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Daily Rules, Proposed Rules, and Notices of the Federal Government

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Docket No. FR-5623-N-02]

Federal Housing Administration (FHA) Healthcare Facility Documents: Revisions and Updates and Notice of Information Collection; 30-Day Notice

AGENCY: Office of the Assistant Secretary for Housing--Federal Housing Commissioner, HUD.
ACTION: Notice.
SUMMARY: On May 3, 2012, and consistent with the Paperwork Reduction Act of 1995 (PRA), HUD published for public comment, for a period of 60 days, a notice advising that HUD was updating and revising a set of production, underwriting, asset management, closing, and other documents used in connection with transactions involving healthcare facilities, excluding hospitals, that are insured pursuant to section 232 of the National Housing Act (Section 232). These documents are referred to collectively as the healthcare facility documents. The 60-day notice published on May 3, 2012, together with a companion proposed rule published on that same date, started the process of updating the healthcare facility documents and the Section 232 program regulations.

This 30-day notice published today continues the process required by the PRA. With the issuance of this notice, HUD will submit the information collection for the closing documents to the Office of Management and Budget (OMB) for review and approval, and assignment of OMB control numbers. In accordance with the PRA, the closing documents will undergo the public comment process every three years to retain OMB approval.

DATES: Comment Due Date:December 21, 2012.
ADDRESSES: 1.Submission of Comments by Mail.Comments may be submitted by mail to the Regulations Division, Office of General Counsel, Department of Housing and Urban Development, 451 7th Street SW., Room 10276, Washington, DC 20410-0500.

2.Electronic Submission of Comments.Interested persons may submit comments electronically through the Federal eRulemaking Portal atwww.regulations.gov. HUD strongly encourages commenters to submit comments electronically. Electronic submission of comments allows the commenter maximum time to prepare and submit a comment, ensures timely receipt by HUD, and enables HUD to make them immediately available to the public. Comments submitted electronically through thewww.regulations.govWeb site can be viewed by other commenters and interested members of the public. Commenters should follow the instructions provided on that site to submit comments electronically.

FOR FURTHER INFORMATION CONTACT: Kelly Haines, Director, Office of Residential Care Facilities, Office of Healthcare Programs, Office of Housing, Department of Housing and Urban Development, 451 7th Street SW., Room 10276, Washington, DC 20410-0500; telephone number 202-708-0599 (this is not a toll-free number). Persons with hearing or speech disabilities may access this number through TTY by calling the toll-free Federal Relay Service at 1-800-877-8339.
SUPPLEMENTARY INFORMATION: I. Background

On May 3, 2012, at 77 FR 26304, HUD published, in accordance with PRA requirements, a notice (60-day notice) seeking comments for 60 days on proposed changes to the healthcare facility documents. In conjunction with publication of the 60-day notice, the proposed revised healthcare facility documents were made available at:www.hud.gov/232forms. HUD presented the proposed revised healthcare facility documents in two formats: (1) A clean unmarked format for all documents; and (2) where available and appropriate, a redline/strikeout format showing changes made to either the final updated multifamily rental project closing documents or sample documents that have been in wide use.1 Along with the 60-day notice, HUD also published on May 3, 2012, at 77 FR 26218, a proposed rule that proposed to strengthen regulations for HUD's Section 232 programs to reflect current policy and practices, and to improve accountability and strengthen risk management. A final rule following the May 3, 2012, proposed rule, and taking into consideration public comment, was published on September 7, 2012, at 77 FR 55120 (referred to in this Notice as the “2012 Final 232 Rule”).

1The final multifamily rental project closing documents can be found athttp://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/mfh/mfhclosingdocuments. See also the announcement of the final documents published in theFederal Registeron May 2, 2011 (76 FR 24507).

This 30-day notice published today continues the process required by the PRA for the healthcare facility documents. As was the case with the 60-day notice, HUD will post on its Web site the healthcare facility documents. Again, HUD will show the documents (1) in a clean format, and (2) in redline/strikeout format, to show the changes made from the versions posted with issuance of the 60-day notice.

While complying with the PRA, this 30-day notice, as was the case with the 60-day notice, provides information beyond that normally provided in such notices. The 60-day notice published on May 3, 2012, provided descriptions of the major documents that are used in FHA's healthcare transactions and identified differences, as applicable, from the final multifamily rental project closing documents and existing healthcare facility documents. This notice issued today identifies substantive changes that HUD has made to the healthcare facility documents in response to public comment submitted on the 60-day notice, responds to significant issues raised by commenters, and identifies changes that HUD is proposing for comment in this 30-day notice following further consideration of certain issues.

The healthcare documents that HUD is submitting to OMB are posted on HUD's Web site athttp://www.hud.gov/232forms. The Office of Residential Care Facilities (ORCF) is the office within HUD that manages the Section 232 program, which provides mortgage insurance for residential care facilities such as assisted living facilities, nursing homes, intermediate care facilities, and board and care homes.

II. Document Changes Following 60-Day Notice

This section identifies key changes made by HUD in response to public comment on the 60-day notice, and further consideration of certain issues by HUD as highlighted below.

A. Numbers of Documents

In the May 3, 2012, 60-day notice, HUD presented for public comment 154 healthcare facility documents. In response to public comment and upon further examination and consideration of the documents during the 60-day comment period, HUD now advises in this 30-day notice, that it has eliminated certain documents from the PRA process for various reasons, and separated concepts in certain existing documents into new documents. As a result of these changes, the number of healthcare facility documents presented for PRA purposes now numbers 115. Of the eliminated documents:

• 14 documents were removed for various reasons: the information in the forms is captured elsewhere; the information is no longer necessary; or the particular form would better serve HUD and the industry as a sample document rather than a prescribed form. For example, the Healthcare Facility Summary Appraisal Report was eliminated, and any necessary portions were incorporated into HUD-92264a-ORCF Maximum Insurable Loan Calculation; the Certification titled FHA Retyped Forms was deleted as obsolete; and the Deposit Account Control Agreement (DACA) and Deposit Account Instructions and Service Agreement (DAISA) were deleted from the PRA process and are being made into samples.

