Section 242 eligibility screen
HUD won't insure a hospital loan unless the hospital clears a short list of hard tests in its regulation: mostly acute care, a three-year operating margin of at least zero, and debt service coverage of at least 1.25. Put in three years of audited numbers and see where it stands before you ask HUD for a preliminary review.
How the hospital screens
- Acute care: 12% of patient days in excluded categoriesPass. The limit is 50% (24 CFR 242.1).
- Three-year operating margin: 2.2%Pass. It must be 0.00 or better (24 CFR 242.16(a)(2)(i)).
- Three-year average debt service coverage: 2.02Pass. The floor is 1.25 (24 CFR 242.16(a)(2)(ii)).
- Current and projected coverage: 2.25 and 1.62Pass. HUD's feasibility benchmarks are 1.25 and 1.40 (24 CFR 242.16(a)(4)).
- HUD's red flagsNone of the four HUD lists.
A pass here means the hospital clears the tests a reader can check from its own statements. HUD also weighs market need, management, the project and the state's certificate-of-need process.
The tests, in HUD's words
A hospital, mostly acute care. Section 242 insures hospitals providing inpatient acute care, including obstetrics, where no more than 50% of total patient days fall in chronic, rest, drug and alcohol, mental and similar categories (24 CFR 242.1). HUD lets hospitals count outpatient care through an "adjusted patient days" calculation described in its handbook. The Critical Access Hospital exception to the 50% rule ran only from January 28, 2008 to July 31, 2011 (24 CFR 242.1).
Three years of results. A hospital whose aggregate operating margin over its three most recent audited years is below 0.00 isn't eligible, unless HUD finds a turnaround with two consecutive positive years. Average debt service coverage below 1.25 over the same years disqualifies it too, unless the latest year reached 1.4 (24 CFR 242.16(a)(2)). For a 223(f) refinance the bar is an aggregate margin of 0.00 or better and average coverage of 1.4 (24 CFR 242.16(a)(3)).
Feasibility. Among the factors HUD weighs: current coverage of 1.25 or higher and projected coverage of 1.40 or higher (24 CFR 242.16(a)(4)), and a market-need study, which HUD can waive when need is "clear and convincing". Where a state runs a certificate-of-need process, it has to be followed before the application (12 U.S.C. 1715z-7).
Red flags. In its 2022 lender training, HUD's Office of Hospital Facilities listed four "deal killers" for 242 and 223(f) applications: very low or negative net assets, very low days cash on hand (under 10 days), a mortgage-to-revenue ratio above 1.0, and a going-concern opinion. HUD gave no number for "very low" net assets.
Operating margin here is operating income divided by operating revenue, summed over the three years. Coverage is income available for debt service divided by debt service, averaged. HUD classifies operating and non-operating items under its own directives, so its numbers can differ from a hospital's audited presentation.
Passed the screen?
Send the commercial mortgage team at Janover Capital LLC the project and the three audited years. A person there will reply with a first read on the program and the questions HUD is likely to ask.