FHA Section 242 Mortgage Insurance Program

PURPOSE To provide funding for the new construction, refinance, or substantial rehabilitation of hospitals. This program also provides permanent take-out financing upon completion of construction. FHA insurance requires the lender to place a first mortgage on the entire hospital, including all appurtenances such as parking lots, physical plants, etc. ELIGIBLE PROJECTS Any hospital developed by non-profit corporations, individuals, partnerships, trusts, government entitities, and private corporations. A project is considered eligible for substantial rehabilitation when the cost of work will be in excess of 20% of the facility’s total mortgage amount. No more than 80% of the mortgage proceeds may be used for refinancing. The following are additional requirements for this program: (1) Facility must be properly licensed and provide acute care with no more than 50% of adjusted patient days attributable to the following services: chronic convalescence and rests, drug and alcoholic, epileptic, nervous and mental, mental deficiency, and tuberculosis. (2) Depending on State requirements a Certificate of Need (CON) must be issued or pending. If not applicable, the State must commission an independent feasibility study. (3) Over the last three full fiscal years, the 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 1.11x. DEBT SERVICE COVERAGE Minimum of 1.11x for new construction and substantial rehabilitation. INTEREST RATE Fixed-rate, based on the sale of GNMA securities, market tax-exempt and taxable bonds. LOAN TERM Up to 25 years, fully amortizing. DAVIS BACON WAGE The Department of Labor’s published wage and fringe benefits must be paid during construction. MAXIMUM LOAN For a new construction project, the loan amount will be the lesser of: (1) Maximum Debt Service Mortgage as approved based on the facility’s projected net operating income. (2) 90% of the eligible replacement costs, including major moveable equipment and furnishings. 95% for non-profit. (3) 90% of the eligible replacement costs less the amount of loans, grants or gifts from other sources intended to offset costs and mortgage financing. For a substantial rehabilitation project, the loan amount will be the lesser of: (1) The amounts set forth under new construction. (2a) Refinance – 90% of the estimated cost of rehabilitation plus the lesser of: (a) Principal amount of existing indebtedness against the property if any, or (b) 90% of the estimated market value of the property before rehabilitation. (2b) Purchase – 90% of estimated cost of rehabilitation and equipment plus the lesser of: (a) 90% of actual purchase price of the property, or (b) 90% of the estimated market value of the property before rehabilitation. (3) Five times the sum of the cost of new improvements and cost of mortgageable equipment which is not in excess of the cost of new improvements. RESERVES (1) Replacement reserves will be established for major building repairs/replacements and for major equipment based on a percentage of total structural costs and total major equipment costs and deposited into Reserve Accounts on a monthly basis beginning with amortization. (2) A Mortgage Reserve Fund will be established by monthly payments to build to a balance equal to one year of debt service after five years and two years of debt service after 10 years. Nothing contained herein is intended to be, nor should it be construed as, a commitment to lend on these or any other terms. Arizona MB007451