Accounts Receivable Financing in HUD Section 232 Loans

Key points

• HUD approval is required for any AR loan or material modification of an existing one.
• The AR lender must sign the Intercreditor Agreement for AR Financing Projects (form HUD-92322-ORCF).
• Requests are submitted by the FHA lender, not by the operator or borrower.
• Deposit account control agreements govern how receivables flow and who has priority.
• Cross-defaults and cross-collateralization with other facilities must be disclosed and approved.

Why operators use AR financing

The Section 232 Handbook describes the problem directly: operators provide care before they are paid, and Medicaid and Medicare reimbursements arrive later, with timing that varies by state and can be significantly delayed. Without a working capital line, an operator may not be able to meet payroll and supplier obligations during those gaps.

AR lenders monitor operators closely, often with daily and weekly reporting, which is one reason HUD is comfortable allowing the arrangement. Close monitoring can also flag trouble early.

What HUD requires

HUD approval must be obtained for any AR loan or any material modification of an existing AR loan, and the AR lender must execute an intercreditor agreement with the FHA lender. A proposed cash flow chart showing how money moves through each account is part of every submission.

When AR financing is put in place at an FHA loan closing, ORCF reviews it as part of the firm commitment and closing. When it accompanies a change of operator, ORCF asset management reviews it. Either way, the FHA lender submits the request.

• Intercreditor Agreement for AR Financing Projects (HUD-92322-ORCF).
• Deposit Account Instructions and Service Agreement for governmental receivables.
• Deposit Account Control Agreements for non-governmental receivables.
• Operator security agreement and an operator legal opinion.
• Disclosure of any cross-defaults or cross-collateralization.

How lien priority and cash flow work

The Handbook says the deposit account control agreements must address priorities between the AR lender and the FHA lender. Generally the AR lender has a first lien on receivables and the FHA lender has a second lien, and the FHA lender must have a secured interest and be able to capture funds if HUD takes possession of the project. Receivables are typically swept into controlled accounts so the AR lender can apply collections, with the remainder flowing back to the operator for operations.

AR financing in a bridge-to-HUD healthcare deal

During a bridge period, operators often have AR lines that were never reviewed by HUD and may be cross-collateralized across many facilities. Before a 232/223(f) application, the AR facility needs to be brought into a form ORCF will approve: limited to the facilities covered by the HUD loan structure, with disclosed cross-defaults, compliant account control agreements and HUD's intercreditor.

The Handbook also notes that negative working capital (payables exceeding receivables) may not be included as existing indebtedness in a 232 refinance, so an operator with large stretched payables cannot simply roll them into the HUD loan.

What operators and owners should watch for

Start conversations with the AR lender early, because its credit approval, document negotiation and HUD's review all have to finish before the HUD closing.

• Cross-collateralization with facilities outside the HUD portfolio, which ORCF scrutinizes closely.
• AR loan maturities that fall before or around the HUD closing, forcing a rushed renewal.
• Covenants in the AR loan that could trigger defaults affecting the operator's ability to pay rent.
• Existing AR loans obtained without required approval, which can lead to administrative action.
• For 223(a)(7) refinances of older loans, the expectation that related-party operators comply with current AR policy.

How it connects to other HUD terms

AR financing sits inside the operator side of a Section 232 transaction, so it interacts with the operator lease, the operator regulatory agreement, ORCF review and any master lease. It also affects underwritten operations: the cost of the AR line is an operating expense, and the operator's liquidity bears on HUD's view of the facility's resilience.

Where to go next

For Bravo's Section 232 program details, see HUD 232 loans.

For a faster ORCF processing option on qualifying deals, see HUD 232 Express Lane.

Related guides: Bridge-to-HUD for Skilled Nursing and Senior Care Facilities; Operator Transitions in a Healthcare Bridge-to-HUD Plan; Assisted Living Bridge-to-HUD: From Acquisition to Section 232.

Related terms: Operator Lease: How HUD Treats Owner and Operator in Section 232; What Is ORCF? HUD's Office of Residential Care Facilities; What Is a HUD Section 232 Loan?; LEAN: HUD's Section 232 Processing Method Explained.

For portfolio figures by state, metro and program, see the HUD multifamily data hub. Bravo Capital’s record: all 26 HUD firm commitments received since April 2022 have closed, totaling $526.0 million (HUD Closing Scorecard).