Summary of HUD’s New Section
232 Healthcare Closing Documents
Table of Contents
Introduction ......................................................................................................................... 3
Main Documents ................................................................................................................. 3
Borrower Healthcare Regulatory Agreement ................................................................. 3
Security Instrument/Mortgage/Deed of Trust ................................................................. 5
Healthcare Facility Note ................................................................................................. 8
Request for Endorsement ................................................................................................ 9
Agreement and Certification ......................................................................................... 11
Lender Certificate ......................................................................................................... 12
Lessee-Operator Documents ............................................................................................. 12
Operator Healthcare Regulatory Agreement ................................................................ 12
Lessee-Operator Security Agreement ........................................................................... 14
Addendum to Operating Lease ..................................................................................... 14
SNDA............................................................................................................................ 15
Lease Estoppel Certificate ............................................................................................ 15
Master Lease Documents .................................................................................................. 15
Master Tenant Healthcare Regulatory Agreement ....................................................... 15
Master Lease Addendum .............................................................................................. 16
SNDA............................................................................................................................ 17
Subtenant Cross-Default Guaranty ............................................................................... 17
Master Tenant Estoppel Certificate .............................................................................. 17
AR Documents .................................................................................................................. 18
AR Financing Certification ........................................................................................... 18
Intercreditor Agreement ................................................................................................ 18
Opinions ............................................................................................................................ 20
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Borrower’s Counsel Opinion ........................................................................................ 20
Operator’s Counsel Opinion ......................................................................................... 22
Master Tenant’s Counsel Opinion ................................................................................ 23
Escrows ............................................................................................................................. 24
Escrow Agreement Non-Critical Deferred Repairs ...................................................... 24
Escrow Agreement for Operating Deficits ................................................................... 24
Working Capital Escrow ............................................................................................... 24
Latent Defects Escrow .................................................................................................. 25
Minor Moveables Escrow ............................................................................................. 25
Construction Documents ................................................................................................... 25
Building Loan Agreement............................................................................................. 25
Building Loan Agreement - Supplemental ................................................................... 26
Construction Contract ................................................................................................... 26
Supplementary Conditions of the Contract for Construction ....................................... 27
Design Professional’s Certification of Liability Insurance ........................................... 28
Payment Bond ............................................................................................................... 28
Performance Bond ........................................................................................................ 28
Completion Assurance Agreement ............................................................................... 29
Off-Site Bond – Dual Obligee ...................................................................................... 29
Memo Requesting Post-Commitment Early Start of Construction............................... 30
Request for Permission to Commence Construction Prior to Initial Endorsement for
Mortgage Insurance ...................................................................................................... 31
Other Documents .............................................................................................................. 31
Borrower’s Certification – Completion of Critical Repairs .......................................... 31
Management Certification ............................................................................................ 32
Subordination Agreement - Financing .......................................................................... 34
Surplus Cash Note......................................................................................................... 34
Residual Receipts Note ................................................................................................. 35
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Introduction
The new Section 232 loan document forms have been published by HUD and are
effective for Firm Commitments issued on or after July 12, 2013. We have undertaken a
document by document analysis of the new forms. Below you will find summaries of the
changes between the new documents and the currently applicable forms. To the extent a
232 Healthcare form has a Multifamily counterpart, we have also highlighted such
changes. At the end of each document, you will find a link to the new HUD form.
Redlines are also available where applicable.
Please note that new Closing Checklists are being finalized by HUD. We have
been advised by HUD that they will become available in the near future.
Main Documents
Borrower Healthcare Regulatory Agreement
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A Borrower that operates the facility will be required to enter into the Healthcare
Regulatory Agreement – Operator and execute the Operator Security Agreement
and applicable deposit account control agreements.
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For-Profit Borrowers may make distributions from surplus cash at any given time
during the fiscal year. However, upon each required calculation of surplus cash
the Borrower must demonstrate positive surplus cash; otherwise, any distribution
taken during such calculation period must be repaid.
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Non-Profit Borrowers are restricted to annual or semi-annual distributions after
such distributions have been placed in a residual receipts account and approved by
HUD. Under certain circumstances, Non-Profit Borrowers may request to be
treated as For-Profit Borrowers for distribution purposes. If the loan being
refinanced is an (a)(7), and the entity was originally treated as a For-Profit
Borrower and allowed to distribute surplus cash, HUD will allow the Non-Profit
Borrower to continue to be treated as a For-Profit Borrower for distribution
purposes.
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Management Agreement- New guidelines require management agreements to
contain provisions giving HUD the ability to terminate any Management
Agreement (a) within 30 days’ notice; (b) immediately under certain
circumstances such as where license is at risk of being terminated; and (c) require
HUD’s approval for an assignment or amendment of any Management
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Agreement. Similar provisions have to be in vendor contracts where there is an
identity of interest with Borrower or Operator.
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As in the Multifamily Regulatory Agreement, the Healthcare Regulatory
Agreement – Borrower includes a section to list the key principals who will be
liable for the so-called “bad boy” acts carving out the non-recourse for these
individuals or entities.
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A complete annual financial report must be submitted to HUD and the Lender
within ninety (90) days following the end of each fiscal year. The report shall
include a certification from the Borrower in a form prescribed by HUD and must
be audited and certified by a CPA.
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HUD included a provision controlling contracts for goods and services including
guidelines on costs and terms. As part of that, Borrowers shall solicit, and retain
copies of, written cost estimates when acquiring goods and services whose cost
exceeds 5% of the gross annual revenue.
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Borrowers shall notify HUD and Lender electronically within two (2) business
days from receipt of any and all notices, reports, surveys or other correspondence
regarding a violation considered higher than a “G” level. The prior time-frame for
reporting the receipt of a notice of a violation was ten (10) days.
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Unpaid and outstanding obligations have to be disclosed and approved by HUD.
Although it is likely the intent of these provisions was to disclose obligations in
connection with debt for the financing of the project, if taken literally, any unpaid
and outstanding obligation in connection with the operation of the facility would
have to be disclosed and approved by HUD.
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Borrowers must disclose any litigation filed against the Borrower or any of its
Principals, the Operator or the facility. Additionally, prior written consent from
HUD must be obtained in order to institute litigation seeking the recovery of a
sum in excess of $100,000, or settle a dispute in excess of $100,000.
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Commercial Leases have to be reviewed and approved by HUD prior to their
execution unless they are for support or ancillary services which are subordinate
to the Borrower’s Security Instrument and have terms of less than five (5) years.
In such instances, a copy of the lease should be submitted to HUD within thirty
(30) days after its effective date.
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HUD’s prior written approval is required for any amendment to a contract that
materially increases the obligations of the Borrower or the rights of the other
parties to such contract. This could potentially create an issue with various
contracts for supplies or services in the day-to-day operations of the facility.
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If the management agent has the license or is the payee under one or more payor
agreements, it will be treated as an Operator.
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Security Instrument/Mortgage/Deed of Trust
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The new form of Healthcare Security Instrument is based on the new
Multifamily Security Instrument (rev. 04/11). Most of the changes from
the Multifamily Security Instrument are to define terms (e.g.,
“Multifamily” to “Healthcare”) and to otherwise adapt the form to a
healthcare loan, although there are some substantive changes.
