HUD – Section 232
Mortgage Insurance for Assisted Living &
Skilled Nursing Facilities
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2,909 active loans
Loan balances of about $20 Billion
Roughly 12% of U.S. loan market
Average of $87 Million Annually returned
to Treasury (232/242 combined).
HUD – Section 232
• 705 loans fiscal year 2013
• $5.5 billion fiscal year 2013
• 400 appraisals to review each year.
Lean Transformation
• In 2008 the 232 underwriting process was
completely reengineered using Toyota Lean
production principles.
• Uses “Market Value” based underwriting
rather than a HUD prescribed valuation
method.
Abandoned Allocation of Value
Going-concern Value
$11,363,636
Less Tangible Asset Value
$10,000,000
Indicated Intangible Asset Value
Proprietary Earnings
Implied Capitalization Rate of
Proprietary Earnings
$1,363,636
$250,000
18.3%
Other Innovations
• Decision Circuit
• Standardized Charts
• Data Tracking
Appraisal Issues That Kill Mortgage Applications
Failure to account for new competition in the pipeline when forecasting
demand, occupancy, payor mix, rents and cap rates.
Departing from the historic NOI experienced at the property.
 We require “normalization” of the history to include typical
expenses including management fee, real estate taxes, and
reserves for replacements, even when the facility has not paid
these in the past.
Cap rate developed from in-place or trailing NOI of the sales, applied to
go-forward NOI for subject – consistency.
Failure to reconcile the going-concern value with the replacement cost.
Cost Approach - Continued
• When the cost approach is lower than the going concern, this
may indicate excess or economic profit, which carries
significantly higher risks.
• Excessive economic profit, where there are few barriers to
entry (Certificate of need or other regulation) will be
challenged.
• Total replacement cost should include the operating deficits
during the initial absorption, plus reasonable developer fees
and incentives. These "soft" costs are recognized as
mortgagable collateral.
Contact Information
Wayne.D.Harris@HUD.gov
(971) 222-2647