Summary of Proposed Changes to HUD LEAN 232 Loan Documents | Man’s pepper with trout


In an effort to summarize the highlights of the LEAN email sendings we receive, we at Pepper Hamilton are providing this quick summary of the latest LEAN update. Our aim is to succinctly provide relevant information as a roadmap for LEAN email sending, not as a substitute for LEAN email sending. We hope you find these summaries useful.

The Office of Residential Care Facilities (ORCF) released for public comment by 10 May 2018 updated versions of the 232 LEAN loan documents in the LEAN email of 10 April 2018 (for your convenience, revised loan documents are here). The MBA Closing Working Group gathers feedback to be submitted to HUD by May 1, 2018.

Proposed changes to the 232 LEAN loan documents

New loan documents generally reflect an effort by HUD to align the documents with the LEAN manual released last year. As an example, the definition of “principal” in the safety instrument and regulatory agreements has been revised to refer to the LEAN manual, as opposed to the code of federal regulations. The revised borrower regulatory agreement includes a list of the Section 38 addendum and executed by key officials (this review reflects the MAP regulatory agreement). As part of this revision, the specific references to the main principles of the note and the mortgage are replaced by a general reference to this article 38 addendum. In addition, the Borrower Regulatory Agreement (Section 29) and Operator Regulatory Agreement (Section 13) are revised to refer to the addendum to the Management Agreement required by HUD and remove specific requirements from the management agreement.

In addition, the documents have been revised to be a little more forward-looking. The definitions of “head lease” and “operator lease” have been broadened to include not only any lease in effect at the time of closing, but any lease affecting the project that may be entered into after closing. Similar changes have been made to the definitions of “primary tenant” and “operator” to include entities involved in leases after closing.

Multi-family note: A new exception to section 9 (prepayment restrictions) is included, allowing the lender to require the borrower to comply with any conditions imposed by the HUD before a prepayment is accepted.

Borrower Regulatory Agreement: A new section 36 (c) (vii) requires non-IOI borrowers or head tenants to use all “commercially reasonable” methods to remedy a breach of the head lease or operator’s lease in order to avoid a claim mortgage insurance.

Addendum to the operator’s lease: Section 4 has been revised to reflect that the right to purchase equipment from the operator, at the end of the lease, rests with the borrower (as opposed to the primary tenant).

Operator regulatory agreement: Two changes have been made to this document that may have a minor impact on the operation of a project. First, section 3 (c) of this document has been revised to require, in accordance with HIPAA regulations, that operators redact patient information when submitting reports to the lender or HUD. Second, section 15 is revised to prohibit the operator from charging fees for service animals.

Operator security contract: Recital F is revised to include health insurance claims in the definition of “health assets”. Additionally, HUD promulgated a separate Operator Lease and Rents Assignment Form and has removed this document as an attachment to the Operator Safety Agreement. The new form is identical to the old attachment.

SNDA operator: The revised document incorporates a new section 8 for borrowers and non-IOI operators which extends the processing period for operators in the event of a breach of the terms of the operating lease, provided there is no risk that ‘any permit or license required to operate the project be terminated.

Master Tenant Regulation Agreement: A new Section 5 (d) is incorporated into this document which reflects the default / remediation provisions of new Section 36 (c) (vii) of the Borrower Regulatory Agreement. As in the Operator’s Regulatory Agreement, Section 9 prohibits the primary tenant from charging fees for service animals.

Main tenant security contract: HUD revised this document to remove the assignment of leases and rents provisions and enacted a separate master assignment of leases and rents. This new Assignment of Leases and Rents is similar to the Assignment of Leases and Rents by the Operator. With the removal of these assignment provisions, we assume that HUD will no longer require registration of the tenant’s master security contract.

In addition, section 3 (i) is revised to not require DACA for payroll accounts where funds have already passed through an account controlled by DACA. Finally, section 9 (e) is revised to require the head tenant to cooperate with the lender in the event of a breach of the terms of the head lease.

SNDA master tenant: A personalized SNDA Master Tenant will now be required for each project, instead of having a single SNDA covering all projects under a Master Lease.

NC Escrow Agreement: A number of modifications have been made to this document to bring it in line with the practices of the LEAN Manual and the ORCF: (1) Recital C is revised to specifically incorporate optional borrower repairs into the definition of “Non-critical repairs”; (2) Sections 1 and 2 are revised to allow both the repair estimate amount and the additional deposit amount to be in the form of cash or a letter of credit; (3) Section 3 has been revised to indicate that the Borrower is responsible for costs in excess of the Repair Estimate and that such excess cannot be paid out of the Replacement Reserve; (4) Section 4 requires a receiver for latent defects only when the actual cost of the repairs exceeds $ 1,000,000, and the escrow of 2.5% of the total actual cost of the repairs is to be retained for a period of 15 months; and (5) Section 5 is revised to allow previously approved lenders to administer NC repair escrow.

Application for approval : New section A (15) (b) is included to allow approved lenders to administer non-critical escrow. New sections C (1) (g) and (h) are incorporated for the lender to disclose the reserve for short and long term debt service. Finally, the revised section D (12) requires the lender to certify that it has carried out research into the disputes of the borrower, the MT, the operator and the principal partners and that it discloses the results of this research on an attachment to the approval request.

Construction contract: Section 1 (A) is revised to require written approval from HUD of any side agreement, as opposed to mere disclosure. Further revisions to the construction contract eliminate the potential for incentive payments for “lump sum” contracts and incorporate a room for calculating incentive payments for “cost plus” contracts. In addition, the construction contract has been revised to eliminate the possibility of an early start before the engagement, but leaves the possibility of an early start after the engagement.

Lender’s certificate: A new section 27 (g) is included, requiring HUD approval for any off-site storage of building materials.

Agreement between creditors: There are a number of proposed changes to the Intercreditor Agreement: (1) Section 2.7 (b) has been revised to allow an additional day for FHA lenders to review excess advances (the lender now has two business days to submit a request for HUD approval), and each request must include a collateral analysis, provided by the AR lender, indicating that such advance is justifiable; (2) a new section 2.7 (h) provides three options to describe how the AR loan is secured between HUD projects (joint and several liability, other agreement approved by HUD, or not applicable); (3) new paragraphs 2.7 (i), (j) and (k) restrict the availability of income derived from HUD-insured projects to pay “non-HUD obligations”; and (4) Section 3.3 has been revised to specifically allow AR loan funds to be used to reimburse the fees of unaffiliated managers / consultants in second priority.

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