8. Is there a legal closing punchlist for 241 loans? (5/2/14)
10. Is there a legal closing punchlist for 241 loans? (5/7/14)
1. Why are we requiring a separate Operator Security Agreement and Operator Regulatory Agreement (and Operator’s Attorney’s Opinion) on an owner operated project?
HUD requires a Borrower and an Operator Regulatory Agreement when a borrower is also the operator of the project because each document imposes different legal obligations on the entities. Similarly, the Borrower Security Instrument and the Operator Security Agreement contain separate requirements. While there is a high degree of overlap between the collateral descriptions in the Security Instrument and Operator Security Agreement, those descriptions are not identical and thus both documents are required. In situations where the owner and operator of a project are one and the same, HUD will subject that entity to the same set of requirements that would be in place if the owner and operator were different entities. To achieve this, owner-operators must sign both Regulatory Agreements (HUD-92466-ORCF and HUD-92466A-ORCF) and both security instruments (HUD-94000-ORCF and HUD-92323-ORCF). In the 232 document reform process, HUD sought to avoid creating new closing documents that relate only to specific types of transactions (e.g., owner-operator transactions). The documents are intended to be applicable to all variations of deals and business models, such that the closing process is simplified and standardized to the greatest extent possible.
This standardization is also helpful if, for whatever reason, a separate operator needs to step in to operate the healthcare facility-the owner’s documents could remain intact and the new operator would sign its own regulatory agreement and security agreement.
Finally, please note that the owner-operator transactions require not only the Operator Regulatory Agreement and Security Agreement, but also the Opinion of Operator’s Counsel (HUD-92325-ORCF).
2. If we add an AR line post-closing and the new documents are required per the New Document Transition Matrix, should we replace the old operator regulatory agreement (HUD-92466-NHL) with the new version (HUD-92466a-ORCF)?
No, if the project currently has the HUD-92466-NHL version of the Operator Regulatory Agreement, simply amend that version to include the AR Rider found here: /sites/documents/RidertoRegAgmtNH.doc. Use the new OMB-approved forms (Intercreditor Agreement, AR Financing Certification, Operator's Attorney's Opinion) for the balance of the transaction.
3. If the owner operates the project, do we still need to have the HUD-required language for operator organizational documents in the owner's organizational documents? Do we need to collect the documents twice? (12/13/13)
To the extent the HUD-required language for the operator’s organizational documents adds to the language required for the borrower’s organizational documents, the added language must be included in an owner-operator’s organizational documents. There is no need for the HUD closing attorney to include two copies of the owner-operator’s organizational documents in a closing docket, so long as the docket clearly indicates that the documents collected constitute both the owner’s and the operator’s organizational documents.
4. The legal punchlist currently states that a DAISA is not required if there are “no government receivables.” My experience has been that we do not require a DAISA for projects (like ALFs in CA) that are not eligible to be reimbursed with Medicare/Medicaid. However, do we also waive the DAISA requirement for a project (a SNF, for example) that is not currently receiving government payments from its current patients (but is statutorily eligible to receive such payments and may do so in the future)? If so, does OHP collect information that sufficiently allows them to independently verify that such representation is accurate in the context of a closing (or are we simply relying on the borrower to satisfy its continuing obligations under the Security Agreement to perfect the lender’s security interests)? (1/14/14)
We do not require a DAISA unless there are government receivables. Mere eligibility to receive government receivables is not sufficient for HUD to require that a bank account be opened and a DAISA be set up. ORCF receives a copy of the provider agreements as part of the application, which allows ORCF to confirm whether there are government receivables.
5. OHP has been using the following special condition in some instances: “Master Lease: The Mortgagor and Operator must sign an agreement to enter into a future Master Lease with the subject and any future new HUD insured projects operated by ---- in the event such projects close. The Master Lease is not required to take effect until at least three projects reach closing (submitted within an 18 month period). Lender agrees that the mortgagor and operator will have to enter into a master lease structure if HUD issues additional commitments on related projects that meet HUD’s master lease requirements, even if the lender is not the proposed lender on the additional insured project(s). In the event that HUD issues a firm commitment with a master lease condition, lender agrees to cooperate with the execution of all necessary documents to include this project into such master lease structure.” What should the closing attorney's response to such a special condition be? (1/28/14)
ORCF is in the process of reviewing their policies regarding future-springing master lease requirements involving multiple lender master leases. Headquarters OGC is discussing with ORCF the various legal considerations involved in these policies and special conditions. In the meanwhile, if a transaction you are working on has a firm commitment special condition such as the one quoted above, one possible way to address this condition is to ask the Borrower and Operator to certify in writing to their agreement to the special condition language. A very simple certification reproducing the language from the specific special condition can be generated for the parties to sign. At this time, ORCF is comfortable with the lender’s agreement to this provision as indicated by its signing the firm commitment and will not require the lenders to sign any additional certifications on this issue at closing
6. The OMB form noncritical repair certification form HUD-92117-ORCF (Rev. 03/13) is designed for situations where repairs are made post-closing. In situations where repairs are made prior to closing, it is probably more appropriate to delete Section 2, 4, 6 and 7. It would also be easier if Section 3 permitted an Exhibit A to be attached for invoices and photos in addition to the list of repairs.
