About the FHA’s Section 242 Office of Hospital Facilities (OHF):
Section 242 of the National Housing Act was enacted by Congress in 1968 to support capital financing for urgently needed hospitals and encourage lending for needed hospital projects. Since its inception in 1968, we have insured nearly 500 loans, with a total principal amount of more than $22 billion in 43 US states and Puerto Rico.
OHF is comprised of two divisions with 22 professionals, as of March 17, 2022, with expertise in the financing and operations of hospital facilities:
- Underwriting Division:
- Functions include all underwriting activities involved in the review and processing of Section 242 mortgage insurance applications
- Asset Management Division
- Functions include portfolio management, default prevention, and risk management
The FHA Section 242 loan program offers credit enhancement that facilitates the construction and refinancing of healthcare facilities through private lenders. Without FHA mortgage insurance, lenders may not lend to our facilities, or would do so only at prohibitively high interest rates. With FHA insurance, hospitals enjoy lower operating and capital costs. With FHA insurance, more facilities are built, modernized, and refinanced, which enhances access to healthcare in the communities these hospitals serve.
Our loans can be funded through the taxable GNMA securities or through tax-exempt bond issues. Because the loans are insured by the federal government the bonds receive a rating of AAA/AA+.
Within the Section 242 program Mortgage Insurance Program, there are a variety of financing options to meet varying needs. The Section 242 program currently offers four types of loans (the numbers reference sections of the National Housing Act).
- Section 242:
The Section 242 program is designed for hospitals that are planning a construction project. While hospitals are allowed to refinance debt with proceeds from a Section 242 financing, to qualify for Section 242, at least 20% of the mortgage amount must be used for a construction project. This program is designed for hospitals that do not already have an existing loan that was funded through FHA.
- Section 223(f):
The Section 223(f) program is designed for the refinancing of debt not presently insured by HUD. To qualify for this program, at least 80% of the mortgage amount must be used to refinance debt. If there is a substantial rehabilitation component to the project, it may comprise no more than 20% of the mortgage amount. Proceeds from a Section 223(f) loan may also be used to acquire an existing hospital.
- Section 241:
The Section 241 program is a supplemental loan program for hospitals that have a Section 242 or Section 223(f) loan outstanding. A Section 241 loan can be used to fund capital improvements, expansions, and rehabilitation.
- Section 223(a)(7):
The Section 223(a)(7) loan program is for the refinancing of existing HUD-insured debt. In very limited circumstances, loans proceeds may also be used to fund critical repairs on the mortgaged property.
- For-profit, not-for-profit, and municipally owned hospitals are eligible:
- The borrower must be licensed and regulated by the state or a political subdivision of the state.
- Certificates of Need are required in States with a CON program
- The program insures loans for Acute Care hospitals. To qualify, more than 50% of a hospital’s adjusted patient days must be in acute care categories.
- The borrower must have the ability to grant first lien on real estate, other capital assets and accounts receivable.
- The borrower must have 3-year Aggregate operating margin of 0%, or better.
- The borrower’s 3-year average historical debt coverage must be 1.25x or better.
- Construction projects already under construction are generally not permitted.
- For more information on the “Eligibility Requirements”, please see the Link on “Section 242 Pre-Screening Tools"
Advantages of Our Program:
- Loan-To-Value: With 90% interim and permanent financing available, we permit access to more capital than many commercial alternatives.
- Interest rates are low due to the high credit rating for FHA backed bonds (AAA/AA).
- Supplemental loans are available through the Section 241 program which provides a vehicle to fund future capital needs.
- Portfolio hospitals may refinance existing HUD loans through the Section 223(a)(7) programs.