixed annual premium is 0.5% of remaining balance. FHA insures 99% of the loan amount.
  • Application process: Long; the first step of the application process is for HUD to perform a preliminary review of the hospital and the proposed project with information provided by the hospital and mortgage lender.

By now a good majority of hospitals with variable-rate bond debt have refinanced their way to higher ground, but not everyone has done it. Moreover, being aware that these types of programs are available to your facility could help keep hospitals out of trouble in the future. Of course the key to success all together is not to over leverage your facility—which is why you won't see me overpaying for a house even though the tax credit is about to expire.

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Karen Minich-Pourshadi is a Senior Editor with HealthLeaders Media.

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