After Record Rosewood Default, HUD Tightens the Screws on Skilled Nursing Financing

Nursing home operators that have relied on government-backed financing for acquisitions and renovations can begin measuring time in two distinct eras: pre-Rosewood and post-Rosewood.

The record-setting default on the Rosewood Care Centers portfolio, publicized in the New York Times, has prompted the Department of Housing and Urban Development (HUD) to take a harder line on the already stringent underwriting and approval process, lending experts noted this week at the eCap health care conference in Doral, Fla., just outside of Miami.

“What Rosewood did, in HUD’s mind — it’s a 180. Anything that was a gray area, or not as heavily investigated — those days are long gone,” Joshua Rosen, senior vice president and managing director at HUD lender Walker & Dunlop, said during a Tuesday discussion. “If you’re a one-star building, if you have survey issues, if the abuse tag is up — a bridge lender may not put the stop sign on you. [With HUD] I don’t want to say it’s a non-starter, but it’s a very difficult, comprehensive process to get those deals done today.”


HUD’s section 232 lending program for nursing homes and other residential care sites was thrust into the national spotlight last summer, when the Times initially reported the $146 million default by the owners of the Rosewood nursing home chain in the Chicago suburbs.

HUD responded by pointing out that defaults represent less than 1% of its overall senior housing and care lending portfolio, a lower rate than its related 242 program for hospitals despite a significant size mismatch: At the end of the government’s fiscal 2019, the 232 portfolio contained 3,782 loans with an unpaid principal balance (UPB) of $31.2 billion, while the hospital program came in at 90 loans totaling $6 billion in unpaid principal.

Lenders in the space also worked to defend the mechanism, arguing that there are few other long-term financing options for nursing home owners and operators; unlike senior living providers, which can take advantage of loans backed by Fannie Mae and Freddie Mac, SNFs are mostly limited to HUD and a small proportion of United States Department of Agriculture (USDA) financing in rural areas.


“The program is essential for nursing homes to function,” Adam Offman, managing director in lender Dwight Capital’s health care finance operation, told SNN last year. “I don’t know of any other source for permanent financing other than HUD for skilled nursing facilities.”

The New York City-based operator and investment firm Greystone has since taken over the facilities, and the former owner of the portfolio faced a $1 million penalty and a Securities and Exchange Commission (SEC) lawsuit — but the affair’s impact on the industry will likely be permanent.

“Quality of care is such a heavy focus now,” Rosen said.

HUD’s vetting process has expanded to include not just a single facility, but also the holistic performance of a potential borrower’s portfolio, as well as his or her operational track record in the nursing home space. So if a buyer has identified a specific property with a history of solid operations, that one SNF won’t be enough to convince HUD to give the all-clear.

“Even if your building is a four-star, that doesn’t necessarily mean what you think it means, because HUD will look at the overall star rating of the group,” Rosen said.

And it’s not just Rosewood that’s causing additional scrutiny from lenders and the federal government alike. The Centers for Medicare & Medicaid Services’ (CMS) decision to release a previously undisclosed list of more than 400 buildings considered for classification as Special Focus Facilities (SFF) list has added a new kind of red flag that’s drawing attention, Meridian Capital managing director Ari Dobkin noted in a separate discussion.

Though Dobkin observed a certain level of irony around the list — lenders and the government have always been able to research survey and compliance records — the controversial report does provide another hurdle that borrowers must clear.

“Lenders can say: But it’s on the list,” he said. “It becomes slightly more challenging.”

Rosen and his fellow panelists agreed that a proactive approach has become even more vital for success when pursuing bridge-to-HUD and HUD financing. A prospective borrower hoping to sweep evidence of past problems under the rug will only make things worse in the long run.

“If there’s something bad that you did, or something bad that we’re going to find out about, it’s better for us to find out in advance,” Alan Litt, founder and president of MONTICELLOAM, said.

Oftentimes, lenders and borrowers can work together to explain black marks on a given provider’s record, Litt noted — with a particular emphasis on clearly demonstrating, with data if possible, how a given building or operator was able to fix the issue and come out even stronger.

“We’re in the bond business, so we have to tell a story,” Litt said. “What happened to this building? What happened with our guy? What has he done? How has he improved?”

Hiding potential problems, or simply hoping that they won’t derail a deal somewhere along the line, isn’t just a potential risk — given the amount of publicly available data on nursing home quality, wishing away a bumpy track record is likely impossible.

Rosen used an argument similar to the warning that both industry leaders and watchdogs sounded in the lead up to the new Patient-Driven Payment Model (PDPM): The federal government has all the data that you do and more, so don’t think they’ll miss any red flags.

“They use Google,” Rosen said. “They’re very well versed in technology.”

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