HUD 232/223(f) refinance sizing, worked through

A HUD 232/223(f) refinance is sized at the lowest of four numbers: the amount you request, the appraised value times 80% (85% for a qualifying nonprofit), the loan your NOI can carry at 1.45 times coverage with the mortgage insurance premium counted as debt service, and the full cost of paying off your existing debt plus eligible repairs and closing costs. Whichever is smallest is the loan.

That list comes from HUD Handbook 4232.1 REV-1, Section II, section 3.8, and it is the same calculation the lender enters on HUD’s maximum insurable loan worksheet, the MILC (Form HUD-92264A-ORCF).

The example

A 120-bed skilled nursing facility, owned by a for-profit borrower. The lender underwrites NOI of $2,400,000. The appraisal comes in at $30,000,000. The existing bank loan has $18,000,000 to pay off, the property condition report calls for $600,000 of repairs, and third-party reports, legal and title come to $350,000. Assume a 6.00% note rate over 35 years and a 2% lender fee. These are illustration numbers, not a quote.

Test 1: loan to value

$30,000,000 × 80% = $24,000,000.

Skilled nursing and existing assisted living both get 80% for a for-profit borrower. A nonprofit with a solid operating record gets 85%, and must keep a residual receipts account.

Test 2: debt service at 1.45

Divide NOI by 1.45: $2,400,000 ÷ 1.45 = $1,655,172 available for debt service. HUD then divides that by the sum of the interest rate, the annual MIP and the first-year principal paydown. For a 6.00%, 35-year level payment loan, interest plus principal is about 6.84% of the loan in year one (the MILC calls the principal part the initial curtail). Add the 0.65% annual MIP and the divisor is about 7.49%.

$1,655,172 ÷ 0.0749 = roughly $22,090,000.

Test 3: cost to refinance

This is 100% of what the refinance actually costs. The costs that scale with the loan have to be grossed up, since they are financed too:

• HUD application fee: 0.30% of the loan
• Upfront MIP on a 223(f): 1.00%
• Lender fee, assumed here at 2.00%

That is 3.30% of the loan. The fixed costs are the $18,000,000 payoff, $600,000 of repairs, $350,000 of other closing costs and HUD’s inspection fee. Repairs here are $5,000 a bed, above HUD’s $3,000-a-bed line, so the inspection fee is 1% of repairs, $6,000. Fixed costs total $18,956,000.

$18,956,000 ÷ (1 − 0.033) = $19,602,800, rounded down to the nearest $100 as HUD does.

Test 4: the request

Test 4 is the amount you request. Request at least the cost-test figure and this test never limits the loan.

The answer

The lowest is the cost to refinance, so the loan is $19,602,800. At that amount, monthly principal and interest is about $111,800, first-year MIP about $127,400, and coverage with MIP about 1.63 times, comfortably above 1.45.

The value test had $4.4 million of room and the debt service test had $2.5 million. None of it is reachable, because a 223(f) cannot pay the borrower cash.

When a different test binds

Three variations:

• Raise the payoff to $23 million and the cost test climbs above $24.6 million, and now the debt service test at about $22.1 million binds. The borrower brings roughly $2.6 million of cash to close, or the deal does not work.
• Cut NOI to $1.9 million and the debt service test drops to about $17.5 million, below the payoff alone.
• Make the borrower a qualifying nonprofit and the value test rises to $25.5 million, which matters only if value was the constraint.

Rules that sit outside the four tests

• The building must have been completed or substantially rehabilitated at least three years before the firm application.
• The maximum term is 35 years or 75% of remaining economic life, whichever is less.
• Debt that does not meet HUD’s eligible-debt rules needs two years of seasoning before it can be refinanced at full value.
• Prepayment penalties on the old loan count as eligible costs only up to 10% of the new mortgage.

Run your own numbers in the sizer, or look up your facility to start from its beds and any existing FHA loan.