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The following are the key substantive changes from the form of
Multifamily Security Instrument:
 Section 1. Definitions.
1. Definition of “Accounts Receivable.” Broad definition of
“all right, title and interest of Operator in and to the
following…all rights to payment of a monetary obligation,
whether or not earned by performance, including, but not
limited to, accounts receivable, healthcare insurance
receivables, Medicaid and Medicare receivables, Veterans
Administration receivables, private patient receivables, and
HMO receivables….”
2. Definition of “Fixtures” includes major movable equipment
including medical equipment and systems.
3. Definition of “Loan Documents” contemplates the
addition/removal of Master Tenant and Operator
documents, as applicable.
4. Definition of “Mortgaged Property” includes Accounts
Receivable, licenses required to operate the facility and “all
receipts, revenues, income and other moneys received by or
on behalf of the Healthcare Facility…..”
5. Definition of “Personalty” includes “all tangible and
intangible personal property used in connection with the
Healthcare Facility….”
6. Additional definitions of “Rent,” “Residential Agreement,”
“Residual Receipts” and “Surplus Cash.”
 Section 2. UCC Security Agreement.
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1. Borrower represents and warrants to Lender that it will not
permit Operator, Master Tenant or any management agent
to enter into any agreement with any party other than the
Lender that allows for the perfection of a security interest
in any part of the UCC Collateral.
2. Borrower grants Lender a security interest in “any and all
of the present or hereafter acquired Mortgaged Property,
and all products, cash proceeds and non-cash proceeds
thereof.”
 Section 4. Assignment of Leases.
1. Deletion of residential lease provisions.
 Section 9. Regulatory Agreement.
1. Affirmative obligation of Borrower to deliver to Lender
copies of all reports, financial statements and other
information Borrower is required to provide HUD pursuant
to the Regulatory Agreement.
2. Affirmative obligation of Borrower to require Operator and
Master Tenant to comply with the terms of their respective
Regulatory Agreements.
a. Note: Requirement that Master Lease contains a
provision memorializing this compliance.
 Section 15. Financial Reporting.
1. Cross-references Regulatory Agreement for reporting
requirements.
 Section 18. Management.
1. Affirmative obligation of Borrower to provide for qualified
management by a “licensed or otherwise qualified entity
consistent with Program Obligations and/or any
governmental requirements pertaining to operation and
licensing.” And affirmative obligation of Borrower to
cause any operator, master tenant or management agent to
do the same and also to adhere to preservation provisions in
(a) through (h).
 Section 19. Insurance.
1. Borrower shall keep property insured at all times to the full
extent of Program Obligations, “as they may be amended
from time to time.”
 Section 22. Events of Default.
1. Subsection 5 states that a default under the Operator’s
Regulatory Agreement is a default under the Security
Instrument if HUD requests that the Lender treat it as such.
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The changes from the prior versions of Security Instruments that were
used on LEAN transactions will be familiar to anyone who followed the
implementation of the new Multifamily loan documents in 2011; however,
the following are the key substantive changes from the prior versions:
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 Opening paragraphs: alternate language depending on whether the
document is a Mortgage, Deed of Trust, etc.
 Section 1. Definitions.
1. New defined terms.
 Section 4. Assignment of Leases.
1. Present assignment that is immediately effective.
 Section 6. Exculpation.
1. Exculpation mirrors exculpation provisions in the Note.
 Sections 7 and 8. Deposits.
1. Lender shall collect “Imposition Deposits” including those
for MIP, taxes, insurance, replacement reserves, escrows
and deposits, etc.
 Section 12. Use of Property.
1. Prohibits the Borrower from changing the use from the use
at the time which the Security Instrument was executed
(e.g., non-healthcare), commercial use in any individual
dwelling units or common areas, changing zoning,
establishing a condo or co-op regime, etc.
 Section 21. Transfers.
1. Prohibits transfers without HUD/Lender consent.
 Section 22. Events of Default.
1. Establishes Monetary and Covenant events of default.
a. Monetary default is “any failure by Borrower to pay
or deposit when due any amount” required by the
Note or the Imposition Depositions set forth in
Section 7.
b. Covenant default is defined in five categories:
i. Fraud or material misrepresentation or
material omission.
ii. Commencement of a forfeiture action or
proceeding which could impair the Lender’s
security interest.
iii. Material failure by Borrower to comply with
the provisions of the Security Instrument.
iv. Failure to comply with the Borrower’s
Regulatory
Agreement
beyond
the
applicable cure period.
v. See above for subsection 5 re Operator’s
Regulatory Agreement.
 Section 33. Single Asset Borrower.
1. Borrower shall be a single purpose entity.
 Section 39. Loan Servicing.
1. Loan servicer (who may or may not be the Lender) has the
right to collect payments, inspect the property, give notices,
etc. In the event of conflicting notices between the Lender
and the servicer, the Lender notice shall govern.
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 Section 41. No Change In Facts or Circumstances.
1. Borrower certifies that there have been no material adverse
changes in any information provided in connection with the
loan application (financial statements, rent rolls, reports,
etc.).
 Section 42. Estoppel.
1. Lender is not an agent of HUD.
 Section 43. Acceleration; Remedies.
1. If a monetary event of default “occurs and is continuing,
Lender, at Lender’s option, may declare the Indebtedness to
be immediately due and payable without further demand,
and may invoke the power of sale and any other remedies
permitted by applicable law….”
2. If a covenant event of default occurs “Lender, at Lender’s
option, but so long as the Loan is insured or held by HUD,
only after receipt of the prior written approval of HUD,
may declare the Indebtedness to be immediately due and
payable without further demand, and may invoke the power
of sale and any other remedies permitted by applicable
law….”
 Section 48. Environmental Hazards.
1. Sets out specific prohibited activities and conditions.
 Section 50. State Law Requirements.
1. State specific addenda are contemplated (note that in
contrast to the Note riders, most jurisdictions have issued
addenda for the new Multifamily Security Instrument).
Query whether the same addenda will be applicable to the
Healthcare Security Instrument or if new addenda will be
issued by the field offices.
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Healthcare Facility Note
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The new form of Healthcare Facility Note is based on the new Multifamily
Note (rev. 04/11). Other than changes to defined terms (e.g., “Regulatory
Agreement” to “Healthcare Regulatory Agreement”), the Healthcare
Facility and Multifamily notes are almost identical.
The following are the substantive changes from the form of Multifamily
Note:
 Section 7. Increased Time Before Lender Can Charge Late Fee.
1. Under the new form of Healthcare Facility Note, the
Lender may charge a late charge if any monthly amount
payable is not received within 15 days (as opposed to 10
days under the Multifamily Note).
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 Section 8. Remedies for Failure to Pay Rents and Security
Deposits.
1. Under the new form of Healthcare Facility Note, in the
event of default, there is no liability for failure of Borrower
to pay rents and security deposits from tenants. This,
however, is due to the existence of an Operator on a
Healthcare loan and picked up in the [confirm: Operator
Regulatory Agreement/Security Agreement].
