Which hospital debt FHA will refinance

FHA will refinance a hospital’s existing debt only if it is capital debt: money originally borrowed by the hospital itself to build, renovate or buy its own buildings and equipment, and owed by the hospital ever since. HUD spelled out the test in Mortgagee Letter 2023-12, dated June 20, 2023, which applies to Section 242, 241 and 223(f) loans.

The three questions

HUD asks of each piece of debt:

1. Were the proceeds originally used only for construction, rehabilitation or acquisition of the borrower’s hospital property and equipment, plus financing costs HUD approves?
2. Is the borrower the sole or principal obligor?
3. Has the debt been the borrower’s liability since it was first issued?

HUD’s test turns on the words “originated and continuously held”: the borrower (or a wholly owned subsidiary that will be obligated on the FHA loan) has to have been the obligor on the original issue and on every refunding since, and the debt has to appear on its audited statements the whole way.

How HUD checks

It starts with the audited financial statements to establish the borrower as obligor and trace the debt back to its original issue. Then it reads the offering statements or closing documents for that issue and every refunding, with their sources and uses, to see where the money went. HUD doesn’t cap how many times the debt was refinanced along the way, but each step has to pass.

When only part of the debt qualifies, HUD can require auditors or counsel to quantify the eligible share, and the hospital has to retire the rest with its own money by endorsement.

What qualifies and what doesn’t

The letter gives examples. Debt that qualifies:

• Bonds originally issued to build a replacement hospital, later refunded.
• A wholly owned subsidiary’s construction debt, where the subsidiary is fully obligated on the new FHA loan.
• Debt that partly qualifies, when the hospital can pay off the rest at endorsement.

Debt that doesn’t:

• Borrowing originally used for operations or for projects unrelated to the hospitals pledged as collateral.
• Debt of an entity other than the borrower or its wholly owned subsidiaries.
• Debt another entity originated that becomes the borrower’s obligation before a 223(f) closes.
• A guarantee of someone else’s debt.
• Borrowing that paid for another entity’s property.

Systems and affiliations

For a health system, the line between the hospital and the parent decides how much can be refinanced. Debt issued by a parent that isn’t the borrower, or assumed through an affiliation, falls into the letter’s ineligible examples.

Source

HUD Mortgagee Letter 2023-12, “Eligibility of Outstanding Borrower Debt to be Refinanced with Insured Mortgage Proceeds Pursuant to Section 242 of the National Housing Act” (June 20, 2023); definitions of capital debt and refinancing in 24 CFR 242.1.