• 20 checklists (including all 16 Production Checklists and 4 Asset Management Checklists) were removed. The Checklists summarize and list other exhibits in the application but do not collect information. The Checklists simply serve as a reminder of the documents that may be needed for a particular transaction.

• The 8 Firm Commitments have been removed. The Firm Commitments are letters from HUD to the lender setting forth the terms of the transaction and do not collect information or imposing recordkeeping requirements.

• The Subordination Agreement and Subordination, Non-Disturbance, and Attornment Agreement relating to the Operating Lease, were combined into one document.

In addition, 4 new documents were added:

• The HUD-2205A-ORCF, Borrower's Certificate of Actual Cost, was added, because the existing HUD multifamily form no longer applies to Section 232 projects.

• An additional addendum was added to the existing Section 223a7 Lender Narrative to address Transfers of Physical Assets (TPA), which now allows for more seamless processing of a refinance and TPA simultaneously.

• In addition to the existing Lender Narrative for a Blended Rate—Single Stage, two additional documents were added to allow a project to submit for a blended rate in a two stage process: Blended Rate—Initial Submission and Blended Rate—Final Submission.

B. Key General Changes

Long-term debt service reserve.A key provision proposed for the Section 232 program regulations and the healthcare facility documents was the establishment of a long-term debt service reserve. The proposed long-term debt service reserve was meant to provide a borrower facing operating difficulties at any time throughout the life of the mortgage the time to arrange a workout plan by providing a source of funds from which the borrower couldmake debt service payments and thus delay or avoid an insurance claim by the lender. In the 2012 Final 232 Rule, HUD revised its policy so that this reserve will not be established for every project, but is likely to be implemented when there is an atypical long-term project risk. Atypical long-term risks could occur, for example, in circumstances in which there is an unusually high mortgage amount, or when some other risk mitigant, such as a master lease structure typically used in a portfolio transaction, is unavailable in a particular transaction.

Consistent with the change made in the 2012 Final 232 Rule, applicable healthcare facility documents have been revised to reflect the policy that the long-term debt reserve is not a requirement for every project.

Segregation of operators' accounts.HUD originally proposed a requirement to segregate accounts by facility. In the 2012 Final 232 Rule, HUD stated that public commenters advised, and HUD agreed, that accounting software was available today to maintain accounts in a manner that separates funds for HUD's reporting purposes. Consistent with the 2012 Final 232 Rule, the applicable healthcare facility documents provide that the operator must maintain accounts in a manner that will allow HUD and the lender to reliably and readily discern the funds attributable to the facility. To the extent an operator's accounting software maintains account information so that funds attributable to the facility can be readily and reliably tracked, segregating accounts by facility is not specifically required.

Reasonable costs for goods and services.HUD's 2012 Final 232 Rule at 24 CFR 232.1007 requires that the costs of goods and services purchased or acquired in connection with the project be reasonable and reflect market prices, which provides HUD with adequate protection in regard to the level of principals' salaries or other compensation. Applicable healthcare facility documents have been revised to reflect this change made at the final rule stage.

HUD approval of a material revision to management agreements.In the 2012 Final 232 Rule, HUD decided to retain the proposed requirement for HUD initial approval of management agent agreements. However, the 2012 Final 232 Rule dropped the requirement that HUD approve every change to the management agent agreement and instead requires approval of only those revisions that are material. This requirement has been revised in the applicable documents, such as HUD-90017-ORCF the Consolidated Certification—Management Agent.

Requirements applicable to third parties.Several commenters expressed concern that forms establishing privity with unrelated third parties would not be acceptable to such third parties who are not benefiting from the FHA-insured transaction. Commenters suggested that such documents be adopted as guides with variations permitted to suit the specifics of each respective transaction. HUD agrees with this proposal and the provisions of the proposed Deposit Account Control Agreement (DACA), the proposed Deposit Account Instructions and Services Agreement (DAISA), and the proposed Blocked Account Agreements will be incorporated into sample documents outside of the PRA process.

Requirements for Financial Reports.Consistent with the 2012 Final 232 Rule, the documents require that financial reports be submitted within 30 days of the end of a quarter to allow HUD to effectively monitor a property's financial operations and the trend of those operations. As the rule recognized the intricacies involved in developing year-end financial statements, HUD has extended the submission of the final quarter and year-to-date operator-certified statements submitted for the 4th fiscal year quarter to 60 calendar days following the end of the fiscal year. In addition, the documents still reflect the policy established in the 2012 Final 232 Rule that separate reports are still required when the borrower is also the operator, as operator reports are to be submitted in separate systems that allow for more prompt submission than audited reports.

Surplus Cash.Consistent with the 2012 Final 232 Rule, which removed a proposed regulatory definition of surplus cash and stated that the term would be defined in the documents, surplus cash is defined in the borrower's regulatory agreement. Commenters had stated that HUD was proposing inappropriate and unnecessary alterations of the definition of surplus cash as it has been used in practice, in accordance with guidance set forth in the Industry User Guide for the Financial Assessment Subsystem—Multifamily Housing (FASS-SUB)2 , and other handbooks and guidance, for many years. Upon consideration of the issues raised by the commenters, HUD concluded there was no need to alter the definition of surplus cash, and returned to that definition of surplus cash currently in use.

2Available on the HUD web page athttp://portal.hud.gov/hudportal/HUD?src=/program_offices/public_indian_housing/reac/products/fass/fassmf_guide.

Working Capital.The proposed rule included a requirement to maintain positive working capital. In response to commenters' concerns about such matters as the need to look at operators' aggregate portfolios, and limitations on the operators' ability to efficiently manage cash at the multi-provider level, the 2012 Final 232 Rule dropped the requirement to maintain positive working capital at all times. Pursuant to comment, HUD has revised the definition of “Healthcare Facility Working Capital” in the operator's regulatory agreement and will provide additional details on its calculation as necessary.

