Summary Of HUD’s LEAN 232 Program E-Mail Blast: Office Of Residential Care Facilities (ORCF), May 2014

by Pepper Hamilton LLP
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In an effort to summarize the highlights of the U.S. Department of Housing and Urban Development (HUD) LEAN E-mail Blasts that we receive, and rarely have time to review in a timely fashion, we at Pepper are providing this quick synopsis of the latest LEAN update. Our aim is to provide pertinent information succinctly as a roadmap to the LEAN E-mail Blasts, not to replace the LEAN E-mail Blasts. We hope you find these summaries helpful. A link to the complete May 7, 2014 LEAN E-Mail Blast can be found here.

New Keyword Feature in E-Mail Blasts

The Office of Residential Care Facilities (ORCF) has added a new “key word” feature at the end of every E-Mail Blast article to make it easier to search them, as well as help with the indexing of E-Mail Blasts on the newly updated ORCF Program Web site, here.

Roger Lewis Is Named Permanent Director of ORCF

After serving as the acting director of ORCF since December, Roger Lewis has been named ORCF director.

Update Regarding Paperwork Reduction Act (PRA) Process

When HUD published the ORCF documents in March 2013, the initial expiration date was just one year following the documents’ effective date because HUD had not yet worked through certain electronic document submission matters. Thus, on September 10, 2013, HUD published a Federal Register Notice setting forth the proposed electronic submission policy and invited public comment. After the 60-day comment period elapsed, with no comments received, HUD published its second Federal Register Notice on February 27, 2014. This second publication repeated the proposed electronic submission policy and added the newly revised Intercreditor Agreement. Public comments have been received, are being reviewed, and ORCF is in the process of responding.

HUD anticipates republishing documents shortly, and with the new OMB approval and inclusion of the revised electronic submission policy, the effective period will be for three years from the upcoming publication date.

Sample 241(a) Documents Posted Online

ORCF historically has not had separate 241(a) documents and instead program participants would revise the Section 232 documents to fit the details of a transaction. ORCF has now posted sample 241(a) loan documents to its Web site; the current sample documents were drafted for a situation involving different lenders from the original and supplemental loans. ORCF acknowledges that this will not be the situation for many 241(a) transactions, and therefore examples of additional scenarios may be added as sample documents in the future.

Since the 241(a) documents are samples, these documents are negotiable and ORCF is amenable to transaction-specific changes. For example: (a) changes to the Borrower Regulatory Agreement to (i) permit combining the replacement reserve for the 241 loan and the replacement reserve for the first mortgage loan and (ii) recognize that there would be only one residual receipts account for the project; (b) changes in the Operator Lease Addendum to reflect the existence of two loans; and (c) necessary changes to the Lender’s Certificate in the Request for Endorsement.

Section 241(a) borrowers will be subject to two different forms of regulatory agreements if the original loan was made under the pre-July 12, 2013 documents, since they will be using the new form for the 241(a) but will have the old form in place for the underlying loan. If the documents do not match in certain requirements, Borrowers are required to meet the requirement that is more stringent. For example, although the most recent regulatory agreement permits frequent distribution of surplus cash, the old form regulatory agreement allows for only semi-annual distributions, thus the Borrower is limited to semi-annual distributions.

Use of New Documents in Application Submission

Lenders are reminded they must use the approved ORCF forms (here) when submitting Firm Applications. It is not acceptable to mix old and new documents in an application (except in circumstances where existing AR financing or master-lease transactions are being modified, as indicated by the New Document Implementation Matrix).

Updated Firm Application Checklists Posted Online

ORCF has made edits to the Firm Application Checklists posted on the Section 232 Program Web site. You can find checklists for the 223(a)(7) application here and for 223(f) here. The edits are predominately scrivener’s errors, but there are also some corrections and clarifications included, to ensure consistency with other documents and policies.

New Construction, Substantial Rehabilitation, Blended Rate and 241(a) Legal Documents

For use on applications received after May 11, 2014, a legal punchlist and checklist for 232 NC and SR and blended-rate transactions has been posted on ORCF’s Web site. The HUD Attorney Closing Checklist can be found here and the Attorney Closing Punchlist is here. These should also be utilized for Section 241(a) projects, but may require transaction-specific modifications.

