18. All three of the opinion forms (HUD-91725-ORCF, HUD-92325-ORCF and HUD-92335-ORCF) say that the loan is insured under 232. Is there any need to change that form language when the loan is insured under 232 pursuant to 223(f) (or (a)(7))? (10/22/15)
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. In the Guide to Opinion of Operator's Counsel (HUD-92325-ORCF), item M in the list of documents reviewed uses the wrong document title. It should be Management Certification – Residential Care Facility. (10/21/13)
We agree. The scrivener's error has been corrected, and the corrected document will be posted soon
agree. The scrivener's error has been corrected by rearranging the text to make it more clear, and the corrected document will be posted soon.
3. In the Guide for Opinion of Master Tenant’s Counsel (HUD-92335-ORCF), must paragraph 11 always be included? (12/13/13)
To correct this scrivener’s error, we added bracketed instructional language to paragraph 11 indicating that this paragraph is to be used only if the Master Tenant is a party to AR Financing. A corrected document will be posted soon.
No. Opinion #1 in the Operator’s Attorney’s Opinion is similar to the version of opinion #1 in the Borrower’s Attorney’s Opinion (the version available to attorneys who didn’t draft the org docs) in that both opinions are based strictly on the entity’s good standing certificate. While opinion #1 of the Operator’s Attorney’s Opinion is broader than that version of opinion #1 of the Borrower’s Attorney’s Opinion (operator’s attorney must opine that the entity was duly organized, while borrower’s counsel does not), HUD expects the operator’s attorney to look no further than the good standing certificate to offer the opinion; additional due diligence is not needed. Accordingly, the form should be left as is.
Opinion #1 in the Operator’s Attorney’s Opinion is similar to the version of opinion #1 in the Borrower’s Attorney’s Opinion (the version available to attorneys who didn’t draft the org docs) in that both opinions are based strictly on the entity’s good standing certificate. While opinion #1 of the Operator’s Attorney’s Opinion is broader than that version of opinion #1 of the Borrower’s Attorney’s Opinion (operator’s attorney must opine that the entity was duly organized, while borrower’s counsel does not), HUD expects the operator’s attorney to look no further than the good standing certificate to offer the opinion; additional due diligence is not needed. Accordingly, the form should be left as is.
Such representation should be disclosed in the form as a detail unique to the particular transaction.
JJ. Master Tenant has rights in the Master Tenant’s Collateral or the power to transfer rights in the Master Tenant’s Collateral to a secured party[, including rights to the Project’s accounts and deposit accounts for accounts receivables subject to the Control Agreement].
The next iteration of the punchlist will include this instruction, and the form will be updated. Until the updated form is posted, please make this change "manually."
8. Can we modify the opinion regarding general partners that are foreign entities? (6/19/4)
If borrower’s counsel interprets state law to say that general partners/managing members don’t “do business” in the state and/or don’t need a Foreign Status Certificate, the attorney should be able to delete, in part or in whole, the highlighted part of the opinion based on the following language from the opinion instructions: “Any material deviation not required by State or local law or otherwise authorized by these instructions must be brought to the attention of the Assistant General Counsel.” The message there is that HUD will accept deviations required by State law.
9. May HUD attorneys continue to request litigation searches? It appears the form opinion allows borrower’s counsel to simply provide a listing instead of the actual docket search. Also, please explain the impact of this update from HUD-ORCF's Lean 232 / Email Blast, February 27, 2014.
Litigation/Docket Searches
To clarify and highlight, ORCF no longer collects litigation searches (except where required by the Attorney’s Opinion as an Exhibit). Please note that the Attorney’s Opinion form requires the attorney signing it to opine that, to such attorney’s knowledge, based on the Docket Searches and the Attorney’s Opinion Certification, there is no litigation or other claim pending before any court or administrative or other governmental body against the Borrower or General Partner/Managing Member, Operator or the Project except as has been disclosed in Exhibit F to the Opinion.
When there is “newly” discovered litigation (“newly” meaning not previously disclosed to ORCF in the application process), ORCF will ask that the Lender immediately address the following:
1. Name and discussion of each newly discovered lawsuit, including estimated potential liability;
2. Whether each newly discovered lawsuit is of the type covered by insurance or whether the lawsuit is for a claim not covered by insurance;
3. The amount of liability insurance available to cover each newly discovered lawsuit and other pending claims and judgments and the estimated potential liability for such other lawsuits/judgments; and
4. Identify who bears the cost of defense of each newly discovered lawsuit and whether the insurance company is participating in the defense.