HUD also revised the operator's regulatory agreement, consistent with the 2012 Final 232 Rule, to remove the requirement to maintain positive working capital. In lieu of such requirement, consistent with the 2012 Final 232 Rule, if a quarterly financial statement is not filed or demonstrates negative working capital, the operator's regulatory agreement now prohibits funds generated by the operation of the healthcare facility to be taken as distribution or used for other purposes, except as specified.

Across-the-board changes.Several of the certifications were revised to include language from HUD's regulations namely 24 CFR 200.62, which provides that any agreement, undertaking, statement or certification required by the Commissioner shall specifically state that it has been made, presented, and delivered for the purpose of influencing an official action of the FHA, and of the Commissioner, and may be relied upon by the Commissioner as a true statement of the facts contained therein.

Other nomenclature and wording changes were made. For example, in HUD-92415-ORCF, the Request for Permission to Commence Construction Prior to Initial Endorsement for Mortgage Insurance, the term “mortgagor” was changed to “applicant” throughout the document. Further, adjustments were made to make the forms more generic, and eliminate needless duplication. In addition, several of the documents were revised, in accordance with the 2012 Final 232 Rule, to revise the time frame for providing notices relating to certain operational deficiencies to two (2) business days.

All changes made to the healthcare facility documents, whether substantive changes or wordsmithing changes, are presented in the redline/strikeoutversions of the documents on HUD's Web site.

C. Key Changes by Category of Document Production—Lender Narratives

These documents include information and certifications that must be made by the lender to ensure that a project is consistent with the Section 232 program requirements and therefore meets FHA eligibility requirements. These “Lender Narratives” are the summary document for each application submission. Based on commenters' concerns, the Lender Narratives have been simplified and revised to make the documents as consistent as possible across each loan type.

While members of the public did not submit extensive public comments on these documents, many of the changes adopted reflect changes made in other healthcare facility documents. For example, the other documents include updated environmental requirements, and updated procedures such as those regarding the amount of commercial space allowed in a facility or the flood insurance requirements. Also, minor technical changes were made, such as cross references to new or changed documents. Changes to these documents are reflected in the redlined/strikeout documents posted on HUD's Web site at the address set forth in the introduction to this notice.

HUD-9001h-ORCF: Addendum to Underwriting Narrative—Transfer of Physical Assets (TPA), Section 232/223(a)(7)

HUD has added an additional addendum to the lender's narrative for the Section 223(a)(7) refinance program. This new addendum addresses the requirements for conducting a TPA concurrently with a refinance. This addendum takes the place of the previous addendum “h,” which related to the operating lease and is being incorporated into the main lender's narrative document, Lender Narrative, Section 232/223(a)(7), HUD-9001-ORCF.

HUD-9003a-ORCF: Addendum to Underwriting Narrative—Phase I Environmental Site Assessment, Section 232/241(a)

This form has been eliminated, and relevant information has been incorporated into a checklist.

HUD-90025-ORCF: Lender Narrative—Existing Buildings with New Construction, Section 232—Blended Rate 2 Stage, Initial Firm Submission; and HUD-90025a-ORCF: Lender Narrative—Blended Rate, Section 232—2 Stage, Final Firm Submission

These forms were added as lenders have requested the option to submit blended rate projects via the two stage process.

Production—Certifications

This group of documents consists primarily of consolidated certifications, which allow each participant in the application submission process—the lender, borrower, principal of borrower, operator and/or management agent—to submit one document containing all required certifications. The required certifications mirror the certifications required for the multifamily program, and include certifications relating to: identifying parties to the transaction, whether there are identities of interest, granting credit authorizations, compliance with the Byrd Amendment, compliance with Title VI of the Civil Rights Act of 1964, and HUD mortgage insurance program requirements. These certifications also include language regarding previous participation disclosures. These certifications did not receive any public comments, and few substantive changes were made to them since the initial publication. Changes to the documents are reflected in the redlined documents posted on HUD's Web site at the address set forth in the introduction to this notice.

Construction Documents

There were few public comments on these documents, and those comments submitted predominately related to loans for the Section 232 program for new construction. The majority of changes to the documents were for minor editing changes or clarifications of policy. Changes to the documents are reflected in the redlined documents posted on HUD's Web site at the address set forth in the introduction to this notice.

Escrow Documents

These documents were generally updated to clarify escrow calculations. Some signature lines were added to specify certification of the calculations included on the forms.

Asset Management Documents

Few comments were submitted on these documents which are used by HUD for routine reviews and approval of facility operations.

Accounts Receivable Documents HUD-92322-ORCF: Intercreditor Agreement

A provision related to the timeframe and scope of the lien was adjusted to provide at least 30 days notice before the “Cut-Off Time” when HUD assumes a priority lien position. This would allow additional time for a turnaround, rather than having the cut-off enforced at the time notice is served.

Several definitions were revised to accommodate concerns from the accounts receivable industry, including “Protective Advances,” “AR Lender Priority Collateral” and “AR Loan Obligations.”

HUD-90020-ORCF: Account Receivable Financing Certification

As a result of public comment to the Intercreditor Agreement, a new section clarifies HUD's requirements that property securing FHA-insured loans may not cross-collateralize obligations of properties without FHA insured loans.

HUD-92321-ORCF: Blocked Account Agreement

This document was removed as a result of public comments. It will be a sample document, not a required form.

HUD-92324-ORCF: Rider to the Intercreditor Agreement

This document was removed as a result of public comments. It has been incorporated directly into the Intercreditor Agreement.

Master Lease Documents

The collection of Master Lease documents was established to address the increase in the number of multi-facility portfolio transactions submitted to the Section 232 program. The May 3, 2012 60-day notice proposed a master tenant security agreement, a master tenant regulatory agreement, a subordination/subordination non-disturbance and attornment agreement, a cross-default guaranty of subtenants, and an addendum to the master lease which includes provisions protecting the lender and HUD's interests. The master lease structure allows for any rental deficiencies at one facility to be supported by income from another facility under the master lease. A master lease does not, however, pool the assets of all facilities for underwriting a single mortgage; each individual loan must meet HUD's underwriting standards on its own merit.

