The June 24, 2015 LEAN Email Blast contains information on the new protocol for release of R4R and NCRE, handling aged account receivables, clarification on UPL revenues, a 241(a) status update, a new IRR legal checklist and other topics.

In an effort to summarize the highlights of the LEAN Email Blasts that we receive, and rarely have time to review in a timely fashion, we at Pepper Hamilton are providing this quick synopsis of the latest LEAN update. Our aim is to provide pertinent information succinctly as a roadmap to the LEAN Email Blasts, not to replace the LEAN Email Blasts. We hope you find these summaries helpful. Here is a link to the complete June 24, 2015 Email Blast.

Specialized Teams Established for R4R and NCRE After July 20, 2015

ORCF is establishing specialized teams to process/administer Reserve for Replacement (R4R) Release Requests and Non-Critical Repair Escrow (NCRE) Requests.

R4R Release Requests

R4R Release Requests shall abide by Handbook 4232.1, Section III – Asset Management, Chapter 3.2, and be submitted electronically to 232R4Rrequest@hud.gov after July 20, 2015. R4R requests on projects currently serviced by ORCF’s Risk Mitigation (Troubled Property) Branch shall continue to be submitted directly to the assigned ORCF Account Executive.

NCRE Administration

Administration of the NCRE on all loans closed on or after July 20, 2015 will be conducted by ORCF’s closing team as a postclosing item handled by the assigned ORCF Closer. Releases shall be submitted to 232NCRrequest@hud.gov. Submissions to HUD related to the NCRE on loans closed before July 20, 2015 shall be directed to the project’s assigned Account Executive.

Account Receivable Financing — Aging Governmental Receivables

As stated in the Section 232 Handbook, Section II, Chapter 15.3.D, aging Governmental Receivables (aged between 120 and 180 days) may only be accepted by ORCF if there are extenuating circumstances and ORCF determines that the delay does not jeopardize the financial viability of the project. HUD will not grant waivers for account receivable financing based on Governmental Receivables aged more than 180 days.

Consideration of Proposed Work by Environmental Consultants and Appraisers

Lenders should notify environmental consultants and appraisers of proposed repairs, improvements, site work, etc. as that may affect the facility’s environmental review and the appraisal.

Trailing-12 (T-12) Data

The importance of T-12 data to ORCF cannot be overstated, as disclosed in theSection 232 Handbook, Section II, Chapter 2. The ORCF Loan Committee is not willing to rely on annualized data — the actual T-12 month data is necessary.

Further Clarification on Medicaid Upper Payment Limit (UPL) Revenues

A few states are utilizing a Medicaid financing mechanism that makes supplemental payments to non-state, government entity (e.g., county hospital)-licensed skilled nursing facilities. The payment is calculated as the difference between what Medicaid and Medicare would pay for the same service — the Upper Payment Limit (UPL). The availability of UPL revenue has led to strange bedfellows between local county hospitals and skilled nursing facilities that are FHA-insured. In the UPL arrangement, the hospital becomes the facility’s licensed operator and frequently contracts with the former operator to be the management agent.

The supplemental UPL payments rely not only on continued programmatic availability, but also on the continued viability of the particular operator/management agent relationship. As a follow up to the June 27, 2012 Email Blast, due to the nature of the arrangement, ORCF will accommodate transactions for facilities utilizing the UPL income; however, ORCF has taken several precautionary measures. First, ORCF will not rely on the UPL income stream to meet minimum debt service coverage ratios. Second, to the extent that any UPL revenue has been utilized for valuation purposes, ORCF applies a very high capitalization rate to that UPL revenue. Third, additional scrutiny is applied as the percentage of NOI derived from UPL increases. Finally, as comparable sales of facilities receiving UPL income become available, they will need to be reviewed and taken into consideration.

Status of 241(A) Transactions

The LEAN Blast provides an update — based on 13 recently closed 241(a) loans — on the issues that lenders are currently facing to obtain GNMA approval if the underlying loan is part of a REMIC, mainly the full tax review. GNMA recently approved 13 transactions that were determined not to require full tax review and approval. In each instance, the lender certified that (1) there was no collateral modification requiring a change to the legal description in the security instrument on the existing loan and (2) there was no cross-default provision between the 241(a) loan and the existing loan. Although GNMA has not indicated these are going to be the dispositive factors, GNMA is in the process of drafting formal 241(a) guidance.

ORCF Creating a Green Lane Queue for 223(f) Applications

Due to the higher volume of 223(f) applications and queue numbers increasing, ORCF is creating a separate green lane queue for 223(f) applications. The LEAN Update sets forth the criteria for a deal to be part of the new queue.

Instructions for Completing Form HUD-2-ORCF Waiver Request

The LEAN Blast sets forth the instructions for submitting waiver requests to ORCF, including PLI and account receivable waivers.

Interest Rate Reduction Legal Punch List

The Office of General Counsel has drafted a legal punch list to assist HUD field attorneys with their reviews of expedited interest rate reduction transactions. Although the punch list is intended as guidance for a HUD attorney, all parties may use the punch list in preparing the required documents. ORCF anticipates that the punch list will save time and address noted inconsistencies in drafting the allonge and/or note modification.