Procedurally, should I be submitting this OMB form revision request through the 232 DocumentFAQ request or is this a Carol Jun/ HQ review request?
If the repairs are made prior to closing and an escrow per se is not required, this document becomes more of a certification and has very little legal concern. Should ORCF approach field counsel for a suggested way to document completion of such repairs, your suggested revisions are one acceptable approach. Because of the limited legal interests in this scenario, there is no need to pro-actively approach ORCF on this matter.
7. Thank you for your 8/22/2013 discussion of the need for an Operator Regulatory and an Operator Security Agreement where a single entity acts as Borrower and Operator.
Would the Assignment of Leases and Rents attached to the Operator Security Agreement also need to be executed and recorded, or is the assignment of leases and rents contained in the Security Instrument sufficient for HUD’s purposes where a single entity acts as Borrower and Operator and no lease is required?
The owner, in its capacity as operator, should sign all documents required of an operator.
The Assignment of Rents that is found in the MF form of Security Instrument (Section 3) was removed from the OHP Security Instrument. The Security Instrument still includes the words “Assignment of Rents” in its title, and Rents are Personalty and Personalty is a component within the definition of Mortgaged Property, but the Security Instrument does not give us a present assignment of rents as we get from the Assignment of Rents attached to the Operator’s Security Instrument.
This standardization is also helpful if, for whatever reason, a separate operator needs to step in to operate the healthcare facility – the owner’s documents could remain intact and the new operator would sign its own regulatory agreement and security agreement.
Is there a legal closing punchlist for 241 loans?
No. Since 241s come in so many different flavors (some just add money for repairs, some change the footprint of the project, etc.), we were unable to come up with a punchlist that adequately addressed every possibility. Depending on how the funds will be used in your deal, we suggest using either the refi or new construction legal closing punchlist as a starting point, then modifying as appropriate.
ORCF historically has not had separate 241(a) documents and instead program participants would revise the Section 232 sample documents to fit the details of a transaction. Please note that ORCF has posted sample 241(a) loan documents to its website; the current sample documents were drafted for a situation with different lenders for the original and supplemental loans. This will not be the situation for many 241(a) transactions, and therefore examples of additional scenarios may be added as sample documents in the future.
Since the 241(a) documents are sample documents, ORCF will allow transaction-specific changes to the documents which will be negotiated with field counsel. In addition to transaction-specific changes, such as changes to the Building Loan Agreement to reflect whether the work involves an addition or renovations, ORCF recognizes that other standard changes will also be necessary. These include: (a) changes to the Healthcare Regulatory Agreement – Borrower (HUD-92466-ORCF) to (i) permit combining the replacement reserve for the 241 loan and the replacement reserve for the first mortgage loan and (ii) to recognize that there would be only one residual receipts account for the project; (b) changes in the Operator Lease Addendum to reflect the existence of two loans; and (c) corresponding changes to the Lender’s Certificate to reflect the changes made.
With the publication of the OMB-approved Section 232 documents, and requirements of the Strengthening Accountability Rule which state that the original transactional documents remain in place, Borrowers completing a Section 241(a) transaction will be subject to two different regulatory agreements. ORCF expects that a Borrower would comply with its obligations under both regulatory agreements by meeting the requirement that is most stringent. As an example, although the most recent regulatory agreement may allow for the more frequent distribution of surplus cash, the original regulatory agreement may allow for only semi-annual distributions, and thus would prevail.
The new documents contain numerous [Master Lease] references in brackets. If a single, non-portfolio project joins a master lease after closing, should we advise Lender’s counsel that all of the OMB form documents would need to be amended and restated to add the bracketed Master Lease language? In that scenario, would we release the Regulatory Agreement and replace it with a new one, or would amending and restating be permitted? (5/7/14)
As the inquiry implies, the new documents contain bracketed language related to master leases that should not be included when a transaction involves a single, non-portfolio project (“independent project”). When an independent project joins a master lease after its loan closes, only three documents collected at the loan closing must be amended: the Operator Security Agreement, the Operator’s Regulatory Agreement and the Intercreditor Agreement. With regard to the rest of the documents executed at an independent project’s loan closing, those documents may be amended to include bracketed master lease language if the parties desire, but their amendment is not necessary because the failure to include the bracketed language does not create material deficiencies in those documents when the project is added to a master lease. HUD’s interest in many of the omitted provisions will be adequately protected in documents that program participants execute when the master lease is created and the loans of the master lease landlords close.
The provisions discussed below are just a few examples that illustrate the importance of amending the three documents mentioned above. Without opining on the materiality of the rest of the bracketed master lease provisions in those documents, all such provisions must be included in the amendments. At a minimum, the bracketed language is helpful in describing the master lease aspect of formerly independent projects.