HUD-92211-ORCF: Master Lease Addendum

In reviewing this document in response to public comment, HUD attempted to eliminate unnecessary duplication and retain only those provisions most appropriate for the Master Lease Addendum. Provisions requiring direct enforcement rights were moved to the master tenant regulatory agreement. In addition, HUD clarified provisions regarding “bed authority,” acknowledging that in most instances, the operator holds the licenses required to operate the healthcare facility. HUD clarified the term “Approved Use” consistent with current policy.

HUD-92331-ORCF: Cross-Default Guaranty of Subtenants

The title of this document was changed from “Subtenants Cross Guaranty” to “Cross-Default Guaranty of Subtenants.” HUD also made additional clarifications pursuant to public comment.

HUD-92333-ORCF: Master Lease Subordination, Non-Disturbance and Attornment Agreement (SNDA)

Minor rewording and clarifications were made to make this document consistent with other documents and terminology used throughout all of the healthcare facility documents.

To be consistent with 24 CFR 232.1015 of HUD's 2012 Final 232 Rule, the time frame for providing notices relating to certain operational deficiencies has been clarified as two (2) business days.

In response to comments, this document was revised to give additional rights to and clarify the rights of the lender. For example, clarifications were adopted to provide the lender authority to allow the operator to select and engage the services of a management consultant in the event of a project operating deficiency.

HUD-92335-ORCF: Guide for Opinion of Master Tenant's Counsel

The title of this document was changed from Master Tenant's Attorney's Opinion to Guide for Opinion of Master Tenant's Counsel. New sections were added in the document to describe the exercise of rights or enforcement of remedies, security interest and rights to the collateral, which are consistent with the Guide for Opinion of Borrower's Counsel. A new section was added to clarify that the Guide for Opinion of Master Tenant's Counsel is governed by the laws of the state where the project is located.

HUD-92337-ORCF: Healthcare Regulatory Agreement—Master Tenant

Changes were made to make this document consistent with the borrower's and operator's regulatory agreements. Provisions that had required segregated accounts were revised in accordance with the 2012 Final 232 Rule. The provision requiring the healthcare facility to maintain positive working capital at all times has been removed.

HUD-92340-ORCF: Master Tenant Security Agreement

In response to public comments regarding Uniform Commercial Code (UCC) requirements, among other changes, the UCC definition of “Debtor's location” reflects UCC requirements rather than, as in the proposed document, the location of the chief executive's office. A new clarification was added for “Permitted Liens,” encompassing both the security interest in favor of the secured party and any liens approved in writing by the secured party and HUD, which are allowable liens against the collateral. Additional recitals and optional language were added to this document to address different scenarios within a project (e.g. to account for a situation where the borrower is not the same as the operator or when a master lease is involved).

Additional Legal Documents

This category is mainly comprised of the documents relating to the borrower's and operator's attorneys' opinions. A summary of the substantive updates is presented below.

HUD-91725-ORCF: Guide for Opinion of Borrower's Counsel

The document was modified to provide that the enforceability opinion does not include the ground lease and certain other documents.

HUD-92325-ORCF: Guide for Opinion of Operator's Counsel and Certification

The documents include several revisions in response to public comments. One modification was to change all references to “Property” to refer to the “Project” when referring collectively to all of the types of property interest that are to serve as collateral for the loan.

Additional ORCF Documents

Changes to the documents are reflected in the redlined/strikeout documents posted on HUD's Web site at the address set forth in the introduction to this notice.

HUD-91121-ORCF: Deposit Account Control Agreement (DACA); HUD-91122-ORCF: Deposit Account Instructions and Services Agreement (DAISA); and HUD-92321-ORCF: Blocked Account Agreement

Several commenters recommended that these documents be eliminated as HUD mandated forms because they are used with third parties who do not normally do business with HUD. The commenters noted that many depository banks, which are large institutions, have their own forms and will not accept the HUD form. The commenters suggested, and HUD agrees, that these documents are more appropriate as samples rather than as forms. As a result, these documents have been removed from the PRA process. Several commenters also provided technical comments which will be addressed when the sample documents are generated.

HUD-92264-ORCF: Healthcare Facility Summary Appraisal Report

As this form was only used by Section 232 new construction program applicants, a few sections of this form (e.g., Land and Replacement Cost) were incorporated into the related Maximum Insurable Loan Calculation form. The Healthcare Facility Summary Appraisal Report has been eliminated.

HUD-92264a-ORCF: Maximum Insurable Loan Calculation

The document name was changed to Maximum Insurable Loan Calculation to avoid confusion with an existing FHA multifamily program form with a similar name. The document was also changed to an Excel spreadsheet with tabs for instructions, sources and uses, land, replacement cost, loan determination criteria and criteria by loan type. Additional features of the form include context sensitive comments for individual cells and calculations for many cells.

HUD-92323-ORCF: Operator Security Agreement

In response to public comment, a new attachment was added to provide an operator Assignment of Leases and Rents subpart of this form. This new document is the only portion of the operator Security Agreement that is recorded. This change removes the recordation requirement for the main document. Other changes were made in response to public comment, including adding a concept of “permitted liens,” and clarifying government receivables account requirements.

HUD-92466-ORCF: Healthcare Regulatory Agreement—Borrower

This agreement reflects changes made in the 2012 Final 232 Rule. For example, the time frame for providing notices relating to certain operational deficiencies has been clarified as two (2) business days; the long-term debt service reserve requirement is no longer a standard provision for every transaction; provisions relating to reasonable operating expenses and ensuring goods and services are acquired at favorable prices were clarified, and in reliance of these clarifications, subsequently unnecessary provisions, such as provisions limiting payments to affiliates, have been relaxed.

HUD also made several changes to this document pursuant to public comment. Triggers for causing the termination of a management agreement were clarified. The surplus cash calculation provisions reflective of current policy were reinstated. Requirements for non-profit borrowers to take distributions were clarified to reflect current policy.

