Insight Center: Publications

Summary of HUD's LEAN 232 Program E-mail Blast: Office of Residential Care Facilities (ORCF), June 27, 2012

LEAN Update

Authors: Christine Waldmann Carmody and Blair L. Schiff


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

New LEAN Document Comments

The comment period on the new LEAN regulations and documents ended on July 2. Pepper Hamilton’s comments on the new LEAN documents are available at http://www.pepperlaw.com/pdfs/LEANUpdate_070612_NewLEANDocumentComments.PDF.

Change in HUD Application Fee Adjustment Process

When there is an increase to the mortgage amount, the HUD Application Fee will need to be adjusted (increased) to reflect the new loan amount. The process for submitting a check for the difference has changed. The check for the difference must now be mailed to Mike Lawassani, with a copy of the check forwarded to the Closing Coordinator. Confirmation from Mike Lawassani that he has received the check must occur at least one day prior to closing. If HUD does not receive this confirmation by the day prior to closing, HUD will reschedule the closing date.

Mike Lawassani’s mailing information:

Office of Healthcare Programs (OHP)
U.S. Department of HUD - San Francisco Field Office
600 Harrison Street, 3rd Floor
San Francisco, CA 94107

Clarified Requirements for Operators and Management Agents

ORCF has released a new document that sets forth the requirements for operators and management agents, to ensure that valid security and regulatory interests are being protected, regardless of an entity’s title.

232/223(a)(7), 232/232(f) and New Construction Closing Legal Punchlists and Checklists Revised Again

Effective August 1, 2012, the 232/223(a)(7), 232/223(f) and 232 new construction legal closing Punchlists and Checklists are being revised again. The legal Punchlists have been revised to remove obsolete or inaccurate language, indicate when redline copies of documents should be provided, suggest that field counsel facilitate discussion of legal comments by directly contacting the lender’s counsel, and clarify the required searches.

The 232/223(a)(7) Punchlist can be found online.
The 232/223(a)(7) Legal Checklist can be found online.
The 232/223(f) Punchlist can be found online.
The 232/223(f) Legal Checklist can be found online.

The new 232 New Construction Final Closing Legal Punchlist will be used by OGC when reviewing the draft final closing submission and the new 232 New Construction Final Closing Legal Checklist outlines all requirements for the draft final closing submission.

New 232 New Construction Final Closing Consolidated Certification

In order to reduce the number of final closing documents, ORCF is accepting this 232 New Construction Final Closing Consolidated Certification as an alternative to resubmitting documents from the initial closing. When using this optional approach, the expectation is that the identified parties will certify to HUD that various critical documents (leases, management agreements, account receivable documents, etc.) have not been revoked, amended, modified or changed, as of the date of final closing. To the extent that the identified documents have changed since initial closing, they must be submitted for HUD review and approval as part of the draft final closing submission.

Select Field Offices Are Accepting One Set of Closing Documents with an Electronic Copy

HUD counsel have been given the choice by ORCF to eliminate the need for multiple sets of closing documents when lender’s counsel has committed to providing HUD, within two weeks but no later than 30 days from closing a closing CD. Those offices that have elected to participate in the pilot program are the Atlanta Regional Office, Baltimore Field Office, and the New York Regional Office. Lender’s counsel are encouraged to ask the HUD closing attorney if they are willing to follow this process, which is completely discretionary. The LEAN Blast sets forth the exact procedure that must be followed for the electronic document process.

Lenders Must Mitigate Special Income Sources in Appraisal and Underwriting

The Section 232 Loan Committee has recently encountered applications where previously undisclosed Medicaid Upper Payment Limit (UPL) revenues have materially impacted the income approach to valuation used to determine the maximum loan amount. In most cases, this relatively new special income source emanated from a new operator arrangement with a governmental entity, thereby allowing the UPL revenue stream to be created. Therefore, Lenders are reminded that all special income sources must be appropriately addressed in advance. Lenders are particularly reminded to disclose the unusual income stream in the Narrative and appropriate charts (financial statements, sources and uses, etc.) and to mitigate against the potential loss of the income stream.

The underwriter must evaluate the risk and stability of the unusual income source and include specific, appropriate, and clearly defined mitigation, such as modified capitalization rates or long-term debt service reserve escrow accounts. The third-party appraiser should also determine the appropriateness of including such income when establishing the market value of the property using the income approach.

ORCF also reminded underwriters that sound appraisal principles require that the appraised market value of a property be established without regard to the identity of the current owner and operator. Examples of special revenue sources that are not included in the calculation of income for determining market value include fundraising, endowments, grants, and investment income. Depending on the circumstances, Upper Payment Limit revenue may need to be excluded as well.

223(a)(7) Green Lane Now Incorporates 232(i) Fire Safety Equipment Transactions

The criteria for the 223(a)(7) “Green Lane” is being revised to acknowledge that ORCF is receiving 223(a)(7) applications simultaneously with 232(i) Fire Safety Equipment Loan Program applications. Effective immediately, so long as all other requirements are met, 223(a)(7) applications submitted with an accompanying 232(i) application qualify for the 223(a)(7) “Green Lane.”

Information Required for Waivers of 24 CFR 232.3 (Bathroom Waivers)

Since ORCF highlighted the bathroom waiver in the April 30, 2012 LEAN Blast, more requests are being submitted. Therefore, the individual at HUD who processes the requests, Vance Morris (at Vance.T.Morris@hud.gov) reminds Lenders that the following information must be included in the waiver request:

  1. Project name
  2. Project address
  3. Copy of license
  4. Sketch of floor plan showing residents’ sleeping, bathing and toileting facilities
  5. Number of residents
  6. Number of full bathrooms
  7. Number of half bathrooms
  8. Number of shower rooms or bathing areas (excluding those in full bathrooms)
  9. Full explanation on why the loan applicant cannot meet the requirements of 24 CFR 232.3 for number of bathrooms and/or private access to bathrooms.

Underwriter Approval Based on Past Five Years of Experience

The March 30, 2012 E-mail Blast contained comprehensive guidance on the criteria for Lender and Underwriter Approval under 232/Lean. ORCF would like to clarify that underwriters are not required to have five years of experience underwriting residential healthcare facilities but are instead required to demonstrate their experience during the past five years. Therefore, effective immediately, the instructions for Exhibit A are amended to read: “Resume for healthcare underwriter which supports experience in underwriting residential healthcare facilities within the previous five years.”

A New Government Technical Monitor Assigned to Savage & Associates

The Government Technical Monitors (GTMs) for Regions I – IV who support the legal services closing contractor—Savage & Associates—have changed. Tina Strong, attorney advisor in the Atlanta Regional Office, has replaced Chali Roche-Garcia, Koren McKenzie John, and Jud McNatt effective immediately. This change does not affect the GTMs assigned to other regions.

232 E-mail Blasts Moving to HUD Listserv

Starting with the July LEAN Blast, the LEAN Blast will be distributed through the HUD Listserv, allowing people to subscribe and unsubscribe themselves directly through the HUD Web site. Due to listserv limitations files will no longer be attached to future LEAN Blasts but instead will be embedded in the e-mails with direct links to the online file.

Christine Waldmann Carmody and Blair L. Schiff

The material in this publication is based on laws, court decisions, administrative rulings and congressional materials, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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