As required by the attorney’s opinions, litigation searches must be run within 30 days of endorsement. While HUD will endeavor to promptly evaluate litigation, disclosure of litigation promptly to HUD will minimize the risks of delays in closing.
HUD counsel should not collect either the UCC or docket searches. Instead, we rely on the lender’s certification that our security instrument constitutes a first lien on the Project. We rely on the borrower’s attorney’s opinion to list any litigation that turned up in the docket search.
The instructions in the email blast relate to the situation where borrower’s counsel runs a docket search and discovers litigation that was not previously disclosed to ORCF. The email blast has no impact on the instruction that HUD counsel not collect docket or UCC searches.
10. In the Guide to Opinion of Operator’s Counsel (HUD-92325-ORCF), document H (Cross-Default Guaranty of Subtenants) is defined as both an Operator HUD Document and a Supporting Document, though it appears these categories are meant to be mutually exclusive. (8/20/14)
We agree. In order to correct this scrivener’s error, in the paragraph following the list of documents reviewed, we removed the sentence that said, “The documents listed in H through Q above are referred to collectively as the ‘Supporting Documents’.” The term “Supporting Documents” was not used in the document, and document H was also considered an “Operator HUD Document,” though the list of Operator HUD Documents was meant to be exclusive of Supporting Documents. A corrected document will be posted soon.
11. Operator’s counsel would like to omit the DAISA from the following paragraph because it argues the HUD form is incorrect as there can be no perfection of interest against the government receivables account.
“In addition to the foregoing opinions, we confirm that (a) the jurisdiction of the Depository Bank, for purposes of the Control Agreement and DAISA, within the meaning of Section 9-304 (“Section 9-304”) of the UCC is the state of __ __ (“Control Collateral State”); and (b) under Section 9-304, the Control Agreement and DAISA, the law governing perfection and priority relating to the deposit accounts designated in the Control Agreement and DAISA is the Uniform Commercial Code of the Control Collateral State.”
This change is not permissible. UCC Section 9-304 says:
(a) [Law of bank's jurisdiction governs.]
The local law of a bank's jurisdiction governs perfection, the effect of perfection or nonperfection, and the priority of a security interest in a deposit account maintained with that bank.
Since 9-304 contemplates non-perfection as well as perfection, there is no reason to change the form.
12. More and more, we are seeing control agreements with out-of-state banks that require that they be governed by out-of-state laws. In the instant matter on which I am currently working, the project is located in New Jersey, but the DACA and DAISA are governed by the laws of Alabama. The Operator’s counsel, who is licensed in NJ, will rely on an opinion of another attorney who is licensed in Alabama to give the HUD opinion above, but wishes to add qualifiers regarding its reliance on a third party opinion and submit the third party’s opinion as a supplemental opinion. The HUD form of opinion allows for reliance on the opinion of another attorney with respect to organizational documents of the Operator, but does not allow for reliance on the opinion of another with respect to the perfection of the control agreements. Is this deliberate, or should it be permitted given the current trend with out-of-state depositories? (11/20/14)
Although form HUD-92325-ORCF includes an optional paragraph stating that counsel providing the opinion has relied on a separate opinion letter in rendering opinions 3 and 5 (which deal with organizational matters), HUD-91725-INST-ORCF (Instructions to Guide for Opinion of Borrower’s and Operator’s Counsel) states:
Reliance on Other Opinions
In instances where Borrower’s Counsel is relying on opinions issued by other attorneys, the Opinion must be modified. Examples include cases involving a separate opinion for bond financing documentation, property jurisdiction vs. organizational jurisdiction, zoning, etc. It is imperative that Borrower’s Counsel specifically reference and attach the additional opinion(s) and that such opinions track the language of the HUD Guide for Opinion of Borrower’s Counsel as closely as is practical under the circumstances. HUD field counsel will exercise discretion in this area, taking the unique circumstances into account.
This language in the instructions indicates that HUD counsel may permit reliance on separate opinions related to various matters, not limited to organizational matters.