HUD-92466a-ORCF: Healthcare Regulatory Agreement—Operator

This agreement also reflects changes made in the 2012 Final 232 Rule. For example, since the 2012 Final 232 Rule allows aggregated accounts so long as accounting can readily and reliably identify and analyze each facility's financial transactions, provisions requiring segregated accounts have been revised accordingly. As with the borrower's regulatory agreement, the time frame for providing notices relating to certain operational deficiencies has been clarified as two (2) business days and the provisions relating to reasonable operating expenses and procedures for ensuring favorable pricing for goods and services have been clarified.

Several changes were made based on public comments received. The requirement to maintain positive working capital at all times was removed. Clearer standards triggering HUD's right to require the operator to hire a consultant were set forth. HUD limited its ability to declare an immediate event of default to situations where a termination, suspension or restriction on a necessary permit or approval would have a materially adverse effect on the operation of the healthcare facility.

HUD-94000-ORCF: Security Instrument/Mortgage/Deed of Trust

In addition to the revisions made in response to the comments discussed below, language was added to this document in response to comment to obligate the borrower to assure that the operator, master tenant and management agent comply with UCC related provisions and to allow liens in favor of HUD-approved accounts receivable lenders.

HUD-9839-ORCF: Management Certification

This form has been revised to be consistent with HUD's 2012 Final 232 Rule, at 24 CFR 232.1011, captioned Management Agents, and to clarify the requirements for a management agent and the management agreement.

Production—Firm Commitments

As stated previously, HUD determined that these documents are inappropriate for the PRA process, and these documents have been removed. HUD will provide additional details about these documents as necessary.

Production—Checklists

As stated previously, HUD determined that these documents are inappropriate for the PRA process, and these documents have been removed. HUD will provide additional details about these documents as necessary.

III. Discussion of Specific Public Comments

Thirteen sets of public comments were submitted in response to the 60-day notice throughwww.regulations.gov,the government-wide portal for the receipt of public comments on federal agency documents.3 Comments were submitted by a wide variety of parties including: commercial mortgage bankers and other lenders, a management oversight and consulting services company for skilled nursing facilities and related healthcare providers, companies that own, manage, and operate skilled nursing facilities and assisted living facilities; and national and state healthcare associations. Comments were also submitted by a coalition of national investment and mortgage bankers that participate in HUD's healthcare programs, as well as a trade association of lenders. The “HUD Practice Committee” submitted comments on behalf of the Forum on Affordable Housing and Community Development Law of the American Bar Association. Private individuals also submitted comments.

3Public comments submitted in response to the May 3, 2012, 60-day notice can be found athttp://www.regulations.gov/#!searchResults;rpp=25;po=0;s=FR-5623-N-01.

As a special outreach to the public on proposed changes to the Section 232 program regulations, HUD hosted a forum, the “Section 232 Document and Proposed Rule Forum” on May 31, 2012, in Washington, DC. A video of this forum is available on the HUD Internet site athttp://portal.hud.gov/hudportal/HUD?src=/press/multimedia/videos.While comments were raised and discussed at the forum, as reflected in the video, HUD encouraged forum participants to file written comments through thewww.regulations.govWeb site so that all comments would be more easily accessible to interested parties. All comments, whether submitted throughwww.regulations.govor raised at the forum, were considered in the development of these revised documents.

In addition to comments submitted in response to the 60-day notice, 27 public comments were submitted in response to the companion May 3, 2012, Section 232 proposed rule. To the extent that comments submitted on the proposed rule related to the healthcare facility documents, those comments were taken into consideration in the further development of the healthcare facility documents presented for additional public comment in this 30-day notice.

This section of the notice highlights the key issues raised by public comments on the documents and HUD responses to these comments. Some documents received no comments and therefore are not included in the discussion section below. For other documents, many of the changes suggested and those adopted by HUD have been discussed in Section II of this notice.

Many commenters recommended different terminology or different organizational structure to several of the documents. All these types of comments are not necessarily addressed in this section of the notice. To address each editorial/organizational structure recommended change would result in a very lengthy notice. The redline/strikeout versions of the documents, however, reflect all changes that HUD agreed with and adopted, and have taken into account any such recommended editorial/organizational changes that HUD did not agree or adopt. Finally, certain issues raised by the commenters on the documents were also raised in connection with the companion proposed rule. To the extent that comments were similar and have been addressed in the preamble to the 2012 Final 232 Rule, HUD does not repeat the issue and response in this notice.

Generally, in the discussion of public comments that follows, the terms “section” and “paragraph” are interchangeable. Some of the documents specifically use the term section, while others simply number paragraphs.

HUD-93305-ORCF: Agreement and Certification

Comment:A commenter raised questions about whether the language in the document regarding reduced costs (section 3) was determined by HUD to be a “loan reduction” and must either go to pay down the mortgage or be deposited into the reserve for replacement account to avoid modification of the loan and an accompanying prepayment penalty. Essentially, the commenter asked whether this constituted prepayment of the loan amount if it was less than estimated prior to final endorsement.

HUD Response:HUD revised the language in the document to clarify the treatment of these funds and re-characterize the calculation as excess mortgage proceeds. These amounts would thus not constitute a prepayment and accordingly would not trigger the need to look to the prepayment lockout and accompanying penalties.

HUD-92441-ORCF: Building Loan Agreement

Comment:A commenter recommended changing paragraph 4(c), which requires a disbursement agreement be attached to the document, to allow either separate disbursement agreement or an attached table of mortgageable cost items rather than requiring a separate disbursement agreement.

HUD Response:HUD declined to adopt this revision. HUD recently addressed this question in connection with the update of the multifamily rental project closing documents, and determined that a disbursement agreement is always required in new construction. HUD determined that it would be much harder to enforce a table of mortgageable costs versus a disbursement agreement that is signed by the parties.

HUD-92441a-ORCF: Building Loan Agreement Supplemental

Comment:A commenter suggested eliminating this supplemental form given that the provisions in this form are addressed in the Building Loan Agreement.

