by James C. Sherlock
Today, we will examine a big factor in why nursing home regulation fails. It is doomed in part by the organizational structures of chains that mask a deadly lack of corporate ethics. Government regulators not only do not stop it, but are currently helpless to do so for the simplest of reasons. They know nothing about those structures and the internal fees and rents that drain funds from the operating companies and from patient care.
The problem starts with a federal law.
The HUD/FHA Section 232 program is an FHA loan product that provides mortgage insurance for residential care facilities. It is a 66-year-old carve-out for the nursing home industry in the National Housing Act. ย Section 232 offers FHA guarantees for non-recourse, below-market fixed-rate, long-term loans at up to 80% loan-to-appraised-value ratios. Lender’s fees are generally 3.5%. The cost for new construction can include land purchase.
The loans may be used to finance the purchase, refinance, new construction, or substantial rehabilitation of a project. A combination of these uses is acceptable – e.g. refinance of a nursing home coupled with new construction of an assisted living facility.
Every nursing home that is purchased or renovated using a loan backed by a Section 232 guarantee has its own operating company and realty company that serves as the landlord for the operating company. That is a 232 program requirement designed to protect the real estate collateral of the loan from failure of the operating company. The loans are made to the realty company.
Operating and realty companies are separate LLCs, but the members of each are usually the same people, at least initially.
That is where many chains get creative, both to protect the assets even further and to generate internal fees with enterprise structures borrowed from the real estate industry.














