Federal Housing Administration (FHA) Healthcare Facility Documents: Proposed Revisions and Updates and Notice of Information Collection

AGENCY:

Office of the Assistant Secretary for Housing—Federal Housing Commissioner, HUD.

ACTION:

Notice.

SUMMARY:

Consistent with the Paperwork Reduction Act of 1995 (PRA), HUD is publishing for public comment a comprehensive set of closing and other documents used in connection with transactions involving healthcare facilities (excluding hospitals) that are insured pursuant to section 232 of the National Housing Act (Section 232). In addition to meeting PRA requirements, this notice seeks public comment for the purpose of enlisting input from the lending industry and other interested parties in the development, updating, and adoption of a set of instruments (collectively, healthcare facility documents) that offer the requisite protection to all parties in these FHA-insured mortgage transactions, consistent with modern real estate and mortgage lending laws and practices. The healthcare facility documents, which are the subject of this notice, can be viewed on HUD's Web site: www.hud.gov/232forms. HUD is also publishing today a proposed rule that will submit for public comment certain revisions to FHA's Section 232 regulations for the purpose of ensuring consistency between the program regulations and the revised healthcare facility documents.

DATES:

Comment Due Date: July 2, 2012.

ADDRESSES:

Interested persons are invited to submit comments regarding this proposed rule. Communications must refer to the above docket number and title. There are two methods for submitting public comments:

1. Submission of Comments by Mail. Comments may be submitted by mail to the Regulations Division, Office of General Counsel, Department of Housing and Urban Development, 451 7th Street SW., Room 10276, Washington, DC 20410-0500.

2. Electronic Submission of Comments. Comments may be submitted electronically through the Federal eRulemaking Portal at www.regulations.gov. HUD strongly encourages commenters to submit comments electronically. Electronic submission of comments allows the commenter maximum time to prepare and submit a comment, ensures timely receipt by HUD, and enables HUD to make them immediately available to the public. Comments submitted electronically through the www.regulations.gov Web site can be viewed by other commenters and interested members of the public. Commenters should follow the instructions provided on that site to submit comments electronically.

Note:

To receive consideration as public comments, comments must be submitted through one of the two methods specified above. Again, all submissions must refer to the docket number and title of the rule.

No Facsimile Comments. Facsimile (fax) comments are not acceptable.

Public Inspection of Public Comments. All properly submitted comments and communications submitted to HUD will be available for public inspection and copying between 8 a.m. and 5 p.m. weekdays at the above address. Due to security measures at the HUD Headquarters building, an appointment to review the public comments must be scheduled in advance by calling the Regulations Division at 202-708-3055 (this is not a toll-free number). Individuals with speech or hearing impairments may access this number via TTY by calling the Federal Relay Service at 800-877-8339. Copies of all comments submitted are available for inspection and downloading at www.regulations.gov.

FOR FURTHER INFORMATION CONTACT:

For policy questions contact: John M. Hartung, Director, Policy and Risk Management Division, Office of Residential Care Facilities, Office of Healthcare Programs, Office of Housing, U.S. Department of Housing and Urban Development, 1222 Spruce Street, Room 3.203, St. Louis, MO 63103-2836; telephone (314) 418-5238 (this is not a toll-free number). Persons with hearing or speech disabilities may access this number through TTY by calling the toll-free Federal Relay Service at (800) 877-8339.

For legal questions contact: Millie Potts, Acting Associate General Counsel, Office of the General Counsel, Room 9230, Department of Housing and Urban Development, 451 Seventh Street SW., Washington, DC 20410-0500; telephone (202) 708-1274 (this is not a toll-free number). Persons with hearing or speech disabilities may access this number through TTY by calling the toll-free Federal Information Relay Service at (800) 877-8339.

SUPPLEMENTARY INFORMATION:

I. Background and Overview

The issuance of this notice is modeled on the public review and input process that HUD utilized in the updating of its multifamily rental project closing documents. On May 2, 2011, at 76 FR 24363, HUD published a notice announcing HUD's completion of the updates to the multifamily rental project closing documents. The update of HUD's multifamily rental project closing documents involved substantial review of proposed changes to those documents and the opportunity for considerable public comment. Building on the experience of that process, including the changes made to the multifamily rental project closing documents, HUD has revised its healthcare facility documents to utilize, as appropriate, the updated multifamily documents while also developing standardized healthcare facility-specific documents as necessary. This notice solicits comments on this revised set of healthcare facility documents.

The revised healthcare facility documents can be viewed at: www.hud.gov/232forms. All of the documents that are the subject of this notice are listed in the Paperwork Reduction Act table found in Section III of this notice. Where healthcare facility documents are based on updated multifamily rental project closing documents, the healthcare facility documents, in addition to being presented in an unmarked format, are presented in redline/strikeout format so that the reviewer can see the changes proposed to be made to the multifamily rental project closing documents in order to make the documents applicable to healthcare facility transactions. Where proposed healthcare facility documents are based on existing healthcare facility documents, the proposed healthcare facility documents, in addition to being presented in an unmarked format, are also presented in redline/strikeout format so that the reviewer can see the changes proposed to the existing healthcare facility documents. Summaries of the major changes to some of the principal documents follow. Where capitalized terms are used, such terms refer to the titles of documents or defined terms in the documents.

