Island Nursing and Rehabilitation Center

sims mortgage funding closes an acquisition/refinancing at a 25-year fixed rate of 5.17%

Sims Mortgage Funding, Inc., our mortgage banking subsidiary, closed in May a $17,158,100 HUD-insured loan for the Island Nursing and Rehabilitation Center. The loan was insured under the Section 232/223(f) program and was funded through the sale of Government National Mortgage Association (GNMA) mortgage backed securities. The taxable securities have a 25-year fully amortizing term and a fixed rate of interest at 5.17%.

background

Island, a 501 © (3) organization, leased the Center, a 120-bed skilled nursing facility, from a for-profit entity that developed, constructed and owned the real estate. The value of the capital lease was approximately $16.5 million, and was guaranteed by Mather Hospital, Island’s sole corporate member. The guarantee limited Mather’s ability to incur additional borrowing on its own behalf. Island’s capital lease required monthly payments that mirrored the owner’s underlying mortgage obligation, which had an interest rate of approximately 9%. Island wanted to exercise its option to acquire the Center, which would require a new source of capital to buy out the leasehold interest.

challenge

Island was attracted to HUD-insured financing because the interest rate was considerably below the 9% lease rate, and its non-recourse provisions would release Mather from its corporate guarantee. However, HUD has separate loan underwriting guidelines for acquisitions and refinancings of healthcare properties: the latter permits up to 100% financing and the former limits the loan to 90% of the acquisition price. Although the acquisition cost was equal to owner’s existing debt, the fact that real estate ownership was being transferred to a new entity made the transaction technically an acquisition, and therefore subject to the lower loan limit.

implementation

Sims Mortgage Funding obtained a HUD Firm Commitment for Mortgage Insurance based on 100% of the refinancing, not 90% of the acquisition. Sims worked closely with HUD’s underwriting, senior management and legal staff before the application was filed to develop a way to structure the acquisition so that it met HUD’s refinance test.

result

Sims’ ability to effectively and positively interact with key HUD program staff early in the process ensured a successful application, and the Firm Commitment it was able to secure enabled Island to maximize its HUD-insured loan proceeds and Mather to be released from its corporate guarantee.