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
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