13. The Intercreditor Agreement (HUD-92322-ORCF) contains the following provisions related to governing law and jurisdiction:
Paragraph 1: “All terms used herein which are not specifically defined shall have the meanings provided in Article 9 of the Uniform Commercial Code as in effect in the State of (Insert property jurisdiction) ________ from time to time (the ‘UCC’).”
Paragraph 1.9: “’Business Day’ shall mean any day other than a Saturday, a Sunday, or any day that banks in [insert Bank’s Jurisdiction] _________________ or [insert Property Jurisdiction if different from Bank’s Jurisdiction] _______________ are required or permitted by law to close.”
Paragraph 4.9: “This Agreement and all matters arising out of or related to this Agreement shall be deemed to have been made under, and shall be governed and construed in all respects by, the substantive laws of the State of [enter property or organizational jurisdiction] _________ without regard to principles of conflicts of laws.”
Paragraph 4.10: “FHA Lender and AR Lender hereby irrevocably consent to the nonexclusive jurisdiction of the State and Federal Courts located in the State of [enter property or organizational jurisdiction] _________ in any and all actions and proceedings arising under or in connection with this Agreement.”
I’m working on a transaction where the AR Lender inserted the AR Lender’s jurisdiction, which is different from the property or organizational jurisdiction, into each of the blanks above. Is this acceptable? (4/2/15)
No, the AR Lender may not insert its jurisdiction into any of the blanks above when that jurisdiction differs from the property jurisdiction or organizational jurisdiction. In each of the paragraphs referenced in the question, the parties must comply with the bracketed instructions when selecting the governing law and venue.
While reviewing this inquiry, the Implementation Committee discovered a potential conflict between the Intercreditor Agreement (ICA) and the Operator’s Attorney’s Opinion (HUD-92325-ORCF). Paragraph MM of the Opinion provides the following: "Each of the Operator HUD Documents is governed by the laws of the Property Jurisdiction and the laws of the United States of America." The term "Operator HUD Documents" includes the ICA; thus, the Opinion requires the attorney to state that the ICA is governed by the law of the Property Jurisdiction even though paragraph 4.9 of the ICA allows the parties to choose either the Property Jurisdiction or the Organizational Jurisdiction. If the parties to the ICA choose the Organizational Jurisdiction as the governing law, paragraph MM of the Opinion may be modified as follows: "Each of the Operator HUD Documents is governed by the laws of the Property Jurisdiction (except the Intercreditor, which is governed by the laws of the Organizational Jurisdiction) and the laws of the United States of America." The form on hudclips will be updated to include this optional language.
14. In the final paragraphs of the Borrower’s Counsel Opinion Letter (HUD-91275-ORCF), wherein the attorney makes certain confirmations, paragraph (c) states that the attorney does not have any interest in the Project, etc. The language specifically states, twice, that the attorney does not have any interest in the “Property” (capital “P”). The term “Property” is not defined in the document; however, “Land” is a defined term for the real property. Should the language here be “Land”? (3/31/15)
No, the term “Property” should not be changed to “Land” in paragraph (c) on page 11 of the Opinion of Borrower’s Counsel. As noted in the question, attorneys state in paragraph (c) that they have no financial interest in “the Project, the Property, or the Loan.” The definition of “Project” in the first paragraph of the Opinion specifically includes “Land”; thus, changing “Property” to “Land” would be redundant.
In reviewing your question, the Committee determined that the inclusion of the undefined term “Property” in paragraph (c) was a scrivener’s error. Until the form is updated, please delete both references to “Property” in paragraph (c). Thank you for bringing this matter to our attention.
15. I have a question regarding the new 232 Opinion forms (HUD-91725-ORCF (06/2014) and HUD-91725-CERT-ORCF (06/2014)) that has come up in a 232/223(f) closing.
Paragraph 7(i) of the Borrower’s Opinion (HUD-91725-ORCF) requires counsel to opine that the execution and delivery of the Loan Documents will not “constitute a default” under the provisions of any agreement to which Borrower is a party or by which Borrower is bound. In contrast, paragraph 4 of the Borrower’s Certification (HUD-91725-CERT-ORCF) requires the Borrower to certify that the execution and delivery of the Loan Documents will not “constitute a material default” under the provisions of any agreement to which Borrower is a party or by which Borrower is bound.
