The quick read: You finance ground-up assisted living construction one of two ways: a HUD Section 232 new-construction loan that insures one fixed-rate loan through both the construction and permanent phases, or a bank or debt-fund construction loan repaid later by a permanent takeout. HUD's handbook benchmark for a new for-profit assisted living facility is 75% loan-to-value with a 1.45 debt service coverage ratio; the federal supervisory limit for a bank's commercial construction loan is 80% loan-to-value, which a bank can exceed only on a capped volume of exception loans, and for a loan within that limit, borrower capital of at least 15% of as-completed value keeps it out of the high-volatility category. Either way, an experienced, licensed operator and cash-funded lease-up reserves decide whether the deal closes.
Path 1: HUD Section 232 new construction with insurance of advances, one loan for construction and the permanent phase
HUD benchmark LTV, new assisted living: 75% for a for-profit borrower, 80% for a non-profit (Handbook 4232.1, Production, Chapter 3)
HUD minimum DSCR: 1.45, calculated including the mortgage insurance premium
HUD loan term: up to 40 years or three-quarters of the remaining economic life, whichever is less
Path 2: bank or debt-fund construction loan, refinanced once the building stabilizes
Bank supervisory LTV, commercial construction: 80% (12 CFR Part 34, Subpart D, Appendix A)
HVCRE exemption: loan-to-value within the supervisory limit plus borrower capital of at least 15% of appraised as-completed value (12 CFR 324.2)
This guide covers ground-up construction only. For the property-type overview, see senior housing loans; for the FHA-insured programs in general, see HUD and FHA loans.
Should you build assisted living with a HUD 232 loan or a bank construction loan?
Choose HUD Section 232 when you can wait for a firm commitment before breaking ground and want one fixed-rate, non-recourse loan through the construction and permanent phases; choose a bank or debt-fund construction loan when speed or an early start matters more and you can plan a separate refinance once the building stabilizes.
HUD's Section 232 handbook (Handbook 4232.1, Production, Chapter 2) says the program can insure both the construction and permanent loan, called insurance of advances, or only the permanent loan, called insurance upon completion. It defines new construction narrowly: all project and construction elements are installed under the construction contract and no work has been done before HUD issues its firm commitment. That sets the timeline: no site work while you wait for HUD.
The same chapter says the interest rate is negotiated between borrower and lender and must be fixed for the term of the loan, and that the healthcare project note carries a non-recourse provision that intentional bad acts can override. The facility must qualify, too: an assisted living project needs at least 20 beds, must be designed for frail elderly residents, and must be licensed or regulated by the state or local jurisdiction.
A bank or debt-fund construction loan avoids the firm-commitment wait but leaves two problems for later: the permanent loan and its terms. Converting an existing building instead of building new is a different path; since HUD Mortgagee Letter 2025-20 (September 16, 2025), Section 232 substantial rehabilitation requires hard costs exceeding 25% of the project's value after completion.
How much will HUD Section 232 lend on a new assisted living facility?
HUD Section 232 lends the lowest of several sizing tests on a new assisted living facility, and the handbook benchmarks are 75% loan-to-value for a for-profit borrower and 80% for a non-profit, with a minimum 1.45 debt service coverage ratio that includes the mortgage insurance premium. Submittals beyond them need substantial justification and mitigation.
Chapter 3 of the handbook says the maximum insurable loan is the lowest of all its criteria, rounded down to the nearest 100 dollars. New construction is held tighter than an existing assisted living facility, which the same table benchmarks at 80% for-profit and 85% non-profit. The statute itself, 12 U.S.C. 1715w(d), caps the mortgage at 90% of estimated value, or 95% for a private non-profit borrower; the handbook benchmarks sit below that statutory maximum.
Hypothetical example: a project appraised at $40 million with a projected stabilized net operating income of $2.6 million. The 75% value test caps the loan at $30 million. The 1.45 coverage test caps annual debt service, including the insurance premium, at about $1.79 million ($2.6 million divided by 1.45). Whichever test yields the smaller loan at the locked rate sets the loan, and your equity fills the rest.
The handbook also says what the loan can carry. Interest on insured advances during construction counts toward replacement cost, and reasonable FF&E, pre-opening management fees and a marketing allowance can be mortgageable. Certificate-of-need costs can count toward total project equity but are not cash equity for the reserves that cover lease-up shortfalls. Run your own budget through a loan-to-cost calculation before you size either path.
What does HUD require before and during construction?
