Summary Of HUD’s LEAN 232 Program E-Mail Blast: Office Of Residential Care Facilities (ORCF), April 29, 2013

by Pepper Hamilton LLP

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 April 29, 2013 LEAN E-Mail Blast is available here.

Implementation of New Section 232 Documents Delayed Until July

On March 14, 2013, HUD published a notice regarding the new/revised Section 232 documents (FR–5623–N–03). The revised Section 232 Healthcare documents are available here. The Notice made 47 of the 115 documents effective for transactions for which a firm commitment was issued on or after April 9, 2013 (which was the date many of the new Rule requirements became effective). After the industry rose up in rebellion over the fact that there was less than 30 days’ notice for instituting the new closing documents, HUD changed the implementation date of the relevant Rule provisions from April 9, 2013 to July 12, 2013, and is now requiring the new documents only for deals that receive a firm commitment issued on or after July 12, 2013.

HUD is permitting parties wishing to use new documents before the July 12, 2013 required date to do so; however, if a new mortgage insurance transaction uses new documents, then it must use all applicable new documents. Exceptions may be considered on a case-by-case basis with respect to master lease documents and accounts receivable financing documents (since these are arrangements that may involve multiple transactions closing over an extended period of time).

Interest Rate Reductions on Performing Loans

ORCF is in the process of updating its process for approving interest rate note modification for performing loans. It is anticipated that ORCF will soon post procedural guidance for interest rate modifications on its Web site in the Loan Servicing Guidance Home Page section.

New ORCF Documents on Web – Structured by Loan Type

ORCF is reorganizing its documents Web page to provide separate directories for each Section 232 loan type, allowing the documents to be easily identified – from application submission through closing – for that loan type. The Section 232/223a7 and 232/223f directories are already available and other loan types will be available in the near future. The new Web directories can be found in the Underwriting Guidance Home Page section; the current documents will be available there as well during this transition period. While we applaud this approach, the Web site appears to still be a work in progress.

Changes for Non-Profit Borrowers in the New Regulatory Agreement (HUD-92466-ORCF)

As we discussed in our article about the new loan documents, the new Borrower Regulatory Agreement includes changes that greatly impact Non-Profit Borrowers and the way their distributions are approved or allowed.

For facilities closing with the new documents, there will no longer be separate Regulatory Agreements for For-Profit and Non-Profit Borrowers. Instead, there is only one Borrower Regulatory Agreement and the first page of the Regulatory Agreement will indicate whether the Borrower is a for-profit or nonprofit entity and whether or the Non-Profit Borrower is permitted to take distributions. Even if a Non-Profit Borrower is permitted to take distributions, there are still specific conditions required to make Surplus Cash distributions.

For Section 232/223a7 refinances, where the existing Regulatory Agreement is profit-motivated, the project will continue to be regulated as for-profit. If the existing Regulatory Agreement is nonprofit, the project will continue to be regulated fully as a nonprofit, and the Non-Profit Borrower will continue to be required to deposit all surplus cash into a residual receipts account.

For new Section 232/223f refinances and all other new projects, if the project is underwritten at a level higher than the benchmark LTV for profit-motivated projects, HUD will regulate the project fully as a nonprofit and all surplus cash must be deposited into a residual receipts account. If underwritten at or below the benchmark LTV for profit-motivated projects, HUD will allow the borrower’s distribution of surplus cash, provided conditions set forth in the Regulatory Agreement (and summarized below) are met.

As a reminder, the benchmarks for Maximum LTV’s for profit-motivated projects is 80 percent LTV for a 223f. For new construction, substantial rehabilitation, 241a and blended rate properties, there is a distinction between the type of facility – if predominantly SNF, the LTV is 80 percent; if primarily ALF, the LTV is 75 percent.

