Rehabilitation in relation to FHA 232 loans is defined as the tools, materials, labor, and other costs associated with improving buildings, excluding routine and/or minor repairs. HUD 232 loans can be used for substantial rehabilitation of properties intended for senior citizens, including skilled nursing and assisted living facilities. However, to qualify for a HUD 232 loan for substantial rehabilitation, the rehabilitation must involve replacing two major building systems, and the costs must equal or exceed 15% of the estimated fair market value of the property, or $6,500 per unit.

In order to qualify for a HUD 232 loan for substantial rehabilitation, a project must meet one of two major requirements. Either the hard cost of any repairs and improvements must exceed 15% of the project's value after completion, or two or more major building components (ex. plumbing, electrical, roof) must be substantially replaced. According to HUD’s rehabilitation guidelines, a Substantial Rehabilitation consists of one of the following:

• Two or more major building components must be replaced OR
• Costs must be at least 15% of the project's value (fair market value) after completion OR $6,500 per dwelling unit.

HUD defines Major Building Components as: “Roof structures; wall or floor structures; foundations; and plumbing, central heating and air conditioning, or electrical systems.” In addition, the term ‘Major’ signifies a component’s importance and the extent of its replacement. For example, a Major Building Component significantly affects a facility’s performance and use. Because of this, it cannot be minor or cosmetic. Also, at least 50% of the component must be replaced. HUD leaves the determination up to architectural staff.

In order to be eligible for HUD 232 financing, a project must:

• House 20 or more long-term patients
• Provide constant/ongoing medical attention for individuals in need of care
• Be licensed by the appropriate city or state organization
• Have had construction be complete for at least three years, though newer property additions are allowed, as long as they are smaller than the original building (for HUD 232 substantial rehabilitation loans)
• Have no more than 20% of the project's gross area or gross income devoted to/derived from non-resident day care
• Have no more than 25% of all units can be independent living units
• Have no more than 10% of the gross floor space filled and no more than 15% of the property's income derived from commercial tenants

Since HUD 232 projects involve federal insurance and construction over $2000, they are subject to the Davis-Bacon act, which requires that all workers be paid the "prevailing wage" in their area. In order to determine the prevailing wage in your area, you can use this free Davis-Bacon wage calculator, provided by wdol.gov.

HUD 232 rehabilitation financing offers a variety of benefits for large-scale owners of senior properties, including:

• Less time and money spent on the approval and origination process
• HUD 232 refinancing of multiple properties can greatly increase cash flow, potentially giving developers the capital to purchase or construct new assets
• HUD fixed-rate financing allows large companies to stabilize expenses and make accurate financial projections well into the future
• Low, fixed interest rates
• Loans are fully assumable (with FHA/HUD approval)
• HUD 232 loans are non-recourse, limiting risks for developers

In order to be eligible for HUD 232 rehabilitation financing, properties must meet the following requirements:

• Facilities must offer ongoing, continuous care and oversight for individuals requiring long-term care or medical attention
• Facilities must be licensed by an appropriate municipality or state body
• Properties must have been completed at least three years prior
• Additions less than three-years-old are acceptable, but cannot be larger than the original facility
• Facilities must accommodate 20 or more patients requiring continuous or skilled nursing care
• Non-resident day care must not exceed 20% of the property’s gross area and 20% of the gross income
• Independent living units cannot make up more than 25% percent of all units
• Commercial space must not exceed 20% of floor area or income

The steps involved in a HUD 232 rehabilitation project depend on the scope of the project. Generally, the steps include:

• Determining the scope of the project and the estimated cost of the rehabilitation.
• Applying for a HUD 232 loan.
• Completing the necessary paperwork and submitting it to HUD.
• Receiving approval from HUD.
• Beginning the rehabilitation process.
• Completing the rehabilitation process.
• Submitting the final paperwork to HUD.
• Receiving final approval from HUD.

For more information, please refer to the HUD Guidelines.