The Federal Housing Administration provides mortgage insurance to a variety of multifamily developments, and that includes seniors housing. Such FHA-backed loans under the Section 221(d)(4) program facilitate assisted living facilities, Alzheimer/dementia care facilities and skilled nursing facilities deals. To this point, the for-profit segment of the seniors housing industry specializing in market-rate properties has shown only a tepid interest in the FHA program.
For some borrowers, the extra paperwork and other filing complexities in dealing with the agency might have previously been the deciding factor against using FHA lending. However, Jonnie Pardue, senior vice president and director of FHA operations at Key Bank Real Estate Capital in Dallas, thinks that more seniors housing developers are now being drawn to FHA finance, even for market-rate properties.
NREI: Do you get the sense that more seniors housing developers are now interested in FHA finance than before?
Pardue: Yes. We’re seeing increasing demand among them for the program, for both market-rate and bond financing. The deals we do in both categories average about $10 million each.
NREI: Why the change?
Pardue: It might have to do with the current high cost of land and high construction costs. FHA-backed funding does have some extra upfront costs, such as mortgage insurance premiums, which are currently 45 basis points each year during construction. And there also are processing and inspection fees, among others. But the program offers the highest leverage possible, a loan based on 90% of total costs and whose term is 40 years. That means a low equity requirement for a developer who needs to make his initial investments go further.
NREI: Do the advantages outweigh complexities of the process?
Pardue: That depends on the developer, of course, but I think some of them are giving the program a second look because of its advantages. Another key feature is that interest rates are locked prior to closing, both for the construction loan and permanent financing, and so interest rate risk is eliminated. (FHA interest rates float with Ginnie Mae mortgage-backed securities or the whole-loan market for FHA-based loans.) Also, the construction loan will roll into the permanent loan upon completion of the project, so there’s the added appeal of one-stop shopping.
NREI: Do you expect the demand for FHA finance to grow among market-rate seniors housing developers as the demand for seniors housing grows?
Pardue: With an aging population to create demand for seniors housing — and the fact that the seniors housing market isn’t overbuilt right now — market-rate developers are going to want to be in the game in the years ahead, and FHA lending can help them do that. For its part, the FHA is glad to do market-rate senior housing deals, though not necessarily luxury properties.
NREI: But there’s not going to be a rush into the program?
Pardue: No. Market-rate FHA transactions still represent a relatively small portion of our total lending in the seniors housing sector. Still, while we continue to see and close more FHA transactions in the affordable seniors housing sector, we’re also observing a gradual rise in demand for market-rate seniors housing deals. Awareness of that kind of FHA finance is just beginning to grow.