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. The complete February 28, 2013 LEAN Blast can be found online.
ORCF Now Offering a New Lender’s Corner Online
The Lender’s Corner is a tool for lenders to use for the latest training opportunities and portal access offered by ORCF. Access to the site can be found online. Currently available in the Lender’s Corner is the TEAM TSI Portal, which provides lenders with the ability to search current survey information on Federal Housing Administration (FHA)-insured skilled nursing facilities including actual citations, Special Focus, Standard, Complaint and Life Safety Inspections along with other facility-related information (you must register with SurveyResults@hud.gov for TEAM TSI Portal). There will be monthly training on how to utilize TEAM TSI Portal from 2 p.m. to 3 p.m. EST on the following dates:
Friday, March 29, 2013
Monday, April 29, 2013
Friday, May 24, 2013
Monday, June 24, 2013
Friday, July 26, 2013
Monday, August 26, 2013
Friday, September 27, 2013
Monday, October 28, 2013
Friday, November 22, 2013
Monday, December 16, 2013
Visit https://student.gototraining.com/rt/8005670953680007424 to register.
Frequently Asked Questions Concerning the Eligibility of Existing Indebtedness
ORCF addressed existing indebtedness in several previous E-mail Blast articles, including Blasts published on April 10, 2009, January 6, 2012, March 30, 2012 and October 31, 2012 (HUD did not post this latter Blast – feel free to contact us and we will provide you with a copy.). Nonetheless, ORCF continues to receive inquiries pertaining to the eligibility of debt and debt seasoning on Section 232 refinances. The following discussion attempts to clarify three areas that seem to be the most confusing to lenders: (i) debt seasoning and identities of interest, (ii) debt investigation, and (iii) bridge loans.
Debt Seasoning and Identities of Interest
LEAN’s 232 debt seasoning periods are imposed when an identity of interest, of any degree, exists between the borrower and lender on the loan that is to be refinanced, or between a seller, purchaser or borrower, including any affiliates of any such entities. The time period for the debt seasoning is either two years or five years, depending on the specific circumstances more fully described below:
Five-Year Waiting Period: When there is an identity of interest between the borrower and the non-FHA lender of the existing indebtedness (beyond a traditional arm’s-length banking relationship between the borrower and the non-FHA lender), there must be a five-year period from the date the existing debt was generated before submitting a 223(f) refinance application to HUD.
Two-Year Waiting Period: The lender must wait two years from the date the existing debt was generated when there is an identity of interest involving a seller, purchaser or borrower (or any affiliates of any such entities). An identity of interest purchase, in which an IOI between the seller and purchaser survives the sale transaction, or a proposed transaction will finance the buying out of a partner, must adhere to the two-year waiting period and must be processed as a refinance transaction. Debt seasoning may not be required in a sale/leaseback transaction when the transaction is clearly arm’s-length, at market value, and the post-transaction operator will have no interest whatsoever in the borrower entity (see the January 6, 2012 E-mail Blast). ORCF will carefully investigate the mortgage insurance request for all sale lease back transactions.
Once the debt has seasoned for the length of time required by the circumstances set forth above, it will be considered eligible debt, subject to underwriting and final approval. Transactions that would involve an identity of interest between the borrower and the FHA lender are not allowed under the Section 232 program. For additional discussion see the April 10, 2009 and March 30, 2012 E-mail Blasts.
Investigation of Debt
An investigation of existing debt is required if project debt that is being retired is less than two years old, even if an identity of interest transaction is not involved. For the debt to be used in the calculation of the cost to refinance, the FHA lender must provide sufficient evidence to establish that the debt meets one of the categories listed in the Definition of Eligible Debt found in the April 10, 2009 E-mail Blast.
ORCF provides a few concrete examples of specific categories of eligible indebtedness in the April 10, 2009 Blast. In addition, the LEAN 232 FAQs include additional examples of eligible debt (e.g., past-due assessments, under certain circumstances, and funds from the cash flow of the property or the borrower used for capital improvements or betterments to the property) and ineligible debt (e.g., operator debt or funds related to the project but used for an unintended purpose, such as paying down a seller’s delinquent taxes or covering the costs of a judgment).