HUD Response:It is HUD's view that it would be very rare that a borrower acts as its own general contractor, a supplement is more appropriate rather than adding this language to the standard Building Loan Agreement.

HUD-92554-ORCF: Supplementary Conditions of the Contract for Construction

Comment:A commenter questioned why there was a supplement to the Construction Contract, stating that this structure made sense when HUD was using old documents, but that it seemed more efficient to incorporate these provisions into the contract now.

HUD Response:The approach to retain a set of supplemental conditions to the construction contract maintains a long-standing approach used in the multifamily documents and matches an approach used by the AIA construction forms.

HUD-92412-ORCF: Working Capital Escrow

Comment:A commenter suggested additional language at page 3, paragraph 4, specifying that for purposes of calculating the debt service coverage ratio, any operating lease will be disregarded and that the debt service coverage ratio will be calculated based upon the operating results of the project rather than of the borrower, master tenant or operator. A similar comment, to carve out the operating lease from debt service coverage calculation, is made to the Escrow for Operating Deficit.

HUD Response:Public commenter's recommendation to exempt an operating lease in the debt service calculation has been adopted in both documents.

HUD-91116-ORCF: Addendum to Operating Lease

Comment:A commenter stated that in order to avoid possible confusion or conflicting requirements among the HUD documents, the operator Lease Addendum should be removed and its provisions should be addressed in the Regulatory Agreement.

HUD Response:HUD declined to adopt the commenter's recommendation. HUD has decided to retain the Addendum.

Comment:Commenters submitted revisions to address what they stated were inconsistencies between the Master Lease Addendum and Operating Lease Addendum. Commenters suggested that HUD needed to develop a form of Operating Lease Addendum for use in Master Lease structures or should incorporate options in the Addendum to Operating Lease for use in a Master Lease structure. The commenters further suggested that HUD revise the documents to address inconsistencies between the Master Lease Addendum and the Operating Lease Addendum. A commenter stated that the ability to tailor an agreement to the facts and circumstances of the loan and the parties needs to be retained, especially when dealing with agreements to be signed by third parties such as accounts receivable lenders and unaffiliated operators and/or managers. Several commenters stated that HUD should revise terminology and add definitions.

HUD Response:HUD accepted many of these recommendations, and added several definitions. The redline/strikeout version of this document reflects the recommendations adopted.

Comment:A commenter stated that if the tenant is not affiliated with the borrower, section 2 should be revised to require only that the tenant comply with the mortgage loan documents to which it is a party. If the tenant is not affiliated with the landlord, it may not even have a copy of the landlord's mortgage loan documents and should not be required to comply with agreements to which it is not a party.

HUD Response:HUD disagrees. Operation of the healthcare facility in accordance with “Program Obligations” is vital to ensuring the success of the project.

Comment:Commenters stated that the provisions in section 3 allowed HUD to eliminate the need for a separate subordination agreement. Also, commenters stated that non-disturbance and attornment provisions could be built into this section and used when appropriate in lieu of a separate Subordination, Non-disturbance and Attornment Agreement (SNDA).

HUD Response:HUD determined to keep the paragraph on subordination and to also retain a separate subordination agreement in order to establish privity of contract between the lender and the tenant.

Comment:A commenter stated that if the tenant is not affiliated with the borrower, section 3(a) should be revised to preserve the tenant's rights set forth in the SNDA which contains the HUD approved non-disturbance language that protects the tenant so long as the tenant is not in default under the operating lease.

HUD Response:HUD agrees with the commenter and accordingly adopts the change.

Comment:A commenter suggested that section 3(b) relating to easements and licenses, be revised to allow the tenant to enter into short term telecommunications services that are not recorded against the property and that are terminable upon 30 days' notice without HUD's consent. The commenterstated that this change will allow the tenant to run its business without having to obtain HUD's approval for short-term telecommunications contracts.

HUD Response:HUD has determined that proper oversight requires notice of these and similar contracts and will provide additional details regarding the process for approval as necessary.

Comment:Multiple commenters suggested revisions to section 4, relating to furnishings, fixtures, and equipment (FF&E). A commenter stated that some operating leases provide that certain non-essential FF&E, such as the tenant's computers, will remain the property of the tenant. To prevent such FF&E from becoming the landlord's property under section 4 of the addendum, the commenter suggested inserting an exception for a lease between unaffiliated parties. Another commenter stated that HUD's requirements do not reflect how the industry actually works and that who owns the personalty should be irrelevant to HUD because HUD will obtain security agreements from both the borrower and the operator.

HUD Response:HUD largely agrees with the commenters and has revised section 4 accordingly. The revised section now contemplates that Lessee could own the FF&E but the borrower would have the right to purchase the FF&E at the termination of the Lease. HUD has also revised section 4 to permit removal of FF&E in the “ordinary course of business.”

Comment:A commenter suggested that in cases where the tenant is not affiliated with the landlord, the tenant may not know if the rent payments are sufficient for the landlord to pay its bills. The commenter stated that the landlord, not the tenant, should make the representation in the first sentence of section 5. Similarly, because the landlord is the borrower under, and benefits from, the HUD insured loan, the landlord should be responsible to HUD for the various premiums that may be required under the landlord's mortgage. The commenter stated that while an existing lease may require the tenant to pay such premiums, to the extent the tenant did not agree to pay for these premiums and it is not affiliated with the landlord, it should not be required to incur additional fees as a result of the landlord's HUD financing.

HUD Response:Under the revised document both the borrower/lessor and the lessee make the representation.

Comment:A commenter stated that language should be added under section 6, “Operator's Regulatory Agreement and Security Agreement,” that addresses the termination of the operating lease if there is a programmatic default of the operator regulatory agreement.

HUD Response:HUD has revised this section to clarify the requirements and to make it consistent with section 13, HUD's right to require termination of the operating lease. Defaults of the operator's regulatory agreement will not terminate the operating lease unless requested or approved by HUD.