HUD requires that no construction work begin before it issues the firm commitment, that the contractor pay Davis-Bacon prevailing wages with weekly certified payrolls, that completion be assured by bonds or a cash or letter-of-credit deposit, and that a working capital escrow of 4% of the loan be funded on an insured-advances deal.
The wage rule comes from the statute: 12 U.S.C. 1715c requires certification that laborers and mechanics were paid not less than the prevailing local wage, and its list of covered programs includes Section 232. The handbook adds that HUD's Office of Labor Standards and Enforcement makes the final wage decision. The other construction rules in Chapter 2:
Assurance of completion, buildings of three stories or less with construction cost over $500,000: payment and performance bonds of 100% of HUD's cost estimate, or a cash or letter-of-credit deposit of 15%
Assurance of completion, elevator buildings of four stories or more: the same bonds, or a cash or letter-of-credit deposit of 25%
Working capital escrow: 4% of the loan amount, half of it a construction contingency; not mortgageable
HUD application fee: 30 basis points of the requested loan amount
HUD inspection fee, new construction: $5 per thousand of loan amount
Mortgage insurance premium: one year paid at initial closing
Cost certification: an independent public accountant certifies costs on completion, and the finally endorsed loan amount can change as a result
The working capital portion is released 12 months after final closing once the project shows break-even occupancy, defined as 1.0 debt service coverage, for six consecutive months.
How do banks size an assisted living construction loan?
Banks size an assisted living construction loan on loan-to-cost against the full budget and test it against appraised value, within a federal supervisory limit of 80% loan-to-value for commercial construction, and the capital rule rewards equity in first: on a loan within that limit, a borrower contribution of at least 15% of as-completed value, made before advances, avoids high-volatility treatment.
The interagency lending guidelines in 12 CFR Part 34, Subpart D, Appendix A (2025 edition) set supervisory limits of 65% for raw land, 75% for land development and 80% for commercial, multifamily and other nonresidential construction. They are supervisory limits, not quotes: a bank may make exception loans above them, but the guidelines keep all such loans within 100% of its total capital, and the commercial, multifamily and other non-1-to-4-family share within 30%. Under 12 CFR 324.2 (2025 edition), a construction loan is not a high-volatility commercial real estate exposure when it is within the supervisory limit and the borrower has contributed capital of at least 15% of the appraised as-completed value, in cash, unencumbered readily marketable assets, paid development expenses or contributed real property, put in before the bank advances funds and kept in the project.
Beyond those two rules, we found no dated public source that publishes assisted living construction spreads, recourse terms or reserve sizes by lender type, so this page prints none. Ask how the interest reserve and any operating-deficit reserve are sized, and whether they sit inside the loan budget or come from equity.
How do the two construction paths compare?
The two paths trade speed against permanence: HUD Section 232 new construction locks a fixed-rate, non-recourse loan of up to 40 years before you build but adds wage, bonding and escrow rules, while a bank construction loan can start sooner and leaves the permanent financing, and its terms, to be solved at stabilization.
Table: Ground-up assisted living construction paths (dated public figures; a framework, not a ranking)
| Feature | HUD Section 232 new construction | Bank construction loan | Debt-fund construction loan |
|---|---|---|---|
| Leverage | 75% LTV for-profit, 80% non-profit, new assisted living (Handbook 4232.1, Production Ch. 3) | 80% supervisory LTV limit, exceedable on a capped volume of exception loans (12 CFR Part 34, 2025 edition); 15% contributed capital on a loan within the limit avoids HVCRE (12 CFR 324.2, 2025 edition) | No dated public benchmark found; quoted per deal |
| Coverage test | 1.45 minimum DSCR including the insurance premium | Set by bank policy; quoted per deal | Quoted per deal |
| Rate basis | Negotiated, fixed for the loan term | Quoted per deal | Quoted per deal |
| Term | Up to 40 years or three-quarters of remaining economic life; minimum 10 years | Construction term plus extensions, per deal | Initial term plus extensions, per deal |
| Recourse | Non-recourse note; intentional bad acts override it | Quoted per deal; ask about completion and payment guaranties | Quoted per deal; ask about carve-out and completion guaranties |
| Timeline driver | Firm commitment before any work; Davis-Bacon payrolls; cost certification | Bank credit approval and appraisal | Fund approval and appraisal |
| Takeout | None needed; the insured loan continues as the permanent loan | A permanent loan at stabilization, such as a bank term loan, or HUD 232/223(f) once the project has been complete for three years | Same as bank |
HUD's handbook describes Section 232/223(f) as the purchase or refinance program for projects that do not meet the substantial rehabilitation test, but it requires the project to have been completed at least three years before the firm commitment application. A bank-built facility that plans a HUD exit should plan for its construction loan, extensions or a bridge loan to carry it until then.