Effective immediately, OGC will complete their legal review after issuance of the firm commitment for New Construction, Substantial Rehabilitation, Blended Rate and 241(a) projects. OGC will only complete an “up front” legal review on projects with a master lease and/or accounts receivable financing. The instructions on the first page of the punchlist include a list of documents to be submitted for “up front” legal review. ORCF reserves the right to request an “up front” legal review in certain situations.

Changes in Contractor Processing

ORCF has modified the process of assigning loan applications to the underwriting contractor. Previously, the application was assigned to the contractor, and then held in a pool until ORCF completed the appraisal and environmental review, before being assigned to an underwriter. Going forward, the contractor will assign the application immediately to the underwriter, without waiting for the appraisal and environmental review to be completed. The contract underwriter will now become the single point of contact, and lenders will be able to track the application more easily.

Section 106 Historic Preservation Reviews

Lenders and Third-Party Phase 1 preparers are reminded of the importance of submitting complete information to the State Historic Preservation Officer (SHPO) for use in the Section 106 consultation. Lenders should check the SHPO’s Web site prior to submitting a request for consultation, because some states have their own process and submission requirements.

24 CFR 232.7 ‘Bathroom’ Waiver

In the November 12, 2013 E-Mail Blast, ORCF indicated that it would provide expedited processing of requests for waivers of 24 CFR 232.7 that met certain criteria. However, ORCF has realized that it cannot make a full and fair determination prior to reviewing the full underwriting of the application. Therefore, all Bathroom Waiver requests will now be reviewed by the HUD Underwriter concurrent with the mortgage insurance application. Lenders are reminded that requests for waivers of 24 CFR 232.7 “Bathroom” will only be approved in unique and exceptional circumstances. The LEAN Update provides some criteria that applicants for the waiver should consider.

Lenders and borrowers that present mortgage insurance applications that are not in compliance with the regulation accept the full financial risk of processing and submitting loan applications, which may not receive waivers. Lenders and borrowers must take into consideration that the waiver request may not be approved, and must be prepared to present a plan to ORCF that brings the facility into compliance with 24 CFR 232.7 “Bathroom.”

Loan Committee Relies on Trailing 12 (T-12) Data

ORCF has long emphasized the importance of actual trailing 12-month data (see the E-Mail Blasts of June 26, 2013, September 1, 2011, and May 4, 2010). ORCF urges lenders to include this trailing 12-month NOI information early in the process, and to update it as appropriate, so that the Loan Committee can readily review the most recent actual historical data.

Revision to New Document Implementation Matrix

ORCF published its New Document Implementation Matrix in the November 12, 2013 E-Mail Blast. The AR Financing Transition Policy of the matrix, starting at the bottom of page 1 (here), has been revised to clarify that “all new AR related documents” (rather than “all new documents”) are required for all new accounts receivable lines submitted on or after July 12, 2013, and for previously approved accounts receivable lines that undergo a Substantial Change (as defined therein).

Adoption of New Phase I Environmental Site Assessment Standard

The Office of Housing – Federal Housing Administration has officially adopted ASTM E 1527-13 as the required standard for Phase I Environmental Site Assessments for all programs. A Federal Register Notice implementing the new standard was published on April 16, 2014 and is available here. As a result, wherever ASTM E 1527–05 is referenced in Office of Housing-FHA guidance, participants in ORCF programs must use ASTM E 1527–13 effective May 16, 2014. Submissions before that date may use either the new standard or ASTM E 1527-05.

Financial Statements

Borrower/Owner

ORCF reminds lenders that all owners are required to file an audited financial statement in the REAC-FASS system. Financial statements must be input into the REAC-FASS system 90 days after the end of the fiscal year. For projects whose fiscal year ended on December 31, 2013, there is a global extension to April 30, 2014.

Lessee/Operator

Currently, lessee/operators may or may not be required to file an annual financial statement – depending upon the language in the particular project’s lessee/operator Regulatory Agreement. If required, the financial statements have the same due date as the borrower/owner financials statements – including the 30-day extension to April 30, 2014 for those with a fiscal year ending December 31, 2013. At this time, operator statements cannot be filed through the REAC-FASS system electronically. For FY 2013 financial statements only, if the required financial statement has not already been submitted to HUD, ORCF requests the financial statement be sent to 232operatorfinancialsfy2013@hud.gov. E-mail submissions are preferred, but hard copies will be accepted. The LEAN Blast includes the appropriate address to send hard copies.

ORCF is developing a portal to accept quarterly operating financials. ORCF expects to beta test this over the summer and have the new system fully operational for the first quarter of 2015.

 

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