Comment:Commenters stated that sections 10 and 11 (Financial Statements, Reporting Requirements and Inspections) should be removed as these functions are already addressed in the operator Regulatory Agreement. The commenters stated that HUD should omit any provision addressed in the Regulatory Agreement from the Lease Addendum.

HUD Response:HUD adopted the commenter's recommendations and removed these sections from this document.

Comment:Commenters suggested adding language to make it clear that the tenant will maintain insurance. A commenter specifically suggested adding a sentence requiring proof of insurance compliance annually, since this requirement also appears in the Master Lease Addendum.

HUD Response:HUD adopted the commenter's recommendation into current section 10.

Comment:A commenter recommended that HUD add provisions in section 13 (now section 11, Assignment) that require a transferee to obtain a Form HUD-2530: Previous Participation Certificate in the case of a transfer to a subsidiary. The commenter stated that HUD would therefore be required to give prior written consent when a change of control occurs involving a master tenant which is controlled or owned by a publicly traded entity. Another commenter recommended clarifications for transfers to affiliated or subsidiary parties be added as a new section.

HUD Response:HUD determined that the language in proposed section 13 (now section 11), as revised, is broad enough to provide adequate protection of HUD's interests and adequate notice of HUD's requirements to interested parties, whether such transfers involve affiliates or non-affiliates, and that additional language is not necessary.

Comment:Multiple commenters stated that section 14 (now section 12, relating to accounts receivable (AR) financing) is more appropriate in the operator Security Agreement.

HUD Response:HUD declines the commenter's recommendation and has determined that this provision is appropriate to memorialize the understanding of the parties and clarify the expectations regarding accounts receivable financing.

Comment:A commenter suggested that in situations where the tenant is not affiliated with the landlord, section 15 (now section 13, relating to termination of the operating lease) be revised to clarify that HUD can terminate the lease only for violations by the tenant. The commenter stated that this is consistent with the tenant's rights under the Subordination Non-Disturbance and Attornment Agreement (SNDA) to be signed at closing.

HUD Response:HUD has determined that it must reserve the right to cause termination of the operator lease for any violations of the operator's regulatory agreement and for other violations of program obligations.

Comment:A commenter stated that the defined term of “Material Term” is used in section 14 of the Addendum to restrict the tenant's ability to make material changes to its accounts receivable documents. HUD, the mortgage lender, the AR Lender, the landlord and the tenant may negotiate the parameters of future amendments in the Intercreditor Agreement. Additionally, AR borrowers need some flexibility in managing the AR loans such as extending the maturity of the loans, adding additional guarantors, increasing or decreasing the principal balance by less than ten percent (10%), increasing the interest rate by no more than five percent (5%) or adding collateral.

HUD Response:Although these changes were not adopted for the Addendum to Operating Lease, consistent with current practice, provisions were added to the Intercreditor Agreement to provide this flexibility.

Comment:A commenter suggested that HUD add several new sections relating to operator responsibilities, defaults, and remedies upon default (to be sections 20-28). The commenter stated that, in particular, section 23 the “Special Purpose Entity Provisions” must be considered carefully as a number of the major long-term care companies that have existing operators are not special purpose entities. The commenter suggested that the “Special Purpose Entity Provisions” be waived as part of the underwriting process.

HUD Response:HUD adopted some of the commenter's suggested additions, but has declined to adopt others. HUD determined that where the provisions duplicated rights found in other provisions or other documents, theywere not necessary to repeat here. In addition, HUD determined that such provisions would be preferable in the operator's regulatory agreement, which HUD has the right to enforce directly.

HUD-91111-ORCF: Survey Instructions and Borrower's Certification

Comment:A commenter suggested that the Table A requirements be adjusted, reviewed and made more practical for use on a refinance (as opposed to new development or acquisition).

The commenter recommended that Table A, Item 1 be deleted, subject to being required by the title company in order to issue the title insurance required by HUD. The commenter further suggested that Item 6b should be dropped as current building setback and related items only impact new construction and not a previously existing structure. The commenter also suggested that Item 10(a) should be deleted, subject to being required by the title company in order to issue the title insurance required by HUD; Item 10(b) should be deleted; Item 11(b) should be deleted and replaced by 11a plotting or disclosure of utilities by observable evidence is sufficient. Going beyond observable evidence is extremely burdensome and oppressive; Item 19 should be deleted as a required item.

The commenter further recommended that section I—2nd paragraph modify the sections that the survey will comply with. The commenter recommended that section I E be revised to add “HUD Project Name” to basic information to be provided.

The commenter recommended that section II A be modified to say: “The title company will delete the title policy survey exception and accept the prior survey in issuing the policy of title insurance otherwise required at endorsement by HUD;”

HUD Response:HUD declined to adopt the commenter's recommendations at this time, but will consider these recommendations further in connection with future changes to the documents.

HUD-9839-ORCF: Management Certification

Comment:A commenter suggested that HUD revise proposed section 1(b)2(b), relating to compensation, to reflect variations in compensation. The commenter stated that managers typically receive a “Base Management Fee” comprised of a percentage of a project's gross revenue after adjustments and contractual allowances, and sometimes net of ancillary expenses. Third party managers frequently also receive an “Incentive Management Fee” based on net cash flow from operations, Earnings Before Interest, Taxes, Depreciation, Amortization, (EBITDA) or net profits.

HUD Response:HUD agrees with the commenter, and made the section (now section B(2)(b)), generic to allow for various forms of compensation to be stated and to allow for industry practice changes for compensation. The form has been adjusted to consider any types of compensation that has been agreed upon between the owner and the management agent. The compensation is expected to be typical of industry practices and not excessive or grossly out of line from a norm. Industry abuse or excessive fees will not be approved based upon HUD's review and determination.

Comment:A commenter stated that the requirement to abide by any decisions HUD makes as a result of appeal of excessive fees is too vague, and recommended new language, further stating that if HUD can change the agreement and economics, the management agent should have the ability to terminate the contract.