The requirements for commitment and endorsement of a mortgage note are provided in HUD's regulations primarily at 24 CFR part 200, subpart A; 24 CFR part 232, and including, in particular, cross-references to general eligibility requirements for the FHA multifamily housing insurance programs in 24 CFR part 207. HUD's regulations provide that where specific documents are referenced in the regulations such documents shall be in a form as prescribed by HUD. The regulations also specify other program requirements that are reflected in the proposed documents. In order to ensure consistency between applicable program regulations and the proposed updated documents, revisions to certain of these regulations will be the subject of a proposed rule that HUD will soon be publishing.

II. Summary of Changes to Selected HUD Healthcare Facility Documents

As detailed more fully below, the overall contractual framework, as set forth in the proposed revised documents, clarifies current policies, and strengthens HUD's oversight. For example, although HUD has always taken the position that an operator, like a borrower, would be subject to regulatory restrictions pursuant to the transaction's regulatory agreements, the revised documents clarify this policy and set forth more specific regulatory restrictions. The revised documents propose to: maintain operators' currently broad discretion over the use of project funds, provided that quarterly and year-to-date financial reports demonstrate that the healthcare facility is maintaining sufficient working capital; give borrowers greater flexibility in the use of project funds, provided that semi-annual calculations demonstrate positive surplus cash; increase a healthcare facility's ability to weather financial downturns with a debt service reserve; expand information sharing with lenders; clarify requirements for multiple facility portfolios and master lease structures; update terms and standardize provisions across the nation. Although a summary of the revised provisions follows below, HUD encourages interested parties to review the proposed form documents, posted on its Web site at: www.hud.gov/232forms.

Regulatory Agreements. The healthcare regulatory agreements are based on the Regulatory Agreement for Multifamily Projects, with three specific regulatory agreements proposed: (1) A borrower's regulatory agreement; (2) an operator's regulatory agreement; and for use where applicable, (3) a master tenant's regulatory agreement. The agreements are proposed to apply to multiple potential deal structures. For example, the operator's regulatory agreement will apply to any operator, whether such operator is a lessee or an operator pursuant to some other contractual arrangement; the borrower's regulatory agreement will apply whether or not the borrower is also the operator, and whether the borrower's operator leases the healthcare facility or operates the facility pursuant to some other contractual arrangement. Borrowers who also operate the healthcare facility will execute both the borrower's and the operator's regulatory agreements.

Substantively, the regulatory agreements provide, without limitation, that: the healthcare facility shall only be used for approved uses and maintained in decent, safe, sanitary condition and good repair; borrowers must maintain a debt service reserve; borrowers may take distributions of project funds so long as semi-annual calculations demonstrate positive surplus cash; non-profit borrowers must maintain residual receipt accounts; project records must be adequately maintained and kept available for inspection; borrowers must submit audited annual financial statements; operators must submit quarterly and year-to-date financial statements; copies of certain notices, reports, surveys and other correspondence relating to the permits and approvals necessary to operate the healthcare facility must be provided to HUD and Lender; HUD's consent must be obtained prior to any change in the operator or management agent; if the healthcare facility's financial or operational viability is at risk, HUD may require the operator to engage an operational consultant; and HUD may terminate an operator's, master tenant's, or sublessee's rights to operate the healthcare facility upon an uncured default.

Management Certification. HUD also invites comments regarding a newly created management certification (“Management Agent's and Owner's or Operator's Certification for Residential Care Facilities for Identity-of-Interest or Independent Management Agents”). HUD recognizes that in most instances the licensed operator, through a contractual relationship with the owner, handles the management activities of the facility. Sometimes, however, that operator (or even the owner itself as the licensed operator) contracts with another entity (“management agent”) to handle some management activities. HUD has determined that, in those instances, it is important that the management agent execute a controlling document whereby it makes key certifications/commitments directly to HUD, and through which HUD can directly pursue remedies in the event of noncompliance.

Security Instrument and Security Agreements. The borrower, operator, and, if applicable, master tenant, all provide collateral to the lender as security for the loan. Operators and master tenants provide Uniform Commercial Code (UCC) collateral through security agreements; borrowers provide their interests in both UCC property and real property. Based on the revised multifamily security instrument, the borrower's security instrument is set up with alternative language that can be used as applicable in states where mortgages, deeds of trust, security deeds, or other instrument forms are used. State-specific addenda may be developed by HUD field counsel as required for the various jurisdictions and may need to be appended, comparable to the approach taken in the multifamily rental documents. Collectively, the borrower's security instrument and operator's and master tenant's security agreements provide the lender with security for the loan in all project-related assets. These security documents also incorporate the regulatory agreements and give the lenders rights to enforce the borrower's promises to provide lender with appropriate notices, correspondence, and other applicable reports. In addition to these security documents, borrowers and/or operators, as applicable, will be required to execute form deposit account control agreements, and related documents, to adequately perfect the lender's security interests in the project accounts. Where accounts receivable financing is utilized, the revised form intercreditor agreement sets forth the terms pursuant to which an accounts receivable lender's interest may take priority over the HUD-insured lender's interests.

