Bridge-to-HUD Financing: 68-Bed Memory Care Facility, Texas

The Situation

A Texas-based senior housing operator completed a 68-bed memory care facility in the Dallas-Fort Worth metroplex in mid-2024. The property was purpose-built for Alzheimer's and dementia care, with private rooms, secured wandering paths, a dedicated activity wing, and a staffing model designed around 1:5 caregiver-to-resident ratios during peak hours. Construction came in on budget at approximately $14.2 million, financed through a regional bank construction loan at 9.25% floating, interest-only, with an 18-month term.

By the time the construction loan matured, the facility had reached 74% occupancy, or roughly 50 of 68 beds. The ramp was healthy. Monthly revenue had grown from zero to approximately $285,000 per month at a blended rate of $5,700 per bed, per month, consistent with DFW private-pay memory care market rates. Operating expenses were running at approximately 68% of revenue during the lease-up phase, a normal ratio for a facility still building clinical and administrative scale. EBITDAR (earnings before interest, taxes, depreciation, amortization, and rent) was approximately $91,000 per month, or $1.09 million annualized.

The operator had a clear path to stabilization. A clinical partnership with a regional physician group was driving referrals, and a local senior living placement agency had the facility on its preferred list. The operator's internal projections, which aligned with the lender's underwriting, showed 90% occupancy achievable within 12 to 18 months. At 90% occupancy with 61 beds filled at $5,700, monthly revenue would reach approximately $348,000, and EBITDAR would improve to roughly $145,000 per month, or $1.74 million annualized. The operator was not in distress. The operator was in transition.

The Challenge

The construction lender required payoff at maturity. The bank had no appetite for a term extension beyond 90 days, and at 74% occupancy, the facility did not yet qualify for conventional permanent financing. Most bridge lenders in the senior housing space apply a minimum DSCR of 1.20x on in-place cash flow and will lend up to 70% to 75% of stabilized value. At 74% census, in-place EBITDAR of $1.09 million annualized, and a capitalization rate of approximately 7.25% on stabilized NOI, the stabilized value was approximately $20.5 million. Seventy percent of that is $14.35 million, which covered the construction loan payoff. But the in-place DSCR test was the problem: bridge debt service on $14.0 million at 10.5% interest-only equals approximately $1.47 million annually, against in-place EBITDAR of $1.09 million. In-place DSCR was approximately 0.74x, well below any conventional bridge lender's floor. The operator needed a lender who would underwrite to stabilized cash flow, not in-place cash flow.

The deeper challenge was interest rate risk. The operator knew that HUD 232 permanent financing was the right long-term solution: a 35-year fixed-rate, fully amortizing, non-recourse loan insured by the Federal Housing Administration, with rates in mid-2024 running approximately 6.50% to 6.75% all-in for memory care. HUD 232 is the lowest-cost permanent capital available to healthcare real estate operators, and for a purpose-built memory care facility with strong demographics, it was the obvious exit. But HUD requires 90% sustained occupancy for six months before the application can be submitted, meaning the permanent loan would not close for at least 18 to 24 months. Rates were volatile. The 10-year Treasury had moved more than 200 basis points in the prior 24 months. Locking a rate 18 months from now at today's level was not possible with a conventional bridge loan. The operator was facing the choice of paying off the construction loan with expensive floating-rate bridge debt and taking 100-plus basis points of permanent rate risk, or finding a lender who could solve both problems simultaneously.

Our Approach

CLS CRE structured a two-tranche simultaneous execution: a bridge loan to retire the construction debt today, and a forward HUD 232 commitment that locked the permanent loan rate at origination, for a facility that would not close its permanent financing for approximately 18 months. The two transactions closed concurrently. The operator signed bridge loan documents and HUD forward commitment documents on the same day. The bridge loan funded the construction payoff. The HUD commitment locked the exit.

The bridge loan was placed with a specialty healthcare lender that underwrites to stabilized cash flow, not in-place cash flow. The underwriting was based on EBITDAR at 90% occupancy: 61 beds at $5,700 per month equals $348,000 in monthly revenue, with operating expenses declining to approximately 58% at scale (the efficiency improvement that comes from fixed costs spread across a fuller building), producing stabilized EBITDAR of approximately $145,000 per month, or $1.74 million annualized. At a 7.25% cap rate, stabilized value was $24.0 million. The bridge loan was sized at $14.2 million, representing 59% of stabilized value, comfortably below the lender's 70% ceiling. Stabilized DSCR at 10.75% interest-only equals annual debt service of approximately $1.53 million, against stabilized EBITDAR of $1.74 million. Stabilized DSCR: 1.14x. Tight, but acceptable given the trajectory and the forward HUD takeout in place as the exit.

The HUD 232 forward commitment was placed through an FHA-approved MAP lender. The forward commitment is a binding HUD commitment to insure a permanent loan at a locked rate, issued before the facility reaches HUD's occupancy threshold, with a closing that occurs once the threshold is met. The rate locked at the forward commitment was 6.625%, fully amortizing over 35 years, non-recourse. The permanent loan was sized at $17.5 million, based on HUD's underwriting of 85% of stabilized value and a 1.45x DSCR floor applied to projected stabilized NOI. Annual debt service on the HUD permanent loan at 6.625% over 35 years on $17.5 million equals approximately $1,290,000. Against stabilized EBITDAR of $1.75 million, permanent DSCR is approximately 1.36x, comfortably above HUD's minimum. The permanent loan proceeds of $17.5 million retire the $14.2 million bridge loan and return approximately $3.3 million in equity to the operator.

The Outcome

The bridge loan closed in Q4 2024. The construction lender was paid off in full. Eighteen months later, the facility reached 91% occupancy, satisfying HUD's six-month seasoning requirement, and the HUD 232 permanent loan closed on schedule in Q2 2026 at the committed rate of 6.625%. The total transition from construction payoff to permanent financing took approximately 18 months, within the operator's original projection. The operator entered the permanent loan with a 35-year fixed rate, no personal recourse, and $3.3 million returned to the balance sheet. At closing, in-place monthly EBITDAR was approximately $152,000, the facility had 62 beds occupied at an average rate of $5,850 (a modest rate increase from the lease-up period), and operating expenses had declined to 56% of revenue as clinical and administrative overhead was absorbed across a fuller building. Permanent DSCR at close was 1.41x.

The forward commitment structure proved its value in the 18 months between transactions. The 10-year Treasury moved approximately 45 basis points between the bridge close and the HUD permanent close. A borrower who had not locked would have closed the permanent loan at approximately 7.10%, rather than 6.625%. On a $17.5 million, 35-year fully amortizing loan, 47.5 basis points of rate equals approximately $82,000 per year in additional debt service, or $2.9 million over the loan term. The forward commitment fee, which was approximately $175,000, paid for itself many times over.

Key Takeaway

Memory care facilities are among the most difficult assets to finance during lease-up because the asset type requires specialized underwriting, HUD's occupancy seasoning requirement creates a mandatory gap between construction completion and permanent financing, and the long-term optimal capital stack (HUD 232) is inaccessible precisely when the borrower needs it most. The bridge-to-HUD structure with a simultaneous forward commitment is the correct solution for operators who know where they are going and can document the path: bridge lending from a healthcare-specialized lender who underwrites to stabilized EBITDAR rather than in-place cash flow, combined with a rate-locked permanent commitment that closes when the asset is ready, not when the capital markets happen to cooperate. Operators who execute the bridge and permanent financing as separate, sequential transactions carry 12 to 18 months of rate risk that can erode years of operational performance. Simultaneous execution eliminates that risk entirely.