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How to Repurpose Aging Senior Living Facilities to Affordable Senior Housing – Part 3

In Part 1 we wrote about how aging senior housing communities could reinvent themselves by repurposing older buildings to affordable senior housing.  In Part 2, we identified a potential source of equity – Low Income Housing Tax Credits (LIHTCs) – to make it happen.  In this final Part 3, we close out the series, and the capital stack, by discussing debt financing structures.   

Debt Structures:  HUD Mortgage Insurance as a Complement to 4% Credits/Tax Exempt Bond Financing

LIHTCs provide the equity for an affordable senior housing development; however, additional sources of financing will be needed to complete the capital stack. 

Three HUD-insured mortgage loans can provide a source of financing for the debt component of a LIHTC transaction: Section 221(d)(4); Section 223(f); and Section 232 (assisted living).   While a modest number of affordable assisted living facilities have been financed under the Section 232 program, the vast majority of HUD transactions that involve LIHTCs occur with the Section 221(d)(4) and Section 223(f) multifamily programs.  (For a detailed summary of HUD’s mortgage insurance programs, please visit

The HUD 221(d)(4) program is the most likely option to accomplish the goals of a senior living sponsor to repurpose to affordable housing when the cost to renovate the property is higher than $40,000 per unit.  This program is used for new construction and substantial rehabilitation and combines construction and permanent financing into one mortgage with an amortization and term of up to 40 years.  Interest rates for the 221(d)(4) loans are currently in the low 3% range.  The industry-best 40-year amortization lowers debt service payments, enhancing the feasibility of the Project. 

Section 223(f) can be used when the cost of the renovation is less than $40,000 per unit.  This program features a maximum 35-year amortization and current interest rates in the range of 2.50%.  Both Section 221(d)(4) and Section 223(f) have .25% annual mortgage insurance premiums for affordable projects.  These premiums are payable on the unpaid principal balance throughout the life of the loan.  

A HUD-insured loan typically complements the tax-exempt bond financing that is needed “up front” to qualify for the 4% LIHTCs.  That is because bond proceeds must be disbursed to pay project costs.  However, the tax-exempt bonds are of limited duration, typically maturing after the rehabilitation is completed and the project is placed into service.  The HUD-insured loan becomes the long-term financing after the bonds are redeemed post-rehabilitation. 

LIHTC transactions often need additional sources of funding beyond the equity and tax-exempt bond/HUD debt.  This funding can come from a variety of sources such as state grants or supplemental financing programs, Federal Community Development Block Grants (CDBG), HOME funds and deferred development fees. 

In Closing – Are LIHTCs for You? 

The LIHTC process is complex and involves significant administrative and reporting activities once the project is placed into service; however, if utilized properly, tax-credits can be a uniquely beneficial tool to preserve or create affordable assisted living or age-restricted housing.  This process is further complicated if the converted units are part of an existing building financed with taxable or tax-exempt debt under a Master Trust Indenture (MTI).  While it’s not impossible to layer tax-credit debt into the existing capital stack, additional legal and advisory work would need to be done to determine the correct path forward.

Due to the highly complex nature of these transactions, LIHTC consultants are typically used to assist with the tax credit application and ensure IRS compliance issues are followed.  Not-for-profit sponsors without LIHTC experience may partner with an experienced developer, who becomes part of the ownership structure, albeit in a limited control setting. 

Sims Mortgage Funding, Inc. (SMF) would perform the upfront screening of the transaction from the LIHTC and HUD-insured loan perspectives, and would coordinate with our parent company, HJ Sims, on the identification of tax-exempt bond issuing agencies with access to 4% credits and the selection of the agency most suitable for the sponsor’s needs.  Moreover, we may be able to recommend specific LIHTC developers, consultants and attorneys based on the sponsor’s geographic location.  Finally, SMF would help the provider identify legal help to ensure the new debt works with the existing MTI debt on the campus. 

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