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. Here is a link to the complete October 30, 2014 LEAN Blast.

New Handbook 4232.1 Web Page and Revisions

A new Web page was created for Handbook 4232.1, allowing for chapters of the handbook to be downloaded separately. Since the May 22, 2014, publication of the handbook, scrivener and other minor errors have been corrected and posted on the new Web page. For a list of scrivener and other minor error corrections, refer toTransmittal 10-17-2014.

Resolving Pay.gov Issues

Some lenders have been unable to use Pay.gov to pay their Section 232 Program Fees. The cause may be that automatic debit may be blocked unless the business is on an approved list. The agency identification for the Section 232 Healthcare Fees Form is: Agency ID: 8609030027; Form Name: Healthcare Fees.

Questions should be directed to Pay.gov Customer Service at: 800.624.1373.

New HUD Attorney Closing Punchlist and Checklists for 223(f), 223(a)(7) and Initial 232 Closings

The new HUD Attorney Closing Punchlists for 223(f) and 223(a)(7) as well as for initial 232 closings have been released. In addition, checklists have been drafted for 223(f)223(a)(7), and initial 232 closings. The updated punchlists reference the June 2014 version of the documents and include closing requirements from Handbook 4232.1.

Limited Guaranty and Security Agreement in Lieu of Master Lease

Under certain circumstances, when a portfolio of properties does not have 100 percent common ownership, a traditional Master Lease is not possible. As an alternative to the Master Lease, a Limited Guaranty and Security Agreement is often appropriate. Under the guaranty, the key principal is required to pledge all distributions it has received (within 180 days before a default) to cure defaults on any of the properties listed on the guaranty. The key principal(s) will be providing a security interest in the above mentioned cash distributions as well. (See Handbook 4232.1, Section II, Chapter 13.3.E.1)

Clarification on ORCF’s View of Appraisals for Non-Profit Owners and Operators

There is some confusion related to the proper valuation of a health care facility operated by a nonprofit organization. ORCF’s goal for all properties is to determine the facility’s sale price, as of the effective date of the appraisal.

ORCF recognizes that it is not always the mission of nonprofit organizations to maximize a facility’s cash flow. For-profit buyers would likely modify the operations of a nonprofit owned facility with the goal of improving profits. Potential differences between nonprofit and for-profit operators, include but are not limited to, staffing ratios, employee benefits packages, higher-level food service, even potentially higher occupancy rates, reputational differences, etc. It is appropriate for an appraiser to adjust these and other revenues and expenses to reflect a true market rate operation (both on the revenue and expense side) in determining the value. If the appraiser believes that the operations would materially change with a market rate sale, the appraiser must factor into its analysis the additional costs and risks associated with converting a facility from the current nonprofit operation to a for profit operation (See Handbook 4232.1, Section II, Chapter 5.3.G). The method for factoring in the additional costs and risks is up to the appraiser, but could conceivably take the form of an increased cap rate or a reduction to value based on a discounted cash flow analysis to support the value or other methods as the appraiser deems appropriate.

Standard Work for New Construction Appraisal Review

At the lender trainings this summer in Seattle, WA and Minneapolis, MN, ORCF outlined the process for reviewing a new construction appraisal. To offer greater transparency, the New Construction Appraisal Review has been added to the Section 232 Program Web site. ORCF encourages third-party appraisers to incorporate similar steps.

Flood Zone Designation, Floodplain and Wetland Covenant

In an effort to assist lenders navigate the various flood zone designations, a table depicting the FEMA flood zone designations for 100-year and 500-year floodplains and for areas of minimal flood hazard has been posted in the Lender Tools on the 232 Program Web site. For projects where an undeveloped portion of the site is located in a floodplain or wetland, an exception from 24 CFR 55, Floodplain Management and Protection of Wetlands, is allowed under 24 CFR 55.12(c)(7). To qualify for the exception, a covenant or comparable restriction must be placed on the property’s continued use to preserve the floodplain and/or wetland area. HUD has issued a Sample Covenant for Floodplain and Wetland that can be used as the template for a covenant that complies with 24 CFR 55.12(c)(7)(iii).

Calculation of Debt Seasoning Period

Debt Seasoning is defined in Handbook 4232.1, Production Chapter 3.13.C. Note that the two-year debt seasoning period must be completed before the firm application is submitted.

Treatment of Existing Reserves Established as Collateral of Current Loan

Section 3.13.B.4 of Handbook 4232.1 addresses how to handle a reserve account that was created as collateral for the existing loan that is being refinanced. The funds in the reserve will only be considered eligible costs if (a) the loan comprising the existing indebtedness meets eligible debt and debt seasoning requirements; (b) the release provisions for the funding of the current loan were clear and pre-defined at the time the original loan was made; and (c) the escrow is released before the FHA Lender makes application to HUD for the loan. Any reserves not meeting these criteria will be treated like R4R on deposit and subtracted from the Total HUD Eligible Costs pursuant to MILC Criterion H.

Extension of Timeframes for Filing Operator and Master Tenant Financial Statements; Amendment of Earlier Agreements Unnecessary

In the October 6, 2014 E-mail Blast, ORCF pointed out that HUD had published an Interim Rule effective October 16 extending the timeframe for submitting quarterly and annual operator and master tenant financial statements (from 30 to 60 days for quarterly/YTD statements and from 60 to 90 days for year-end statements). If the project closes after October 16, the operator and master tenant regulatory agreements should be revised before closing to reflect the more favorable financial statement submission time frames. Please note the more favorable submission timeframes for these particular financial statements also apply to projects that closed before October 16, 2014. However, it is not necessary to amend the earlier regulatory agreements to reflect those revised timeframes; the timeframes of the Interim Rule control over conflicting timeframes in those earlier regulatory agreements.

July 2014 Section 232 Lender Trainings - Parking Lot Follow-Up

As a follow-up to ORCF’s July lender trainings in Seattle, WA and Minneapolis, MN, ORCF responded to a number of the issues raised in “the Parking Lot items.” See the LEAN Blast for the complete grid of issues and responses.