 Section 9(h). Deletion of five year prepayment prohibition
language applicable to Section 207/223(f) loans – not applicable to
LEAN.
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The changes from the prior versions of Notes that were used on LEAN
transactions will be familiar to anyone who followed the implementation
of the new Multifamily loan documents in 2011; however, the following
are the key substantive changes from the prior versions:
 Separate prepayment language for construction loans with split
rates, construction loans with single rates and permanent loans.
 Definition of “Program Obligations” in Section 1 contemplates
changes throughout the life of the loan as new FHA guidance is
issued.
 Exculpation/Non-Recourse provision in Section 8 requires naming
of specific individuals or entities that are exculpated, and Section
8(b) sets forth specific exceptions to exculpation.
 Alternative prepayment provisions in Section 9 – alternative B is
for use when the loan is being purchased by GNMA and will be
most commonly used.
 Section 20 provides for automatic termination of HUD specific
provisions and obligations when HUD no longer insures or holds
the Note.
 State specific riders are contemplated (although note that only a
few states have issued Note riders for the new Multifamily Note).
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Request for Endorsement
Please find below deviations of the new 232 Request for Endorsement to the
Multifamily form.
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Subsection I.A.11, Definition of Financing Charge(s), stipulates that the lender
may collect fees and charges for any services requested by the Borrower or HUD
which were not customarily provided by HUD lenders, which include invest of
RR funds or any other funds or to perform other administrative services for the
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benefit of Borrower or HUD or as required by HUD. This provision is contained
under Section B of the LEAN Rider to Request for Endorsement.
Subsection I.A.14, clarifies that Lender agrees to notify HUD in writing
immediately upon learning of any violation to the Regulatory Agreement by the
Borrower, whereas the housing form does not limit violations to just the borrower.
A new subsection I.A.15 has been added to include the amount required for the
inspection fee, as required by Section E.c. of the LEAN Rider to Request for
Endorsement.
New subsection I.A.16 requires lender to disclose the prepayment premium and
the amount of such prepayment penalty to be funded by the lender as a result of
the premium generated by the GNMA sale, as required by Section Ea. of the
LEAN form of Rider to the Request for Endorsement.
New subsection I.C.1.d, Reserve for Replacement, requires the amounts to be
reflected of the initial deposit to Replacement Reserve and the amounts being
transferred from the existing account, as required by Section E.a. of the LEAN
Rider to Request for Endorsement.
Provisions of Section E.b. of the LEAN Rider to Request for Endorsement,
regarding Residual Receipts, has been added as new subsection I.C.1.e.
A new subsection I.C.1.f regarding Debt Service Reserves has been added.
Subsection I.C.6, pertaining to Residual Receipt accounts, recognizes the
Lender’s designee as an additional party who can control these accounts.
New subsection I.C.7, Debt Service Reserve Account, outlines how the account is
held, including that accounts will be held in an interest-bearing account, etc., and
advises that withdrawals may only be made with the prior written consent of
HUD. Lender must also notify HUD in writing of any non-compliance with
Program Obligations, once known to Lender.
Under Subsection I.D.10, Lender must now acknowledge that all necessary
certificates, permits, licenses, qualifications, etc. have been obtained by the
borrower and Operator and requires that a list of all necessary certificates,
permits, licenses, etc. be attached as an exhibit to the Request for Endorsement.
Currently the housing form does not require a list of permits, approvals or license
to be attached.
As required by Section C of the LEAN Rider to the Request for Endorsement, a
provision regarding PCNA reporting has been added as Section I.D.12.
Section II.2.b, The first sentence has been revised to replace the word
“Certifications” of Lender with “Certificate” of Lender and instructs the drafter to
delete the portion of the sentence relating to drawings and specifications, in the
case of a refinance transaction.
Section III, Certificate of General Partner - Instructions to delete Section III on
refinance transactions has been inserted.
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Agreement and Certification
Below you will find the substantive and non-substantive changes of the new
Agreement and Certification to the multifamily form.
Substantive changes:
 HUD is no longer a party to the agreement.
 It appears that BSPRA and SPRA are no longer permitted when determining
actual cost. Language in paragraphs 10 and 11 regarding BSPRA consideration
has been removed. The 50-75% rule now makes up new paragraph 10, as shown
in the attached blackine.
 The language under Paragraph 11 has been substantively changed, as reflected in
the attached blackline. Language requiring the form of cost-plus, with a maximum
upset price, for current IOI’s or those coming into existence prior to the final
endorsement of the Note remains, along with the fees that determine actual cost.
Non-substantive changes:
 Page 1: Title of the agreement includes the Section of the NHA and references the
Office of Housing Residential Care Facilities.
 Warning Language now located on page 1.
 Page 1: The word “HUD” has been replaced with “FHA” in the Project No.
reference.
 Paragraph 1: The term “Secretary” was replaced with “HUD” as used throughout
the agreement.
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Lender Certificate
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Despite our prior comments to HUD regarding the representations HUD is
requiring the Lender to make in connection with the perfection of the security
interest, HUD is still requiring the Lender to certify that the Borrower’s Security
Instrument and the UCC Financing Statement filings, establish a perfected first
lien security interest under the UCC.
HUD added a statement for the Lender to agree to obtain a new PCNA every 10
years, the costs of which can be paid for with RR funds.
HUD wants lenders to attach a list of the Borrower's various certificates, permits,
licenses, qualifications and approvals that show the project construction may
proceed, and that show Borrower has the necessary governmental approvals to
own and operate the Mortgaged Property.
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Lessee-Operator Documents
Operator Healthcare Regulatory Agreement

Although the new form of Healthcare Regulatory Agreement – Operator does not
specifically address this issue, we know from the new Regulations that HUD
requires the Operator to be a single-asset entity. We understand that HUD will
waive this requirement in situations in which licensure or other issues make
utilizing a single-asset entity problematic.

Operator shall submit to HUD and Lender financial reports certified by an
authorized representative of the Operator on a quarterly and year-to-date basis.
These reports shall be submitted within thirty (30) days following the end of each
quarter and within sixty (60) days following the end of the fiscal year. If the
financial report demonstrates negative working capital, the Operator shall submit
to HUD and Lender a plan to restore positive working capital.
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Upon HUD’s request, Operator shall deliver within two (2) business days any
financial or operational reports, or other information relating to the performance
of the facility that HUD or Lender may deem relevant to risk assessment.
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
Based on the review of the financial information, and if it is determined that an
operating deficit exists, HUD may require the Operator to select and engage the
services of a management consultant.
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Operators shall implement and maintain a risk management program.
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Operators shall not charge any resident of the facility an admission fee, key fee,
finder’s fee, continuing care retirement community fee, life-care fee or similar fee
pursuant to any agreement to furnish residential units or services to persons
making such payments.
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HUD must approve any Management Agreement. New guidelines give HUD the
ability to terminate any Management Agreement within 30 days’ notice,
immediately under certain circumstances and require HUD’s approval for an
assignment or amendment of any Management Agreement.