Healthcare Facility Note. The substantive provisions of the promissory note used for the healthcare facility transactions have not been substantially revised, but the form of note has been revised, adopting the revised multifamily note form. The loan remains a non-recourse loan, as set forth in the note. The borrower's personal assets are not at risk for the repayment of the loan. However, as with the multifamily note posted on HUD's Web site on May 2, 2011, to the extent an individual commits fraud, steals funds from the project, or is otherwise unjustly enriched through improper use of project funds, HUD will pursue recovery of such funds, and certain controlling entities and individuals will be asked to sign the regulatory agreement in acknowledgement of such potential liability.

Master Lease documents. As multi-facility portfolio transactions increase in occurrence, the master lease structure is increasingly utilized. In response to this trend, HUD proposes several form documents to be used in master lease structured transactions. The documents proposed include an Addendum to the master lease which includes provisions protecting the Lender and HUD's interests, a Master Tenant Security Agreement, a Master Tenant Regulatory Agreement, a Subordination Agreement or Subordination Non-Disturbance Agreement, and a Cross-Default Guaranty of Subtenants. The master lease structure allows for any rental deficiencies at one facility to be supported by income from another facility under the master lease. It is important to note that a master lease does not pool the assets of all facilities for underwriting a single mortgage loan for multiple facilities. Each individual loan must meet HUD's underwriting standards on its own merit.

Definitions. Several definitions have been clarified throughout the documents, and several new terms have been added. The terms “Borrower,” “Lender,” and “Operator,” have been added and apply when referencing the respective concepts of borrower/owner/mortgagor/lessor, lender/mortgagee, and operator/lessee/sub-lessee/sub-tenant. Based on the multifamily concept, the term “Mortgaged Property” refers to all of the borrower's interests in any aspect of the project, and includes concepts and interests specific to healthcare programs. Although “Mortgaged Property” relates only to the Borrower's interests in the project, the operator's interests in project-related assets are separately conveyed as collateral through the operator's security agreement. In order to capture all of borrowers' and operators' interests and assets related to the development and operation of the healthcare facility, including those that, in the strictest legal interpretations may not be a part of the healthcare facility itself, the terms “Healthcare Facility” and “Project” have been set forth as very closely related but distinct concepts: “Project” has been defined as “any and all assets of whatever nature or wherever situated related to the Loan, including without limitation, the Mortgaged Property, any Improvements, and any collateral owned by operators securing the Loan;” whereas “Healthcare Facility” has been defined as “any portions of the Project (both tangible, and intangible), operated on the Land as a Nursing Home, Intermediate Care Facility, Board and Care Home, Assisting Living Facility or any other healthcare facility authorized to receive mortgage insurance pursuant to Section 232 of the National Housing Act, as amended, or other applicable federal law.” Several other definitions have been revised, added, or deleted, as appropriate.

Finally, a decision was made to adopt more consistency in the numbering system for the program documents, e.g. HUD Form 9XXXX-OHP. Greater consistency should reduce confusion because the documents will appear in the same group wherever HUD publishes the documents, e.g. HUDCLIPS at http://www.hud.gov/hudclips.

III. Paperwork Reduction Act

The proposed new information collection requirements contained in this notice have been submitted to the Office of Management and Budget (OMB) for review under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501- 3520). Under this Act, an agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection displays a valid control number. The public reporting burden for this new collection of information is estimated to include the time for reviewing the instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Information on the estimated public reporting burden is provided in the following table:

In accordance with 5 CFR 1320.8(d)(1), HUD is soliciting comments from members of the public and affected agencies concerning the proposed collection of information to:

(1) Evaluate whether the proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility;

(2) Evaluate the accuracy of the agency's estimate of the burden of the proposed collection of information;

(3) Enhance the quality, utility, and clarity of the information to be collected; and

(4) Minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated collection techniques or other forms of information technology, e.g., permitting electronic submission of responses.

Interested persons are invited to submit comments regarding the information collection requirements in this proposal. Comments must be received by July 2, 2012. Comments must refer to the proposal by name and docket number (FR-5354-N-01) and must be sent to:

HUD Desk Officer, Office of Management and Budget, New Executive Office Building, Washington, DC 20503, Fax number: (202) 395-6947, and Colette Pollard, Office of the Chief Information Officer, Department of Housing and Urban Development, 451 Seventh Street SW., Room 4178, Washington, DC 20410.

IV. Solicitation of Public Comments

HUD welcomes public comments from industry and other interested members of the public on this most recent issuance of revised documents, posted at: www.hud.gov/232forms.