Surplus Cash Criteria for Nonprofit Borrowers Who Are Eligible to Take Distributions:

The following provisions in the Borrower Regulatory Agreement govern when a nonprofit is permitted to take distributions from surplus cash, rather than being required to deposit the surplus cash into its residual receipts account:

(i) distributions may only be made immediately after the end of any annual or semi-annual fiscal period, when the Borrower can demonstrate positive Surplus Cash (pursuant to Section 15 of the Regulatory Agreement)

(ii) Operator is in good standing with the applicable licensing agency and has no open state compliance issues or special focus facility designation

(iii) there are no unresolved audit findings in the annual audited financial statements relating to the Project

(iv) Borrower and Operator are in compliance with the terms of this Agreement and the Operator’s Regulatory Agreement, respectively, with no notice of noncompliance or violation from HUD

(v) no defaults exist under any of the Loan Documents and all payments required by any of the Loan Documents are current, with no notice of noncompliance or violation from HUD, and

(vi) the balance of the Residual Receipts account remains equal to no less than six months of the Borrower’s required debt service (including any mortgage insurance premium, escrow deposit, reserve deposits, or any other payments required by Borrower pursuant to the Loan Documents).

The Regulatory Agreement further speaks to when funds may be withdrawn from the Residual Receipts account. In the case of a nonprofit that is permitted to take distributions, the same criteria applicable to determining the ability to retain surplus cash are used when evaluating requests to withdraw funds from the residual receipts account.

Nursing Homes with National Fire Protection Association (NFPA)-13 Non-Compliant Sprinkler Systems

The Centers for Medicare & Medicaid Services (CMS) has required that all nursing homes be fully equipped by August 13, 2013 with sprinklers per the 1999 Edition of the NFPA-13 Standard for the Installation of Sprinkler Systems. CMS maintains a publicly available database of compliant properties at this Web site. The LEAN Update provides specific instructions on how to utilize the CMS Web site. If submitting a mortgage insurance application for a nursing home, or there is a mortgage insurance application pending, Lenders should confirm that the facility is listed on the CMS database. If the facility is not listed on the CMS database, Lenders should contact the assigned underwriter or, if not yet assigned, then consult with promptly.

Bridge Loans Not Required to Debt Season

ORCF wanted to clarify the February 28, 2013 E-mail Blast article addressing the eligible indebtedness of bridge loan debt. To confirm, so long as the Lender demonstrates the bridge loan has been used for an eligible purpose, it is not required to season.

Advisory Base Flood Elevations

ORCF requires elevation maps of new structures in accordance with the most recent Federal Emergency Management Agency (FEMA) data. The latest FEMA data includes Advisory Base Flood Elevations (ABFEs) and Preliminary Flood Insurance Rate Maps (P-FIRMs). ABFE maps are available for Hurricane Sandy-affected areas in New York and New Jersey. Please refer to the FEMA Web site to determine if your new construction site is in an affected area. If higher elevations are required by locally adopted code or standards, those higher standards would apply. Please consult with before commencing a new construction project in the areas affected by Hurricane Sandy.

Reminder: Submit Key Environmental Concerns in Advance of Application Submission

As a reminder, per the March 30, 2012 E-mail Blast, ORCF is available to review key environmental issues prior to application via its Lean Thinking e-mail box. ORCF encourages Lenders to submit questions on unusual site conditions, such as soil contamination, explosive hazards, unacceptable noise levels, fall hazards, etc., to By submitting potential environmental concerns prior to application submission, Lenders may avoid wasted time and effort by early consultation with ORCF.

2013 Eastern Lenders Association Lean (ELA) Training Presentation Slides and Survey

Links to the presentations delivered during the ELA Lean training on March 13-14 in Philadelphia, PA are available here.

Office of Healthcare Programs Organizational Chart

The Office of Healthcare Programs, which includes ORCF, has posted an updated organization chart online (under the General Overview heading). The organizational chart provides organizational information for all three of ORCF’s divisions: Production, Asset Management and Lender Relations, and Policy and Risk Analysis.


‘Comfort Letters’

In limited circumstances involving complex transactions (typically transactions that are part of portfolios), parties have occasionally requested letters (sometimes labeled “comfort letters”) conditioning HUD’s exercise of its rights under certain contractual agreements on a party’s concurrent noncompliance with some other identified document(s). HUD has considered this matter in the context of the comprehensive set of documents published March 14, 2013. HUD does not anticipate such letters being necessary going forward.

Written by:

Pepper Hamilton LLP

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