Why do lease-up reserves decide how much cash you need?
Lease-up reserves decide your cash because a new assisted living facility can run at a loss while it fills, and HUD requires an initial operating deficit escrow, funded in cash or a letter of credit and never from loan proceeds, whenever the lender's analysis identifies any period of deficit operations.
The handbook says the operating deficit escrow pays operating expenses and debt service when net income falls short during initial lease-up and stabilization. Unused funds come back 12 months after final closing once the project shows a debt service coverage ratio, including the insurance premium, of at least 1.45 for three consecutive months. Where units are added to a market, HUD may also require a short-term debt service reserve of six to twelve months of principal, interest and premium payments, or longer. Excess loan proceeds may not fund either escrow.
Add those escrows to the working capital escrow and a minor movable equipment escrow, and the cash due at a HUD closing is larger than the loan-to-value gap alone suggests. On the bank path the same gap shows up as the interest reserve and any operating-deficit reserve in the budget; size them through the projected fill-up, not to the certificate of occupancy.
Why do operator experience and state licensing gate the loan?
Operator experience and state licensing gate the loan because the lender is underwriting care revenue that only a licensed, proven operator can produce; HUD generally requires principals with at least three years of successfully operating multiple projects with the proposed bed types, and the facility itself must be licensed or regulated by the state.
The handbook says operators with only one project need a longer history than three years, that experience near the proposed market counts more than experience elsewhere, and that management-agent experience is generally not an acceptable mitigant for a borrower's lack of it. A firm application that adds units to a market must show lease-up metrics from prior projects: fill pace, occupancy and net operating income. Licenses are pledged as security, and licensed beds must equal or exceed underwritten beds.
State need review works differently for assisted living. Under 12 U.S.C. 1715w(d)(4), the federal state-need certification applies to nursing homes and intermediate care facilities; for assisted living, the state licensing agency must give HUD assurances that the facility will meet applicable standards. If your state requires a certificate of need for assisted living, the handbook says the lender submits a copy. Whether one applies is a state question, so confirm it with the licensing agency before you buy the site.
How does memory care change the construction budget?
Memory care changes the construction budget because a secured unit needs its own design, staffing plan and marketing, and each of those costs lands before residents move in; HUD lets reasonable pre-opening management fees, marketing and major movable equipment into the mortgage, but the lease-up reserves stay cash.
The handbook requires project design that caters to residents' specialized needs, and describes pre-opening management fees as covering lease-up budgets, licensing submissions, staff hiring and training, and operating manuals for functions such as nursing and dietary. They are mortgageable only when there is no identity of interest between the borrower and the pre-opening provider. For memory care, check what your state's licensing rules require of a secured unit before the architect finishes drawings, because a late design change hits the contract, the cost certification and the lease-up schedule.
Developing a care facility? What will a construction lender and HUD ask for?
A construction lender and HUD will ask for the site and zoning, the operator's track record and licensing path, a market study, a line-item budget with FF&E, pre-opening costs and reserves, your general contractor and bonding, your cash equity, and, on the bank path, the takeout plan. Incomplete packages slow quotes.
YieldStack is a commercial mortgage brokerage, not a lender. It costs Zero upfront to submit a deal and review offers; YieldStack's broker fee is 0.50–1.00% of the loan amount and is paid only at closing. Every credit decision is made by the lender; YieldStack arranges the introductions and negotiates on the borrower's side, and no loan, rate, or closing is guaranteed. Submit your assisted living construction deal with the package above, and the brokerage will route it to the HUD 232, bank and debt-fund lender types whose current programs fit the project.
The bottom line
Ground-up assisted living has two financing paths. HUD Section 232 new construction gives one fixed-rate, non-recourse loan of up to 40 years, benchmarked at 75% loan-to-value for a for-profit borrower and 1.45 coverage, but no work can start before the firm commitment and Davis-Bacon wages apply. A bank construction loan is held to an 80% supervisory loan-to-value limit that banks can exceed only on a capped share of loans, rewards 15% equity in first and needs a takeout. On both, the operator's record, the license and cash lease-up reserves decide the deal.