Borrower’s counsel has requested to add “material” to paragraph 7(i) of the Opinion for consistency with the Borrower’s Certification.
This same inconsistency is also in the Opinion of Operator's Counsel (HUD-92325-ORCF). Please compare paragraph 6(i) in the Opinion with paragraph 2 on Exhibit C: Certification of Operator.
Is it acceptable to change "default" to "material default" in paragraph 7(i) of the Borrower's Opinion and paragraph 6(i) of the Operator's Opinion? (4/29/15)
Yes, attorneys may change "default" to "material default" in paragraph 7(i) of the Borrower's Opinion and paragraph 6(i) of the Operator's Opinion. These changes make those paragraphs consistent with a related provision in the latest version of the Opinion of Borrower's Counsel used for multifamily closings (HUD-91725M). Until corrected versions of the documents are posted, attorneys may make these changes manually.
16. Opinion 9 of Operator’s Attorney’s Opinion (HUD092325-ORCF) states:
. . . the accounts receivable and related deposit account collateral provided by Operator to AR lender under the AR Loan Documents and to Lender under the HUD Documents are not subject to a security interest or otherwise provided as collateral or encumbered in favor of AR Lender to secure any indebtedness or obligation to AR Lender other than the obligations arising under the AR Loan Documents.
The term “HUD Documents” is not a defined term. It is used here and again in the Operator Certification. We think this is referring to the Loan Documents (as defined in the 232 Borrower’s Counsel’s Opinion). It refers to the HUD loan and collateral thereunder. I need clarification on this, however (7). (7/17/15)
You are correct that the term “HUD Documents” in paragraph 9 of the Opinion and the Operator Certification is undefined. Use of that term in this paragraph is a scrivener’s error. “HUD Documents” should be changed to “Operator HUD Documents” to reflect the documents that the operator’s attorney is required to review. The use of the term “Loan Documents” would include the Security Instrument which the operator’s attorney is not required to review and would exclude the Operator’s Security Agreement which the operator’s attorney is required to review.
The form on HUDCLIPS will be updated to correct this scrivener’s error. In the meantime, please make the change manually.
17. Paragraph I of the Operator’s Attorney’s Opinion (HUD-92325-ORCF) defines “Filing Collateral” but that term is not used throughout the Opinion. This definition is important to an opinion that we obtain from counsel. In opinion 8 we receive an opinion that the security interest will be perfected. However, as it reads now, it only relates to the Control Collateral. There is no equivalent opinion for the Filing Collateral (collateral where perfection is made by filing, not by control). (7/17/15)
Thank you for bringing this matter to our attention. HUD will consider clarifying the language in the next OMB-approved version of the document.
In the meantime, we note that the Opinion does in fact assure HUD that the security interest in the Filing Collateral is perfected. The Opinion defines “Filing Collateral” as follows:
“’Filing Collateral’ means Operator’s Collateral (defined hereafter) that constitutes any interest in accounts, equipment, inventory, general intangibles, instruments, or chattel paper as defined in the UCC, and for which perfection is completed by filing under Section 9 310(a) of the UCC.” (Emphasis added).
Through the emphasized language, the perfection opinion for the Filing Collateral is incorporated into the definition of that term. The attorney also acknowledges the perfection of the security interest in the Filing Collateral in the following excerpt from the Opinion:
“The Uniform Commercial Code, as adopted in the law of the state of the UCC Filing Office, requires the periodic filing of continuation statements with the UCC Filing Office . . . in order to maintain the perfection and priority of security interests and to keep the Operator Financing Statement in effect.” (Emphasis added).
18. All three of the opinion forms (HUD-91725-ORCF, HUD-92325-ORCF and HUD-92335-ORCF) say that the loan is insured under 232. Is there any need to change that form language when the loan is insured under 232 pursuant to 223(f) (or (a)(7))? (10/22/15)
No, there is no need to change the opinion forms for 232/223(f) or 232/223(a)(7) transactions. While it is more precise to state that refinances are insured under Section 232 pursuant to 223(f) or Section 232 pursuant to 223(a)(7), it is not incorrect to state that such loans are insured under Section 232. Section 232 of the National Housing Act is HUD’s primary source of statutory authority for insuring healthcare facility transactions (except hospital transactions), including refinances, acquisitions and new construction deals.