Operators shall execute and deliver an Operator Security Agreement and the
applicable deposit account control agreements. If by any reason the Operator is
replaced, the new Operator must sign the Operator Security Agreement and
applicable deposit account control agreements.
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A/R financing must be approved by HUD and Lender in writing. In the event of a
conflict between the Healthcare Regulatory Agreement – Operator and the HUDapproved Intercreditor Agreement, the Intercreditor Agreement shall control.

Operators shall solicit, and retain copies of, written cost estimates when acquiring
goods and services whose cost exceeds 5% of the gross annual revenue.

Operators shall notify electronically HUD and Lender within two (2) business
days from receipt of any and all notices, reports, surveys or other correspondence
regarding a violation considered higher than a “G” level. The prior time-frame for
reporting the receipt of a notice of a violation was ten (10) days.

Commercial Leases have to be reviewed and approved by HUD prior to their
execution unless they are for support or ancillary services which are subordinate
to the Borrower’s Security Instrument and have terms of less than five (5) years.
In such instances, a copy of the lease should be submitted to HUD within thirty
(30) days after its effective date.
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Lessee-Operator Security Agreement
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Expanded to cover the Master Lease.
HUD has added as a required obligation under the Operator Security Agreement,
the performance and payment under the Cross Default Guaranty Agreement and
the Master Lease.
HUD expanded the carve-outs for Permitted Liens to include the rights of the
Borrower granted by the Operator in the Operating Lease/Agreement.
A cash flow chart should be attached that shows all relevant deposit accounts.
Clarifies Operator's ability to dispose of assets.
Affirmative restrictions on a Borrower changing "location," i.e. state of
incorporation, and its name.
Lender’s rights were expanded to allow for the collection of financial statements.
Affirmative requirements regarding DACA's and DAISA, including when they
are not required and provisions regarding HUD's DACA and DAISA
requirements, including making it a default if the DACA or DAISA is modified,
terminated or any deposit account is closed unless a replacement DACA/DAISA
is obtained.
Operator given a 30 day grace period to cure most defaults.
Operator must agree to cooperate with HUD when HUD forces a replacement of
the Operator.
Clarifies the provisions on when an Operator may pledge its accounts
receivables.
The Assignment of Lease and Rents have been pulled out of the body of the
agreement and must be incorporated in a separate document pursuant to the statespecific requirements governing the assignment of leases and rents.
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Addendum to Operating Lease
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Definition section expanded - Accounts Receivable, Approved Use, Bed
Authority, Con (Certificates of Need), and Program Obligations.
At the termination of the operating lease, Lessor (i.e. Borrower or Master Tenant)
has the right to purchase Lessee/Operator's personal property located at the
Healthcare Facility at book value.
HUD removed the provision on providing financial statements and allowing for
inspections. Instead it reads more appropriately as an obligation to cooperate with
providing such items to HUD or Lender.
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Requires Operator to be a "Special Purpose Entity" (as defined in the Program
Obligations).
Upon termination of operating lease, language has been added to effect a transfer
of all licenses, provider agreements, etc. from Lessee/Operator to Lessor.
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SNDA
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Final changes update the various defined terms to match those terms as used in
other loan documents, e.g. term Program Obligations revised to match the
definition used in the Healthcare Regulatory Agreement - Operator.
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Lease Estoppel Certificate
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There are no substantive differences. Terms “Owner/Landlord” and “Tenant”
changed to Borrower and Operator, respectively.
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Master Lease Documents
Master Tenant Healthcare Regulatory Agreement
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Master Tenant may maintain a general collection account for the Operator and
affiliated Operators, provided deposits to such general collection account can be
traced to the applicable facility that generated such deposit.
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Master Tenant shall implement and maintain a risk management program.
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HUD must approve any Management Agreement. HUD has the ability to
terminate any Management Agreement within 30 days’ notice upon finding a
violation of any of the Regulatory Agreements.
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Master Tenant shall submit to HUD and Lender financial reports certified by an
authorized representative of the Master Tenant on a quarterly and year-to-date
basis. These reports shall be submitted within thirty (30) days following the end
of each quarter and within sixty (60) days following the end of the fiscal year.

Master Tenant shall not charge any resident of the facility an admission fee, key
fee, finder’s fee, continuing care retirement community fee, life-care fee or
similar fee pursuant to any agreement to furnish residential units or services to
persons making such payments.
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A/R financing must be approved by HUD and Lender in writing.
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Master Lease Addendum
A comparison between the new Master Lease Addendum (“New Addendum”)
and the draft Master Lease Addendum (“Old Addendum”) showed a number of
differences, though for the most part the documents were equivalent. The New
Addendum is more streamlined than before. It accomplishes the key HUD requirements
from the Old Addendum of having a single, indivisible lease, providing for a subtenant
guaranty as well as others. HUD has removed the following provisions from the Old
Addendum, and transferred them to the new Regulatory Agreements.
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Accounts receivable pledge prohibition
Risk management program requirement
DACA requirement
Management agreement prohibition
SPE requirement
FF&E owner by Borrowers
When comparing the New Addendum to the HUD Compliant and/or Suggested
Master Lease Provisions template, we notice a couple of changes. There are no
provisions for HUD mandated repairs and reserves nor provisions to grant the Landlord a
security interest. The latter is due to a specific requirement that Master Tenant and
Operator Security Agreements be executed for closing.
Clean
© 2013 Krooth & Altman LLP
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Blackline
SNDA
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HUD incorporates the concept of a "Project Operating Deficiency" and imposes
upon the Operator several obligations for instances where there is a Project
Operating Deficiency, e.g. give written notice to HUD when it occurs, Lender
may require Operator to hire a consultant to help remedy the Project Operating
Deficiency, Operator must implement all reasonable Consultant
recommendations.
Clarified provisions for Master Tenant and Operator or Lender the ability to cure
a borrower default under the respective documents.
Provided clear guidance on releasing a project from the Master Lease.
Clean
Subtenant Cross-Default Guaranty
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HUD and Lender consent will be required for any amendment to Guaranty
agreement.
Choice of law is now the choice of law for the State used in the Master Lease
Clean
Master Tenant Estoppel Certificate
Previously there was no Estoppel Certificate form specific to the LEAN Master Lease
Documents. The “new” Master Tenant Estoppel Certificate, Section 232, effectively
replaces the “old” Estoppel Certificate document.
Changes in terminology include revisions to convert this to a Master Lease document:
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“Owner/Landlord” becomes “Borrower”
“Tenant” is now “Master Tenant”
“Lease” is now “Master Lease”
There were no substantive changes.
The following certification was added in the new Master Tenant Estoppel Certificate at
the end of the document:
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Master Tenant and Borrower hereby certify that the statements and
representations contained in this instrument and all supporting
documentation thereto are true, accurate, and complete and that each
signatory has read and understands the terms of this instrument. This
instrument has been made, presented, and delivered for the purpose of
influencing an official action of HUD in insuring the Loan, and may be
relied upon by HUD as a true statement of the facts contained therein.
