Sims Mortgage Funding (SMF) completed the second phase of its consulting assignment for the Menorah Home and Hospital for the Aged, a 320-bed skilled nursing facility in Brooklyn, NY.  

Menorah closed on a $20 million loan not insured by FHA that was issued by a major commercial lender.

Proceeds from the loan, along with $6 million derived from SMF’s successful note modification of Menorah’s existing FHA-insured loan that closed in April and an equity contribution will be used to: 

  • Renovate the older part of the building and restore skilled nursing capacity by 100 beds.
  • Make needed repairs to the façade of the project.
  • Create a hospice unit that will be leased to a related party.

SMF worked closely with the U.S. Department of Housing and Urban Development (HUD) Office of Healthcare Programs (OHP), Menorah’s financial and legal advisors and the commercial bank’s counsel to develop a structure that would meet HUD’s and the bank’s requirements.

The solution was to designate Menorah as the borrower, but have a related party to Menorah provide a guarantee to the bank and full collateral for the $20 million loan from a portion of the related party’s assets. 

In way, the bank loan was not secured by a mortgage on the FHA-insured project or a pledge of any of Menorah’s assets, both of which would have violated FHA’s requirements.

This structure enables Menorah to benefit from third-party reimbursement for the capital expenditures related to the expansion and renovation, while at the same time the first lien position of the FHA-insured loan remains intact, with no sharing of collateral with the commercial lender. 

HUD also benefits from this structure as it will receive approximately $32 million in capital improvements to its collateral (the skilled nursing facility) with no additional risk exposure as there is no increase in the amount of the FHA-insured loan.

HUD’s Section 241 program provides mortgage insurance for supplemental loans to finance additions or renovations to projects that have an existing FHA-insured loan in place. 

This would have been the traditional “first choice” of Menorah. 

However, the supplemental loan application requirements, FHA fees and additional mortgage insurance premiums, underwriting protocols and timeline to obtain OHP approval and close the loan were all prohibitive.

SMF obtained OHP for approval of the note modification and commercial loan in approximately 5 and 7 months respectively, reducing the timeframe by half. 

Moreover, since the interest costs for the commercial loan will be less than the combined interest and mortgage insurance premium costs of an FHA-insured supplemental loan, the state will benefit from reduced capital reimbursement costs.

Sims’ solution for Menorah Home and Hospital can be broadly applicable to other borrowers. For example, a non-profit organization could have its foundation secure the FHA-insured loan. 

For more information contact Anthony Luzzi at 201-307-9383.