A New Interpretation

What W&D did was successfully argue that this concept could also apply to the New Jersey portfolio.

“We made the argument to HUD that these 14 memory care facilities were managed and operated as one asset, and would be marketed as one if they were to sell the group of buildings — which they are not planning to do — so these should be considered one loan,” Giusti said.

“We were able to get HUD comfortable with that approach.” The transaction wound up being the largest number of individual properties to be included as one loan using scattered site in the 232 program, he said.

High Costs, High Stakes

The stakes to the argument were significant to the company and W&D. Simply put, the costs of refinancing each property separately would have been too large to make the deal worthwhile, according to Giusti. For example, he said, the company would have been facing roughly $250,000 is legal costs if the properties were financed separately but as a portfolio those costs were $40,000.

Additionally, Vaughn notes that grouping all 14 individual properties as one combined HUD loan allowed the stronger performing properties to balance out the projects that were still in lease-up “thus providing maximum loan proceeds to our client while providing HUD with added collateral and cash flow.”

Giusti says W&D will try to do more deals using this structure since it benefits both the borrower and to HUD, as it gives the agency has more collateral.

“But the deal has to make sense,” he warns. In other words, HUD is not going to consider facilities located in say, Washington DC, New Jersey and Ohio a viable contender for the scattered site approach.

BETHESDA, MD–Walker & Dunlop structured a $28.3 million refinance loan for Valstone Partners after persuading the US Department of Housing and Urban Development that the 14 memory care properties located throughout New Jersey backing the loan met the guidelines for the agency's so-called scattered site approach in its 232 program.

But before we get to the significance of that, some background for the transaction is necessary.

The financing, arranged by Kevin Giusti and Michael Vaughn, is a 35-year, fixed rate, fully amortizing loan structured as a 232/223(f) Health Care Facility refinance with an 80% loan to value. Valstone Partners is using the proceeds to repay the existing bank debt, reimburse itself for the original acquisition costs and capital expenditures, and to fund renovation at several properties. Within the portfolio, 12 properties were refinanced from the borrower's existing portfolio, and two were acquired and refinanced.

HUD's scattered site approach refers to guidelines — which are arguably vague — that allow a borrower to group two or three facilities that are next door to another in one loan. The thinking is they benefit from economies of scale so it would be logical to group them in the same loan. But, as Giusti told GlobeSt.com, “the guidelines are somewhat left to interpretation.”

A New Interpretation

What W&D did was successfully argue that this concept could also apply to the New Jersey portfolio.

“We made the argument to HUD that these 14 memory care facilities were managed and operated as one asset, and would be marketed as one if they were to sell the group of buildings — which they are not planning to do — so these should be considered one loan,” Giusti said.

“We were able to get HUD comfortable with that approach.” The transaction wound up being the largest number of individual properties to be included as one loan using scattered site in the 232 program, he said.

High Costs, High Stakes

The stakes to the argument were significant to the company and W&D. Simply put, the costs of refinancing each property separately would have been too large to make the deal worthwhile, according to Giusti. For example, he said, the company would have been facing roughly $250,000 is legal costs if the properties were financed separately but as a portfolio those costs were $40,000.

Additionally, Vaughn notes that grouping all 14 individual properties as one combined HUD loan allowed the stronger performing properties to balance out the projects that were still in lease-up “thus providing maximum loan proceeds to our client while providing HUD with added collateral and cash flow.”

Giusti says W&D will try to do more deals using this structure since it benefits both the borrower and to HUD, as it gives the agency has more collateral.

“But the deal has to make sense,” he warns. In other words, HUD is not going to consider facilities located in say, Washington DC, New Jersey and Ohio a viable contender for the scattered site approach.