Clean
AR Documents
AR Financing Certification
The new AR Financing Certification adds two (2) new sections. First, the AR
borrower certifies that receivables from government sources have not been comingled
with receivables from other sources. Second, the AR borrower certifies that the AR
collateral does not secure any obligations to AR Lender relating to non-HUD insured
projects.
Clean
Intercreditor Agreement
The new Agreement is improved in some aspects, but takes a few steps back in
others. It is uncertain how these will impact AR Lenders’ ability and willingness to
provide AR financing to HUD-insured projects. The major improvements lie in the
incorporation of the Intercreditor Rider into the Intercreditor Agreement itself. That
streamlines the drafting process. Moreover, HUD has allowed incredible flexibility to the
original Section 4 of the Rider, which is now Section 3.4 in the new Intercreditor
Agreement. Prior practice was that HUD allowed a great deal of flexibility in structuring
a Project’s operating cash flow when incorporating AR financing. HUD has continued
this with the new Section 3.4.
The new Intercreditor Agreement adds a new “Cut-Off Time” concept to govern
when and what the AR Lender may recover. First and foremost, though, HUD has
redefined which obligations the AR Lender may recover on. Previously, an AR Lender
could recover on all obligations as defined in the AR Loan Agreement. The new
Intercreditor Agreement now defines AR Loan Obligations, which could be more limited
than in the AR Loan Agreement and limits recovery to the newly defined AR Loan
Obligations. The full definition may be found in Section 1.7 of the new Intercreditor
Agreement. Moreover, HUD has defined a new term Priority Obligations, which is more
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limited than AR Loan Obligations, and is key for the Intercreditor Agreement’s new CutOff Time concept. See Section 1.23 of the new Intercreditor Agreement.
As a further limitation, Cut-Off Time provides that AR Lender may not recover
under the full AR Loan Obligations after a certain defined time, which is effectively
thirty (30) days after notice of a HUD Loan default or thirty (30) days after a default
under the AR loan. See Sections 1.9 and 1.26 of the new Intercreditor Agreement. This
may prove problematic for AR Lenders depending on what a default is under the AR
Loan. It is possible some immaterial defaults may result in the AR Lender stopping
advancing funds to a Project from fear of losing priority after the thirty (30) day Cut-Off
Time window. Projects may be significantly impacted.
The priority of AR Lender is diminished as a result of Cut-Off Time. After the
Cut-Off Time, the AR Lender would immediately lose priority over part of its
obligations, and may only recover the newly defined Priority Obligations. Any receipts
following the Cut-Off Time are to be held in trust by AR Lender for the benefit of the
FHA Lender, even if other non-Priority Obligations are outstanding. Once the Cut-Off
Time is triggered by an event such as default under the HUD documents, AR Lender can
cease to make any advances under the AR Loan. However, AR Lender may make
“Protective Advances”. This term is somewhat vaguely defined in Section 1.25 of the
new Intercreditor Agreement.
Section 4.14 of the new Intercreditor Agreement also imposes a number of
onerous new requirements. Previously, both the AR Lender and FHA Lender had their
own set of documents that were crafted specifically for the financing being provided.
UCC Financing Statements were filed by each with the respective collateral description.
Both could then rely on the Intercreditor Agreement to govern their respective priority
rights. Unfortunately, the new Intercreditor Agreement requires the AR Lender and
Operators to “immediately effectuate amendments to the AR Loan Documents as and to
the extent necessary to conform the AR Loan Documents to this Agreement”. Moreover,
AR Lender and the Operators authorize the FHA Lender to file amendments to the AR
Lender’s UCC Financing Statements to change the collateral description to reflect the
new Intercreditor Agreement terms. Apparently HUD has determined they cannot rely
solely on the Intercreditor Agreement to govern each lender’s respective rights. We don’t
expect AR Lenders to be happy about this provision. And FHA Lenders now need to
review AR Loan Agreements more in depth to ensure they are consistent with new
Intercreditor Agreement form, despite the fact the AR Lender is also a party to and
executes the new Intercreditor Agreement. This will very likely add time and cost to the
review process.
Other changes of note:
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The AR Lender Priority Collateral has been reduced substantially. See Section 1.6
in the new Intercreditor Agreement. For instance, the term Accounts has been
defined in a more limited way. It does not include insurance proceeds,
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commercial tort claims, or accounts arising from the sale of Operator’s
equipment, inventory or other goods. See Section 1.1.
The new Intercreditor Agreement adds a requirement for AR Lender to be the
FHA Lender’s bailee for collateral perfection purposes, if necessary. See Section
2.5(d).
There is a new broad prohibition against amending AR Loan Documents that was
not in the prior Intercreditor Agreement form. See the new Section 2.7.
AR Lender loses its right to exercise control over deposit accounts under a control
agreement after its Priority Obligations are satisfied. At such time, the FHA
Lender or HUD may require the cancellation of existing control agreements
among other remedies. Similarly, after the Cut-Off Time, the FHA Lender or
HUD may require the establishment of new accounts with new control
agreements. Section 2.9(b).
The prior Intercreditor Agreement Rider allowed cross-default with non-HUD
line of credit. HUD has removed this allowance entirely. Current HUD policy has
been to not allow this.
The Committee on Healthcare Financing is working with various industry
stakeholders to address the concerns raised in connection with the new Intercreditor
Agreement and as briefly summarized below.
Clean
Opinions
Borrower’s Counsel Opinion
There have been substantive changes to the Borrower’s Counsel Opinion. The
substantive changes include the deletion of a few key opinions previously required by
Borrower’s counsel and addition of a few new opinions and certifications. Below are the
changes as outlined. However, we would like to point out a few key changes:
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Opinion can now be executed by multiple attorney signatories.
Counsel no longer has to opine that Borrower has the necessary license,
governmental certificates. Instead, they must describe the permits and approvals
necessary to operate the project and state that they have been reviewed.
The Opinion on perfection of security interest by filing of the UCCs (paragraph
13 on the old opinion) has been deleted. The accompanying assumption/qualifier
page 7 of the old opinion for paragraph 13 is also deleted.
The new opinion requires the Counsel’s affirmative statement based upon the
Certification of Borrower and to the best of the Counsel’s knowledge there are no
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side deals (transaction outside the parameters of the Documents that amend or are
inconsistent with the terms of the HUD Documents between Borrower and any
party to the transaction other than what is disclosed in the HUD documents.
The usury opinion is now deleted.
In a case of a refinancing, Counsel can refer to a date down endorsement instead
of a new title policy.
Counsel is required to provide an affirmative statement that there has been no
deviation to the HUD form and if there are any changes, they have been approved
by HUD counsel.
Below please find all the opinion changes in more detail:
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Term Changes: Mortgagor to Borrower, Mortgagee to Lender. Project is now
Healthcare Facility
Additional reference to the Section 232 of National Housing Act for paragraph on
HUD insurance.
List of Documents Reviewed updated to include the following:
Updated reference to the new LEAN loan document names
Under Title Insurance (item S) HUD allows Counsel to reference a Date Down
Endorsement for refinancing deals.
