HUD-242: Blazing a Trail to Affordable Financing
In today’s economy, many hospitals may find that FHA-insured financing is the only way they can obtain viable and affordable funding. Since 2001, we’ve been a part of seven HUD-financed hospital projects.
As the program has developed we’ve seen our clients explore the FHA 242 Hospital Mortgage Insurance Program not only for new facilities, but also to refinance existing debt while incorporating new hospital-related projects such as medical office buildings and wellness centers.
For those interested in exploring HUD 242 financing, it’s ideal to have team members who’ve forged this path before to lead you in the right direction. While the journey isn’t difficult, it is a new one for most healthcare facilities, so we’re offering up this brief trail map.
The design schedule for a HUD 242 project will need to incorporate HUD’s Office of Architecture and Engineering (OAE) in the process. OAE’s role is to protect the interests of HUD by reviewing, approving, and monitoring the entire design, development, and construction process, including all construction documents.
While this additional level of project oversight by OAE follows strict federal guidelines, a project team experienced with the HUD process can anticipate requirements and ensure all submissions are complete.
As you continue down the path, you’ll want to keep these trail markers in mind:
- Schematic design should only begin after a successful pre-application meeting is held with HUD and an FHA mortgage lender—the only party that can make an FHA loan.
- The typical design timeline with HUD from start of the architectural narrative to delivery of HUD-approved construction documents can average 8-10 months.
- When handled by an experienced design and finance team, the FHA 242 process, from pre-application through approval, should average 7-9 months.
- Those processes run concurrently and should take a total of 8 to 10 months, although both could be affected by several factors, including project size and complexity.
- Though the actual construction period is typically unaffected in a HUD-financed project, there is a required liquidated damages clause in the construction manager's contract to compensate the hospital for costs resulting from a failure to complete the project on time. To avoid the potential for liquidated damages, simply extend the schedule on paper but run a normal schedule on site.
A huge attraction for HUD financing is the affordability. Financing costs of an FHA 242-insured mortgage loan compare very favorably to available alternatives. In general, costs considered directly related to the project, including all financing costs and interest expense during the construction period, may be funded with mortgage loan proceeds.
A certain amount of capital will be expended for pre-construction and design work prior to the closing of the FHA-insured mortgage loan. Keep in mind that many of these costs can be rolled into the loan amount because they are considered directly related to the project, but a certain amount of capital will be needed to fund pre-construction and design work.