Frequently Asked Questions About Healthcare Facility Documents
Addendum to Operating Lease
1. Section 19 of the Addendumto Operating Lease (HUD-91116-ORCF) refers to the Cross-Default Guaranty of Operators. The correct title of the document is Cross-Default Guaranty of Subtenants. (10/21/13)
We agree. The scrivener's error has been corrected, and the corrected document will be posted soon.
2. The Addendum to Operating Lease (HUD-91116-ORCF) contemplates the Lessor being the Borrower. What if the Lessor is the Master Tenant? Also, how should the blank in the definition of “Licenses” be completed? (12/13/13)
To correct these scrivener’s errors, we added a definition for the term Borrower to account for instances in which the Lessor is the master tenant rather than the borrower. We added bracketed language where the parties may need to change Lessor to Borrower. These changes are in the defined terms Borrower’s Regulatory Agreement and Borrower’s Security Instrument, and in Sections 2(c), 5(a), 11(b), 21.
We also removed the definition of Licenses and in Section 20, we changed licenses to no longer be capitalized.
We also removed the definition of Licenses and in Section 20, we changed licenses to no longer be capitalized.
3. Our firm commitment requires the following provision to be added to the operating lease: “The lease must have an annual rent payment which shall be $260,221. In no event shall rent payment be less than 1.05 times the sum of annual principal and interest payments; annual mortgage insurance premium; annual deposit to reserve for replacement; annual property insurance; and annual property taxes.” Can that language be added to the end of Section 5 of the Addendum to Operating Lease (form HUD-91116-ORCF)? (2/6/14)
Section 5 of the Operating Lease Addendum requires rents payable by the Lessee to be sufficient to maintain the project and meet project expenses, but does not reflect the 1.05 coverage requirement that commonly appears in ORCF’s firm commitments. ORCF is taking this requirement out of the firm commitments going forward. In the meantime, HUD attorneys working on transactions where the firm commitment requires the lease to be amended to reference the specific formula for annual rent calculation may request such amendments through the Document Change Protocol posted on this Sharepoint site.
4. I’m working on a healthcare facility closing that is part of a master lease. Paragraph 3(a) of the Addendum to Operating Lease (HUD-91116-ORCF), provides the following, in part:
Unless Lender agrees otherwise, if Lender or another person or entity shall succeed to the interest of Lessor by reason of foreclosure or other proceedings brought by Lender in lieu of or pursuant to foreclosure, or by any other manner (Lender or such other person or entity herein referred to as “Successor”), then the Operator Lease and this Addendum shall terminate, or, at the option of Successor, the Operator Lease and this Addendum shall continue in full force and effect, in which case Lessee shall attorn to Successor and recognize Successor as its landlord and as “Lessor” under the terms of the Operator Lease and this Addendum.The lender’s attorney wants to change the first reference to “Lessor” to “Borrower and/or Lessor, as applicable.” He reasons that, in the master lease context, a foreclosure would result in the Lender succeeding to the interest of the Borrower, not the Lessor (i.e., the master tenant). Is he correct?(1/29/16)
Yes, lender’s counsel is correct in noting that the above-quoted provision does not accurately describe the consequences of foreclosure (or proceedings in lieu of foreclosure) when the project is subject to a master lease. The proposed revision effectively addresses the issue. Accordingly, when the HUD-91116-ORCF is attached to a sublease between the master tenant and operator, program participants should revise the last sentence of paragraph 3(a) as follows:
Unless Lender agrees otherwise, if Lender or another person or entity shall succeed to the interest of Borrower and/or Lessor, as applicable, by reason of foreclosure or other proceedings brought by Lender in lieu of or pursuant to foreclosure, or by any other manner (Lender or such other person or entity herein referred to as “Successor”), then the Operator Lease and this Addendum shall terminate, or, at the option of Successor, the Operator Lease and this Addendum shall continue in full force and effect, in which case Lessee shall attorn to Successor and recognize Successor as its landlord and as “Lessor” under the terms of the Operator Lease and this Addendum.Thank you for bringing the need for this revision to our attention. A corrected version of the document will be posted to Hudclips. In the meantime, please make the revision manually.
5. Paragraph 3(a) of the Addendum to Operating Lease (HUD-91116-ORCF) provides the following:
Unless Lender agrees otherwise, if Lender or another person or entity shall succeed to the interest of Borrower and/or Lessor, as applicable, by reason of foreclosure or other proceedings brought by Lender in lieu of or pursuant to foreclosure, or by any other manner (Lender or such other person or entity herein referred to as “Successor”), then the Operator Lease and this Addendum shall terminate, or, at the option of Successor, the Operator Lease and this Addendum shall continue in full force and effect, in which case Lessee shall attorn to Successor and recognize Successor as its landlord and as “Lessor” under the terms of the Operator Lease and this Addendum.(Emphasis added). Does the emphasized language work when there’s a master lease?
No, the emphasized language must be modified to accommodate master lease transactions. In a master lease scenario, the Lessee is the subtenant and the subtenant’s landlord/lessor is the master tenant. When there’s a foreclosure, the purchaser of a project under a master lease will succeed to the interest of the Borrower, not to the interest of the Lessor/master tenant. It is therefore incorrect to say that the Lessee/subtenant will recognize the Successor as the landlord and “Lessor.” To correct this error, parties may modify paragraph 3(a) as follows:
Unless Lender agrees otherwise, if Lender or another person or entity shall succeed to the interest of Borrower and/or Lessor, as applicable, by reason of foreclosure or other proceedings brought by Lender in lieu of or pursuant to foreclosure, or by any other manner (Lender or such other person or entity herein referred to as “Successor”), then the Operator Lease and this Addendum shall terminate, or, at the option of Successor, the Operator Lease and this Addendum shall continue in full force and effect, in which case Lessee shall attorn to Successor and recognize Successor as its landlord and as “Lessor” under the terms of the Operator Lease and this Addendum or as the “Landlord” under the terms of the Master Lease Addendum.This change will appear in the next version of the document. In the meantime, please make the change manually.
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