Under Survey (item X) additional reference to a Borrower’s Certification for
existing Surveys.
Paragraph I deleted (affirmative statement that Mortgagor has title to real
property)
Qualifier for Paragraph 13 deleted (Assumption that Personalty is located at
Property and Mortgagor’s Chief Executive Office).
Deletion under Paragraph 2. Counsel no longer has to opine that Borrower has the
necessary license, governmental certificates. Instead, they must describe the
permits and approvals to operate the project. They just need to reference the
documents the reviewed the documents and describe the documents.
We now have a stand-alone paragraph opining to execution, delivery and
performance, regardless if the HUD forms have not been modified.
Zoning Opinion - Allows for the following alternatives:
o If there is no zoning endorsement to the title policy, then attach the Zoning
Certificate and state the property is a permitted use based on the Zoning
Ordinance.
o If there is an use exception to the zoning ordinance, you rely on the
Zoning Certificate to state that it is a permitted use.
The opinion on perfecting security interests by UCC filings (paragraph 13) is
deleted.
Usury Opinion deleted
UCC filing assumption/qualifier on page 12 is deleted.
Expansion and Clarification on the conflict of interest paragraph. Counsel can be
a direct or indirect owner of interest in public companies.
Deletion of Flood Insurance opinion.
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Affirmative statement based upon the Certification of Borrower and to the best of
the Counsel’s knowledge there are no side deals (transaction outside the
parameters of the Documents that amend or are inconsistent with the terms of the
HUD Documents between Borrower and any party to the transaction other than
what is disclosed in the HUD documents.
Allows for multiple signatories for the Opinion.
Affirmative statement that the Opinion does not deviate from the HUD Form
opinion, except for changes specifically approved by HUD counsel.
The Borrower’s Certification also contained a number of changes as highlighted
below.
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Certification regarding no side deals.
Certification that there are no liens or encumbrances against the Property not
reflected in the title work.
Certification there are no notices, actions or initiatives of which the Borrower
is aware, by any governmental, regulatory or funding provider entity, that
place either the operation of the facility for its intended purpose or the funding
of such operations at significant risk.
Borrower must provide the following certification “statements and
representations contained in this instrument and all supporting documentation
thereto are true, accurate, and complete. This instrument has been made,
presented, and delivered for the purpose of influencing an official action of
HUD in insuring the Loan, and may be relied upon by HUD as a true statement
of the facts contained therein.”
Clean
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Operator’s Counsel Opinion
There have been substantive changes to the Operator’s Counsel Opinion. The
substantive changes include the deletion of a few key opinions previously required by
Operator’s counsel and addition of a few new opinions and certifications. Below are the
changes as outlined:
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Term Changes- Lessee to Operator, Mortgagee to Lender, Mortgagor to
Borrower
Definition of Project is now Healthcare Facility
Reference to the Section 232 of National Housing Act for paragraph on HUD
insurance.
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Deletion of Paragraph 4 (opine that all necessary authorization consents, permit
have been obtained). Instead the Counsel needs to attach the list of Certificates,
permits, licenses, qualifications and approvals as Exhibit E, see paragraph 2.
Paragraph 9 and 10 (UCC financing statement in proper form, perfection) deleted.
Paragraph 12 deleted regarding events of default under AR documents.
Allows for multiple signatories for the Opinion.
Certification of Operator:
o Additional certification that the AR documents are not subject to a
security interest other than the AR loan.
o Additional Certification: “Each signatory below hereby certifies that the
statements and representations contained in this instrument and all
supporting documentation thereto are true, accurate, and complete. This
instrument has been made, presented, and delivered for the purpose of
influencing an official action of HUD in insuring the Loan, and may be
relied upon by HUD as a true statement of the facts contained therein.”
Clean
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Master Tenant’s Counsel Opinion
Prior to the New Lean Documents there was no form Master Tenant Opinion. It
was typically included in the Operator’s Opinion. The form is substantively very similar
to the new Operator Opinion with the following additions or deletions:
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Addition of Paragraph 8-Master Tenant Security Agreement authorizes lender
to file financing statements (this is deleted from the Borrower and Operator’s
opinions)
Addition of Paragraph 9- Opinion on UCC perfection. This is a bit strange, as
they deleted the UCC perfection paragraph from the Borrower and Operator
opinions.
Deletion in the Master Tenant Certification of the additional certification
regarding statements and representations (see item h (ii) above)).
Clean
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© 2013 Krooth & Altman LLP
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Escrows
Escrow Agreement Non-Critical Deferred Repairs
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The new document appears to be more organized and thorough.
The new document is much more similar to the multifamily counterpart.
No new or revised healthcare specific provisions that should be noted
Nothing in the new document appeared to add to a loan’s servicing requirements
Clean
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Escrow Agreement for Operating Deficits
The new document is much more similar to the Multifamily counterpart but with the
following differences:
o Attaches a letter of credit for informational purposes
o Notes that closing costs are not eligible operating expenses
o Removes the Break Even Occupancy provisions
o Alters the debt service coverage provision in #4
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Working Capital Escrow
Below you will find the substantive and non-substantive changes of the new Working
Capital Escrow to the Multifamily form.
Substantive changes:
 HUD is no longer a party to the agreement.
 A notation that HUD assumes no responsibility for reviewing the letter of credit
for sufficiency or enforceability has been added to Section 2.
 Provisions regarding the release of any unused balance in the escrow is based on
debt service ratio in lieu of break-even occupancy. The provision outlines that
debt service coverage shall be determined based on the operating results of the
Project, rather than the operating results of the borrower, master tenant or
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operator; therefore, the Operator Lease, Master Lease or Sublease cannot be a
factor in determining debt service ratio.
Non-substantive changes:
 Page 1: Title of the agreement includes the Section of the NHA and references the
Office of Housing Residential Care Facilities.
 Warning Language now located on page 1.
 Page 1: The word “HUD” has been replaced with “FHA” in the Project No.
reference.
 Paragraph 1: The term “Secretary” was replaced with “HUD” as used throughout
the agreement.
Clean
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Latent Defects Escrow
The new LEAN document is almost entirely the same as the MF form, except it
explicitly states that the Lender may extend the completion date with HUD approval.
Clean
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Minor Moveables Escrow
The language in the new document is different, but it is functionally the same form that
accomplishes the same objective with the same requirements.
Clean
Construction Documents
Building Loan Agreement
The new healthcare form is substantively identical to the current housing form.
