HUD 232 new construction for senior housing developers

A HUD Section 232 new construction loan finances a licensed assisted living facility, memory care building or nursing home of 20 or more beds from groundbreaking through a 40-year fixed-rate term, at up to 90% of cost. Few developers use it: HUD endorsed 34 new construction or substantial rehab loans on care facilities in fiscal 2021, 22 in 2022, 3 in 2023 then none in fiscal 2024 and one in 2025, by HUD’s endorsement database (data run July 8, 2026). The program is still available.

The terms

	New assisted living	New skilled nursing
Loan to cost	90% of total estimated replacement cost	90%
Loan to value, for-profit / nonprofit	75% / 80%	80% / 85%
Minimum debt service coverage	1.45	1.45
Term	up to 40 years, fully amortizing, fixed	same
Mortgage insurance	0.77% upfront and 0.77% a year; the lender pays the first year at initial closing	same
HUD inspection fee	0.50% of the loan	same

From HUD Handbook 4232.1 REV-1 (sections 2.6 and 3.2 to 3.4) and the Federal Register premium notice of June 26, 2025. Assisted living financed with low-income housing tax credits pays 0.45% a year. One loan covers construction and the permanent term when HUD insures advances during construction.

The equity HUD does not finance

Beyond the 10% of cost the loan does not cover, HUD requires four more cash commitments:

• A working capital escrow of 4% of the loan, “half of which will be a construction contingency for cost overruns and approved change orders” (2.6.K). It is released 12 months after final closing once the building has run six straight months at breakeven.
• An initial operating deficit escrow, sized to “the total of all cumulative monthly losses projected to occur until the project reaches breakeven operations” (Appendix 2.1), in cash or a letter of credit, released after three straight months at 1.45 coverage.
• Possibly a short-term debt service reserve of six to twelve months of principal, interest and premium where new units enter a market (2.5.NN).
• Completion assurance: 100% payment and performance bonds, or a cash or letter-of-credit deposit of 15% of construction cost for buildings up to three stories and 25% for elevator buildings of four or more (2.6.H).

With the calculator’s example inputs (100 units, 4 net move-ins a month from 15 at opening), the deficit escrow comes to about $2.7 million. The development calculator sizes it from your own absorption pace.

The other requirements

• Davis-Bacon prevailing wages apply to Section 232 construction by statute (12 U.S.C. 1715c), with weekly certified payroll.
• Nursing beds need a certificate of need where the state has one; HUD will not proceed without it (2.5.EE). See the state table.
• The operator needs “at least three years of experience successfully operating multiple projects with the types of beds proposed” (2.5.FF).
• Substantial rehabilitation now means hard costs above 25% of the value after completion (Mortgagee Letter 2025-20, September 16, 2025), up from 15%.

Why most developers build with a bank loan instead

A bank construction loan avoids HUD’s Davis-Bacon requirement and HUD’s queue, and the building can refinance into a HUD 232/223(f) loan once it has been open three years. That route gives up HUD’s 40-year fixed rate during construction and lease-up, and adds refinance risk, and HUD’s construction volume suggests most developers take it.