The October 31, 2012 E-mail Blast’s discussion of bridge loans prompted inquiries by several lenders (Again, HUD did not post this Blast – feel free to contact us and we will provide you with a copy). HUD considers a bridge loan a short-term loan that allows a borrower to borrow funds to bridge a gap between the existing financing structure (or a purchase) and permanent financing such as a HUD-insured loan. Bridge loans are permitted as eligible indebtedness as long as the FHA Lender can demonstrate that 100 percent of the bridge loan has been used for purposes related to a facility, i.e., there is no cash out, and that it complies with all LEAN requirements for debt seasoning or eligible indebtedness.
When a bridge loan is structured to bridge a gap between the date that an outstanding project loan must be repaid and the time permanent financing will be able to be secured, the bridge loan itself does not need to season for two years if the amount of the bridge loan is equal to the principal amount of the previously repaid loan with no cash takeout to any entity or individual.
If there is an identity of interest between the bridge lender and the FHA lender, in addition to the requirements stated above, HUD requires the FHA lender to disclose such identity of interest so that the bridge loan may be carefully analyzed in order to address any potential concerns regarding the objectivity of the value analysis.
ORCF expects there to be additional questions regarding the eligibility of existing indebtedness, and requests that lenders first review the LEAN 232 FAQs and then send any further questions to Lean Thinking.
Clarification Regarding Master Leases for Borrowers with Multiple FHA Lenders
The November 18, 2011 E-mail Blast included guidance on portfolios and master leases. In that guidance as it relates to master leases, ORCF stated that HUD will reach back and require existing FHA facilities to be included in a new master lease if those facilities were submitted for financing/refinancing within the past 18 months, or if credit considerations on a new transaction would warrant it. For purposes of clarification, please note that this standard applies even if a borrower uses different FHA lenders for the loans in its portfolio. ORCF finds master leases to be an appropriate required risk mitigation tool regardless of whether the borrower elects to hire different FHA lenders to finance FHA-insured loans in their portfolio.
2530 Application Delays
ORCF has noted an uptick in lenders submitting 2530 forms that are incomplete and/or incorrect, which is causing delays in processing and backing up the LEAN queue. While ORCF will continue to accept either paper or electronic filings, it strongly encourages electronic filings as it has found those submissions have been significantly better and allow for faster processing of applications.
Below are some key reminders for completing 2530 forms:
all principals (as defined in the 2530 instructions) listed at the top of Section 7 must also be listed at the bottom of page 1 and must have a signature next to their name, unless one principal has authorization to sign on behalf of all principals with the same participation. All principals listed on page 1 must also be listed on the Schedule A
the 2530 must be consistent with the organizational chart
TINs/SSNs presented on the 2530 must match the BPRS registration
all certifications must be dated (bottom of page 1)
the Schedule A must be completed according to the instructions, including attention to the information outlined in the column headings
all principals must be registered in BPRS.
ORCF staff reviewing 2530 forms are going to be notifying lenders if their 2530 is incorrect, and it will be the lender’s responsibility to review the submission and check for incomplete items. Incomplete 2530 submissions may result in an application not being assigned out of the queue until they are correct and complete.
MIP Reminder for 223(a)(7) Projects
As a reminder, for 232/223(a)(7) projects, the first year MIP is .50 percent (50 basis points). This percentage should be shown in paragraph 6 of the firm commitment, used when calculating the MIP amount for Criterion 10 on the Supplement to Project Analysis (HUD-92264-A) and on all closing statements. The MIP for Criterion 5 (which is the annual post-closing payment) on the HUD-92264-A is .55 percent for non-LIHTC projects and .45 percent for LIHTC projects.