© 2013 Krooth & Altman LLP
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Clean
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Building Loan Agreement - Supplemental
This is a new LEAN document and has no multifamily counterpart. It sets forth
additional provisions to be added to the BLA when the borrower acts as its own general
contractor. This new form stipulates that the borrower/contractor will:
a. Execute all agreements/certifications required by HUD
b. Commence construction within X days
c. Incorporate into subcontracts and conspicuously post wage determination at
site; incorporate supplemental conditions into subcontracts
d. Authorize HUD/lender inspections
e. Require all tiers of subcontractors subscribe to same provisions re: work
performance
f. Disclose identity of parties providing supplies upon request
g. Comply with all applicable requirement (including re notices)
h. Immediately notify lender of delivery of permits, licenses, C of O’s, etc.
i. Allow HUD/Lender to inspect work, materials, fixtures etc. and “furnish an
enclosed working space” as to location/size/accommodations/furnishings
j. Correct defects within in 12 months of completion date which is the date the
HUD rep signs a final Trip report that is subsequently endorsed by the
Construction Manager
Clean
Construction Contract
There was no LEAN form of Construction Contract prior to the issuance of this new
document. The 232 Construction Contract is substantively similar to the Multifamily
Construction Contract. The two documents differ in the following ways: (also see
blackline)
a. Article 2 (Identification of Contract Documents), paragraph A of the
LEAN form of Contract does not reference the document naming
identities of interest between Owner, Contractor, Subcontractors, and
Architect, as is referenced in the Multifamily form of Contract. Instead,
the LEAN form inserts an “Article 14: Identities of Interest” section to
© 2013 Krooth & Altman LLP
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allow for the disclosure of any identities of interest to be made in the
Contract itself as opposed to using a separate document.
b. Article 3 (Time), paragraph B of the LEAN form of Contract does
reference or define the terms “Project Substantial Completion” or
“Substantial Completion” as are referenced and defined in the Multifamily
form. Instead, paragraph B of the LEAN form references/defines the term
“Date of Final Completion”.
c. Article 3, paragraph D of the LEAN form states that “Contractor shall
correct any defects due to faulty materials or workmanship which appear
within twelve (12) months from Date of Final Completion” as opposed to
Project Substantial Completion, as is seen in the Multifamily form.
d. On the LEAN form of Contract, Option 1 - Article 4 (Contract Sum -Cost Plus Contract) and Option 2 – Article 4 (Contract Sum -- Lump Sum
Contract) both include a provision applicable in the event HUD approves
in writing the early commencement of Work to be performed prior to
issuance of a firm commitment by HUD, and a provision applicable in the
event HUD approves in writing the early start of Work to be performed
after issuance of the Firm Commitment by HUD and prior to initial
endorsement of the Note by HUD. These provisions are not present in
Article 4 of the Multifamily form of Contract. Article 5 (Requisition and
Payment Procedures) also includes a provision applicable in the event
HUD approves Early Commencement Work or Early Start Work. This
provision is also not found in the Multifamily form.
Clean
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Supplementary Conditions of the Contract for
Construction
There was no LEAN form of Construction Contract prior to the issuance of this new
document. This document has no substantive changes from its Multifamily counterpart
(see blackline).
© 2013 Krooth & Altman LLP
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Design Professional’s Certification of Liability Insurance
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The new document includes additional certification language at the end.
The new document includes minor changes to title company and ACORD
references
No new or revised healthcare specific provisions that should be noted
Nothing in the new document appeared to add to a loan’s servicing requirements
Clean
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Payment Bond
The new healthcare form is substantively identical to the current housing form.
Clean
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Performance Bond
The new healthcare form is substantively identical to the current housing form.
Clean
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© 2013 Krooth & Altman LLP
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Completion Assurance Agreement
There was no LEAN form of Completion Assurance Agreement prior to the
issuance of this new document. The 232 Completion Assurance Agreement is
substantively very similar to the Multifamily form of Completion Assurance. There are a
few minor differences, including the following: (also see blackline)
a. In enumerated paragraph 2 of the Agreement, the LEAN form states that
the “Contractor shall complete the construction, free of all liens, on or
before the Project Final Completion Deadline” (as defined in the
Construction Contract), whereas the Multifamily form cites the Project
Substantial Completion Deadline.
b. In the same paragraph, the LEAN form does not include the following
language found in the Multifamily form: “The time frame for Latent
Defects shall be extended twelve (12) months from the Date of Final
Completion for the completion of work first performed after Project
Substantial Completion or portions of the work not specifically included in
a Certificate of Substantial Completion”; and “The Latent Defects time
frame for all work performed after the Date of Final Completion shall be
extended twelve (12) months from the date any such work is completed.”
c. In enumerated paragraph 3(f) of the Agreement, the LEAN form states
that any remaining balance in the Latent Defects Deposit shall be returned
to the Contractor/Depositing Party 15 months after the Date of Final
Completion, whereas the Multifamily form states it shall be returned 15
months after Project Substantial Completion or after the Date of Final
Completion for the completion of any work performed after Project
Substantial Completion.
Clean
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Off-Site Bond – Dual Obligee
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There are requirements in the January 23, 2009 LEAN Legal Punchlist for OffSite Contracts, however no mention of a form of Off-Site Bond – Dual Obligee.
So, this appears to be the first LEAN version of this document.
© 2013 Krooth & Altman LLP
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There are very few differences between the multifamily version of the Off-Site
Bond – Dual Obligee and the LEAN version of the Off-Site Bond – Dual Obligee,
with regard to the public burden reporting and warning language at the top of
page one; however, the two forms are substantively the same.
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Memo Requesting Post-Commitment Early Start of
Construction
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The LEAN website has a section containing documents for “Construction Start
Prior to Commitment” and a section for “Construction Start Prior to Closing but
after Commitment,” however this section is noted as being “(Under
Construction).”
The “Construction Start Prior to Commitment” section contains a form of Memo
Requesting Early Start of Construction, which is slightly less detailed than the
new form of Memo Requesting Post-Commitment Early Start of Construction.
The sections at the top of page 1 regarding public reporting and warning are
different (this language is not included in the form of Memo Requesting Early
Commencement of Construction). The form of Memo Requesting Early
Commencement of Construction also does not contain the Construction Type and
Facility Type sections reflected in the Memo Requesting Post-Commitment Early
Start of Construction.
There is not a form of Memo Requesting Post-Commitment Early Start of
Construction on the multifamily side.
Clean
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© 2013 Krooth & Altman LLP
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Request for Permission to Commence Construction Prior to
Initial Endorsement for Mortgage Insurance
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The “Construction Start Prior to Commitment” section on the LEAN website
contains a form of Request for Permission to Commence Construction Prior to
Initial Endorsement for Mortgage Insurance, which differs from the new form of
Request for Permission to Commence Construction Prior to Initial Endorsement
for Mortgage Insurance. The “old” form is based on the multifamily form and has
a rider which changes the language in the form. There are strikethroughs on the
“old” LEAN form which refer to the rider for different language. The new form
incorporates much of that language in the rider so that the new form stands alone
as its own LEAN form.
There is a form of Request for Permission to Commence Construction Prior to
Initial Endorsement for Mortgage Insurance on the multifamily side. The sections
at the top of page 1 regarding public reporting, privacy act notice and warning are
different. The substance of the terms and conditions are also quite different in the
body of the document.
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Other Documents
Borrower’s Certification – Completion of Critical
Repairs
The LEAN form of Owner’s Certification – Completion of Critical Repairs used
in LEAN transactions prior to April 9, 2013 and the new LEAN form are the same, save
for using the term “Borrower” in the new form in the place of “Owner” and the insertion
of a borrower’s certification, inclusive of the certification language set forth in 24 CFR
200.62, just before the signature block, in the new form. Finally, the Warning language
that had been included after the signature block on the prior LEAN form is not included
in the new form.