Operator Security Agreement (HUD-92323-ORCF)
In the master lease context, the Operator Security Agreement (OSA) is partially intended to secure a subtenant’s performance under the Cross-Default Guaranty of Subtenants (HUD-92331-ORCF). If the OSA collected at an independent project’s closing is not amended to include the bracketed master lease language when the project joins a master lease, that operator’s property will not secure the operator’s guarantee that the other subtenants will perform under their respective contracts. Additionally, paragraph 8(d) of the OSA states that a default under any of the Loan Documents is a default under the OSA. If the Agreement is not amended to include “Master Tenant Regulatory Agreement” as part of the Loan Documents, there may be a question as to whether the lender has the ability to declare a default under the OSA based on a default under the Master Tenant Regulatory Agreement. Accordingly, this document must be amended to include all of the previously omitted master lease language when an independent project is added to a master lease.
Operator’s Regulatory Agreement (HUD-92466A-ORCF)
Paragraph 10 of the Operator’s Regulatory Agreement provides that if HUD sends the Operator a notice
(i) stating that a default exists under the Borrower’s Regulatory Agreement [, Master Tenant’s Regulatory Agreement,] or any note or security instrument with respect to the Project . . . and (ii) directing Operator to make all future payments . . . to HUD or Lender . . . Operator shall thereafter make all future payments . . . to HUD or Lender . . . .
The omission of the bracketed language could become a material deficiency if a master tenant violates its Regulatory Agreement and HUD needs to direct the operator of a previously independent project to make future payments to HUD or the lender. The Operator’s Regulatory Agreement must therefore be amended and rerecorded to include all master lease provisions in the situation described in this inquiry.
Intercreditor Agreement (HUD-92322-ORCF)
In the event an independent project’s operator enters into an Intercreditor Agreement and later joins a master lease in which other operators will have access to the same Accounts Receivable (AR) financing referenced in the Intercreditor Agreement, the Agreement must be amended, or a new document must be entered into. It is very likely that when an independent project joins a master lease, the AR lending line will be altered. The AR lender will also very likely want to list the other facilities in the master lease as the “Other Facilities” defined in the document.
Is there a legal closing punchlist for 241 loans? (5/7/14)
No. Since 241s come in so many different flavors (some just add money for repairs, some change the footprint of the project, etc.), we were unable to come up with a punchlist that adequately addressed every possibility. Depending on how the funds will be used in your deal, we suggest using either the refi or new construction legal closing punchlist as a starting point, then modifying as appropriate.
ORCF historically has not had separate 241(a) documents and instead program participants would revise the Section 232 sample documents to fit the details of a transaction. Please note that ORCF has posted sample 241(a) loan documents to its website; the current sample documents were drafted for a situation with different lenders for the original and supplemental loans. This will not be the situation for many 241(a) transactions, and therefore examples of additional scenarios may be added as sample documents in the future.
Since the 241(a) documents are sample documents, ORCF will allow transaction-specific changes to the documents which will be negotiated with field counsel. In addition to transaction-specific changes, such as changes to the Building Loan Agreement to reflect whether the work involves an addition or renovations, ORCF recognizes that other standard changes will also be necessary. These include: (a) changes to the Healthcare Regulatory Agreement – Borrower (HUD-92466-ORCF) to (i) permit combining the replacement reserve for the 241 loan and the replacement reserve for the first mortgage loan and (ii) to recognize that there would be only one residual receipts account for the project; (b) changes in the Operator Lease Addendum to reflect the existence of two loans; and (c) corresponding changes to the Lender’s Certificate to reflect the changes made.
With the publication of the OMB-approved Section 232 documents, and requirements of the Strengthening Accountability Rule which state that the original transactional documents remain in place, Borrowers completing a Section 241(a) transaction will be subject to two different regulatory agreements. ORCF expects that a Borrower would comply with its obligations under both regulatory agreements by meeting the requirement that is most stringent. As an example, although the most recent regulatory agreement may allow for the more frequent distribution of surplus cash, the original regulatory agreement may allow for only semi-annual distributions, and thus would prevail.
Thank you for your 8/22/2013 discussion of the need for an Operator Regulatory and an Operator Security Agreement where a single entity acts as Borrower and Operator.
Would the Assignment of Leases and Rents attached to the Operator Security Agreement also need to be executed and recorded, or is the assignment of leases and rents contained in the Security Instrument sufficient for HUD’s purposes where a single entity acts as Borrower and Operator and no lease is required. (5/7/14)
The owner, in its capacity as operator, should sign all documents required of an operator.
The Assignment of Rents that is found in the MF form of Security Instrument (Section 3) was removed from the OHP Security Instrument. The Security Instrument still includes the words “Assignment of Rents” in its title, and Rents are Personalty and Personalty is a component within the definition of Mortgaged Property, but the Security Instrument does not give us a present assignment of rents as we get from the Assignment of Rents attached to the Operator’s Security Instrument.
This standardization is also helpful if, for whatever reason, a separate operator needs to step in to operate the healthcare facility – the owner’s documents could remain intact and the new operator would sign its own regulatory agreement and security agreement.
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