Two-Stage 241(a) Supplemental Loan Submissions
ORCF has formally agreed to accept two-stage 241(a) supplemental loan applications (as they have been doing in the past when requested) when provided with a compelling justification. Due to the low volume of requests received to date, ORCF does not believe it is necessary to develop a separate process for 241(a) loans. Applications should follow the general format of a Substantial Rehabilitation or Blended Rate two-stage application, depending on which is more appropriate; ORCF will work with the lender to make any specific adjustments to the application package as necessary.
FROM THE CLOSING CORNER
LEAN 232 New Construction – Reminders for Release of Contractor’s Retainage
The Building Loan Agreement requires the lender to retain at least 10 percent of the construction proceeds from each advance. The construction contract also provides for a 10 percent holdback from the contractor’s monthly payments for acceptably completed work, acceptably stored materials, and where applicable, components acceptably stored off-site. The holdback provides an incentive for the general contractor and Mortgagor to: (i) promptly complete the project; (ii) submit cost certification; and (iii) reach final closing.
1. At 90 percent construction completion, the Contractor may request that up to 5 percent of the construction retainage be released. HUD may approve the request under the following conditions:
a. the Contractor has no identity-of-interest with the Owner greater than a 5 percent equity interest
b. prior written consent from the surety company must be attached to the request for release, and
c. there are no questions regarding the contractor’s performance concerning the quality of work, compliance with the contract and any change orders or work in progress.
2. Upon construction completion, the Contractor may request that an additional 2.5 percent of the retainage be released. HUD may approve the additional retainage release under the following conditions:
a. contractor’s cost certification, where required, has been reviewed and approved
b. contractor has disclosed its final obligations on Form HUD-92023, Request for Final Endorsement of the Credit Instrument
c. all work under the construction contract has been inspected and approved by the controlling jurisdictions and/or authorities
d. certificates of occupancy or other required approvals for the dwelling units, and non-dwelling facilities, where applicable, have been issued by governmental authorities having jurisdiction. Note that separate buildings for community rooms, rental offices, laundry rooms, etc. commonly require their own certificates of occupancy
e. Permission to Occupy, Form HUD-92485 has been issued by OHP for all units
f. all Davis-Bacon Act payroll requirements have been satisfied, and
g. prior written consent from the surety company is attached to the request for release.
In addition to the conditions above, HUD may also require an As-Built Survey, conducted according to “Survey Instructions.”
3. HUD requires a 2.5 percent retainage held until final closing and HUD will retain, where applicable, an adequate amount for the following:
a. items of delayed completion in an amount equal to 150 percent of the OHP Inspector’s cost estimate for completion
b. any owed or contested amounts indicated by mechanic’s, subcontractor, supplier, or equipment lessor liens, etc.
c. lessor of the liquidated damages or actual damages computed at cost certification, and
d. net effect of negative change orders.
4. HUD will not approve the release of any part of the retainage until final closing for a contractor with an identity of interest.
Please ensure that all parties involved in new-construction transactions are aware of these requirements for release of contractor’s retainage.
Please Engage Counsel Prior to Submitting Applications
HUD closing attorneys have noticed that with the end of the completeness check and the certification of the closing checklist, the quality of the closing package has deteriorated significantly and in several instances no checklist has been provided. In addition, ORCF has been told that in some instances the closing packages are no longer being reviewed by an attorney, or the assigned attorney may not be aware that the lender has sent the closing package to HUD. This lack of legal review prior to submission to HUD has resulted in lost time for all parties involved. A function of the closing checklist was to get lender’s counsel involved at the beginning of the process when documents are being drafted so that there would be minimal comments from HUD field counsel and a timely closing. Immediate efforts should be made to improve the quality of the closing packages, i.e., lender’s counsel should ensure compliance with all closing checklist requirements before documents are submitted to HUD.
Updated Procedure for Post-Closing Recorded Documents
Lender’s counsels are now to send the closing attorney the following recorded documents (if applicable):
Subordination Agreement (copy)
Memorandum of Lease (copy)
Regulatory Agreement (original)
Regulation Agreement Nursing Homes (original)
UCC-1 Financing Statement – County (Owner and Operator) (copy).