© 2013 Krooth & Altman LLP
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Management Certification
The “new” LEAN document Management Certification – Residential Care Facility,
Section 232 replaces the “old” LEAN document Management Agent Certifications for
Section 232/223(f) (the latter having neither a HUD form number nor a version or
expiration date on the document, it is located on the HUD website under Lender Tools for
Firm Application for Section 232, prefaced by “7-7” and followed by “4.25.10”).
The new LEAN document substitutes or eliminates the three standard certifications that
were embedded in the former document, and the style changes to a more integrated
approach in plainer English. There is also more specificity to various aspects of the
management agreement and the agent’s role, obligations and understandings in managing
a HUD-insured project.
The following two certifications were eliminated: Byrd Amendment (former Part III) and
the Equal Employment Opportunity (former Part VI). The Equal Employment
Opportunity certification, an excerpt from the regulations of the Secretary of Labor at 41
CFR § 60-1.4(b), was lengthy and, combined with the deletion of the Byrd Amendment,
accounts for some two pages of text that were eliminated.
And while the following certification was not eliminated per se, it no longer appears as a
separately labeled standalone section: Fair Housing; Title VI of the Civil Rights Act of
1964 Section (former Part VII). The substantive Title VI language is now found toward
the end of the new LEAN document in Section J with certification to comply with the act
and its requirements in Sub-Sections 1 and 4.
The following familiar HUD disclosure was retained:

Identifies of Interest (form Part V)
While the management agent is still required to disclose any identifies of interest, the
format of the certification changed from a line-by-line check box for each potential
participant to a “none” or “tell all” format in Section K for which the agent is encouraged
to attach additional sheets of paper as necessary.
In addition, HUD has focused on certain potential concerns behind identify-of-interest
relationships, including the following new provision in Section F(3) providing for
transparency in the procurement process for goods and services:
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The following clause will be included in any contract entered into with an
identity-of-interest individual or business for the provision of goods or services to
the Project: “Upon request of HUD or (name of Borrower, Operator or Agent),
(name of contractor or supplier) will make available to HUD, at a reasonable time
and place, its records and records of identity-of-interest companies which relate to
goods and services acquired for the Project. Records and information will be
sufficient to permit HUD to determine the services performed, the dates the
services were performed, the location at which the services were performed, the
time consumed in providing the services, the charges made for materials, and the
per-unit and total charges levied for said services.” The Agent agrees to request
such records within five (5) business days of receipt of HUD’s request to do so.
Additional procurement related provisions are found in Sections D(5), D(6) and F(2) of
the new LEAN document.
While the new LEAN document differs somewhat from its multifamily counterpart,
Project Owner’s/Management Agent’s Certification (HUD-9839-B) (06/2003), it is
modeled after its MAP counterpart, rather than to the prior Section 232 certification.
For example, the above-quoted procurement Section F(3) in the new LEAN document is
taken directly from Section 7(c) the subject MAP certification.
And as with its MAP counterpart, in addition to requiring the agent to put certain HUDrequired provisions in the Management Agreement including events that could trigger its
termination, both certifications have the agent agree in the certifications themselves “to
be bound by them” – see Section 9 in the MAP certification and Section H in the new
LEAN certification. While the former LEAN certification contains HUD-required
provisions for the Management Agreement in Part X, it does not have the language “to be
bound by them” for the agent to agree to in the certification itself.
In addition, in Section C of the new LEAN document, the agent certifies that it
“understands that, pursuant to Program Obligations, HUD has the right to require the
termination of the Management Agreement upon certain defaults of certain loan
documents relating to the Project” and that the Management Agreement “is consistent
with this right.”
There are a number of new healthcare specific provisions. In particular, as we are
accustomed to checking management agreements for HUD requirements that prohibit
indemnification of the agent, it is noted that in Section F(9) of the new LEAN document
that the management agent is asked to certify that, “Indemnity, subrogation, or hold
harmless agreements shall have no effect and will not be allowed except with the specific
approval of HUD.”
From a legal perspective, it should be noted in the new LEAN document that the agent
agrees to agency law, where it states in Section F(10) that, “The Agreement creates a
principal/agent relationship between the Agent and the Borrower or Operator.”
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This new document does not directly add servicing requirements, but it is noted in
Section I of the new LEAN document, Agent and Borrower/Operator explicitly agree to
provide HUD with another Management Certification, Form HUD-9839-ORF, under the
following circumstances (quoted text from the new LEAN document) and prior to the
actions taking effect:
1. The expiration date of the Agreement is altered;
2. The Agreement is renewed;
3. Any new management agent is permitted to manage or operate the Healthcare Facility;
4. Any new management agent is permitted to collect a fee; or
5. Borrower and/or Operate [sic] undertake self-management of the Healthcare Facility.
NOTE: There is a typographical error in Section I, at Sub-Section 5, in the above quoted list
where “Operate” should read “Operator”.
Likewise, in Section L, “material amendments” to the Management Agreement require
HUD’s prior written approval, and in Section M, the “Agent certifies and agrees to
submit updated information to HUD about the Agent whenever there is a significant
change in the organization or operations of the Agent.”
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Subordination Agreement - Financing
The new LEAN document is almost entirely the same as the MF form, except for
a few defined terms and the order of paragraphs, except for two points: (1) the definition
of “Business Day” is changed to also exclude state banking days in the project state; and
(2) a clause was added so that Subordinate Lender agrees to release its lean on the project
in the event the Mortgagee or HUD acquires the project pursuant to a deed in lieu of
foreclosure.
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Surplus Cash Note
The form of surplus cash note used in LEAN transactions prior to April 9, 2013
was the old multifamily form of Promissory Note (HUD-92223). The 232 form of
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Surplus Cash Note is basically identical to the multifamily counterpart, with the
exception of the signature page. The Maker must execute the Note; followed by the
signature of both the Maker and the Payee underneath a certification regarding their
understanding of the terms and conditions of the Note itself, in particular regarding
unauthorized prepayment from project funds. There is an additional certification
paragraph just before the signature of the Maker and Payee that contains the certification
language set forth in 24 CFR 200.62. I note that a similar certification regarding
unauthorized prepayment, signed by both Maker and Payee, is included in the current
multifamily form of Residual Receipts Note (Nonprofit Borrowers).
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Residual Receipts Note
The form of residual receipts note for nonprofit borrowers used in LEAN
transactions prior to April 9, 2013 was the old multifamily form of Residual Receipts
Note (Nonprofit Mortgagors) (FHA Form No. 1710). The 232 form of Residual Receipts
Note (Nonprofit Borrowers) is basically identical to the multifamily counterpart, with the
exception of the inclusion of an added certification, which contains the certification
language set forth in 24 CFR 200.62, just before the signatures of the Maker and Payee
regarding their understanding of the terms and conditions of the Note, in particular
regarding unauthorized prepayment from project funds.
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