19. We have a question on whether and how docket searches should be conducted against the principals of the borrower, a limited liability company, originating from a current 232/223(f). There are currently three members of the borrower listed as managers, and one family trust that owns 70% of the borrower. We are requesting clarification on whether docket searches must be run on any of those principals, when none of those principals will appear in the borrower’s signature block at the behest of Borrower’s Counsel, who believes that it is unnecessary to conduct the searches when none of the principals will appear in the borrower’s signature block.
Our research seems to indicate that docket searches should be run on each of the managing members of the borrower and the family trust that owns in excess of 25% of the borrower, regardless of whether or not the names will appear in the borrower’s signature block. Is this a correct reading of the HUD form and its instructions on whether docket searches must be run in this scenario? (11/24/15)
Borrower’s counsel provides the following in paragraph (g) on page 12 of the Opinion:
Based solely on (a) our [my] knowledge, (b) the Certification of Borrower and (c) the Docket Search; there is no litigation or other claim pending before any court or administrative or other governmental body against Borrower (or the general partner, managing member, or similar person or entity thereof), or the Project.
To provide this opinion, the Borrower’s attorney must review, at a minimum, searches under the names of the Borrower and the Borrower’s controlling principal(s) (i.e., the general partner(s), manager(s) and managing member(s)). Searches under the names of other principals of the Borrower, such as investors (limited partners, non-managing members) who own more than 25% of the ownership entity, will generally not be necessary, although HUD Counsel reserves the right to require additional searches based on the details of the transaction at hand.
Additionally, we note that an entity’s inclusion in (or absence from) the Borrower’s signature block has no direct bearing on whether the Borrower’s attorney must review searches under the name of that entity.
20. There appears to be a conflict between the Instructions to Guide for Opinion of Borrower’s and Operator’s Counsel (HUD-91725-INST-ORCF (06/2014)) (the “Instructions”) and the Guide for Opinion of Operator’s Counsel (HUD-92325-ORCF (06/2014)) (the “Operator Guide”), as well as the Guide for Opinion of Master Tenant’s Counsel (HUD-92335-ORCF (06/2014)) (MT Guide). The Instructions require a redlined comparison copy to be attached to the Operator Guide as follows: “The guide forms of opinion require any attorney submitting an opinion to HUD for review to attach a comparison copy that has been ‘redlined’ against the HUD form, so that any deviations are specifically identified.” The Operator Guide and the MT Guide do not include a comparison copy as an attachment to the opinions. Should the Operator and MT guide forms be modified to require comparison copies and be consistent with the Instructions? (7/8/16)
Yes, comparison copies should be attached to all legal opinions provided to HUD, including the Opinion of Operator’s Counsel and Opinion of Master Tenant’s Counsel. The next version of those documents will be amended to require comparison copies. In the meantime, HUD field counsel should ask attorneys representing operators and master tenants to attach redlined copies as Exhibits to their Opinions in a manner consistent with the Instructions.
21. In the “Guide for Opinion of Borrower’s Counsel Section 232” (HUD-91725-ORCF) the term “FHA Commitment” is referenced in paragraphs 2 and (a), but appears to be an undefined term. Paragraph 2 requires counsel to opine that Borrower has the power and authority “to perform all of its obligations under the Loan Documents and to comply with applicable federal statutes and regulations of HUD in effect on the date of the FHA Commitment.” Therefore, it would seem that a definition of FHA Commitment and its date would be appropriate for this opinion. (8/1/16)
We agree that providing a definition of FHA Commitment could be useful, and will consider adding one to the next version of the Opinion during the upcoming PRA process. In the meantime, attorneys providing the Opinion should continue to use the Opinion in its current form, with the understanding that the FHA Commitment encompasses all amendments thereto. Additionally, “the date of the FHA Commitment” referenced in paragraph 2 of the Opinion is the date of HUD’s signature on the original (unamended) Commitment.
22. Q: Requester asked, in owner/operator transactions, where the borrower owns both the real property and the healthcare entitlements, can paragraph 8 of the Borrower’s Attorney’s Opinion be amended to include the qualification from paragraph 7 of the Operator’s Attorney’s Opinion? Paragraph 7 of the Operator's Attorney's Opinion (HUD-92325-ORCF) allows attorneys to qualify their opinion regarding the lender's security interest in the operator's healthcare entitlements as follows:
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