HUD Response:The appeal process was removed from the form. As long as the compensation is typical of industry practices the compensation will be allowed.

Comment:A commenter suggested removing language about the management agent complying with payment requirements and reasonableness of the fees (proposed section 2(c), now section D(2)), stating it is too vague, that the management agent will need more definition of the requirements, and that reasonableness is already discussed in a previous section.

HUD Response:HUD declines to adopt the commenter's recommendation. The provision alerts the management agent that the fees charged are to be reasonable within industry standards and allocation of those costs between the management fee and the Healthcare Facility's account.

Comment:The commenter stated that section 3(f) should be deleted as it is too burdensome to maintain copies of verbal and written estimates.

HUD Response:HUD determined that an audit trail of transactions is necessary for compliance and for analysis and standard operating purposes. HUD determined that a record of the operations of the facility is typical of a project and is in the normal course of business and not burdensome. Therefore, the provision to keep records in accordance with program obligations was maintained (now section D(6)).

Comment:A commenter suggested that HUD reduce the number of documents with which the Agent must comply, since many of the loan documents are beyond the scope of the Agent's relationship.

HUD Response:HUD has determined that, in managing the healthcare facility, the management agent must comply with program obligations, including any regulatory agreements and the operating leases. In revising these provisions, HUD attempted to balance any burden to the management agent with the important role the management agent plays in the operation of the healthcare facility.

Comment:A commenter suggested that HUD delete proposed section 3(g) saying that it should be the borrower's obligation (not the management agent's) to invest project funds.

HUD Response:Although deal structures may vary, the management agent typically is collecting and depositing funds, including into accounts in the operator's or borrower's name. In revising this section (now section D(7)), HUD attempted to provide flexibility for deal-specific variations in a management agent's responsibilities.

Comment:A commenter stated that section (4) changes insurance notification to the lender (not HUD), and suggested that the correct “loss payee” designation is “the Lender, its successors and assigns.” Until HUD is assigned the Note, it is the lender who is the Loss Payee.

HUD Response:HUD agrees with the commenter. As this certification is meant only to confirm the management agent's compliance with HUD's insurance requirements set forth in other legal documents, this provision (now section D(8)) and other references to insurance have been revised accordingly.

Comment:A commenter suggested that proposed section 5(b)(2) be modified to allow accounting principles other than Generally Accepted Accounting Principles (GAAP)4 .

4GAAP refers to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards.

HUD Response:HUD has revised this section (now section E) to clarify the bookkeeping requirements. HUD will provide more details as necessary.

Comment:A commenter stated that it may be in the project's best interests to allow the management agent to advance funds to the project, and as such, suggested deleting section 6(g) that disallows such advances.

HUD Response:HUD declines to adopt the commenter's recommendationand has maintained this provision (now section F(7)). A management agent should not advance funds to a project without discussing with the operator and owner the current and future hardships necessitating such advances. Simply forwarding funds to the project can jeopardize the project if the owner or operator is not aware of the situation.

Comment:A commenter suggested deleting the entire “hold harmless” of section 7, stating the provision is too vague.

HUD Response:HUD disagrees with the commenter and declined to adopt the commenter's recommendation. This section (now section F(9)) allows such agreements if approved by HUD. It is HUD's position that, given the potential for harm, any hold harmless and similar arrangements should be rare and HUD requires HUD review of any such provisions.

Comment:A commenter suggested that HUD revise the form and update the termination provisions to provide a 30-day notice period.

HUD Response:HUD agrees in part with this comment and has revised the relevant sections (now sections H(1) and (2), and corresponding language in section C) accordingly. Although these sections now provide for a 30-day notice period for terminations based upon violations of the regulatory agreements, the provisions reserve HUD's right to act immediately if the permits or approvals are in substantial and imminent risk of being terminated, suspended, or otherwise restricted in a way that would have a materially adverse effect on the project.

Comment:A commenter stated that a new provision be added to section 9 to require the management agent's certification if the owner or operators plan to permit collection of a new fee which not set forth in a management agent's certification.

HUD Response:HUD has clarified in this section (now section (I)) the triggers for requiring a new certification. The commenter's suggestion is not necessary to add because similar protections are set forth elsewhere in the document.

Comment:A commenter stated that many projects have existing identity-of-interest management agents, and, that under the documents as proposed, these parties will now have the additional burden of “clearly establishing” that the fees charged are consistent with those charged by independent management agents.

HUD Response:Consistent with the 2012 Final 232 Rule, HUD is maintaining the requirement for HUD approval of a management agent and management agreement prior to a management agent being retained. In light of new provisions in HUD's Section 232 program regulations at 24 CFR 232.1007, which provide that operating expenses shall be reasonable and necessary for the operation or maintenance of the project, HUD determined that it was unnecessary to delineate further management agent restrictions in regulatory language. Accordingly, the documents are revised to be consistent with the policy established in the final regulation.

HUD-92466-ORCF: Healthcare Regulatory Agreement—Borrower

Comment:A commenter suggested adding the phrase “as evidenced by the discharge or satisfaction of the Security Instrument” to the third paragraph on page 2, to clarify when the regulatory agreement remains in effect.

HUD Response:HUD has revised this paragraph to include the phrase “as evidenced by the discharge or release of the Security Instrument,” as a release of the lien of the security instrument would be a recorded instrument that can provide adequate evidence of satisfaction of the note.

Comment:A commenter stated that the definition of “Approved Use” should be changed to conform to the Firm Commitment forms.

HUD Response:HUD agrees with the commenter and adopted the commenter's recommendation.

Comment:A commenter stated that the definition of “distribution” should omit the phrase “any asset of borrower.”

HUD Response:HUD declines to adopt the commenter's recommendation. As set forth in the 2012 Final 232 Rule, the borrower is, unless otherwise approved by HUD, a single asset entity, so any assets of the borrower's will be project funds subject to distribution requirements.

Comment:A commenter recommended that the definition of “healthcare facility” be expanded to include “independent living facility” and that the word “or” be changed to “and/or.”

HUD Response:HUD broadened the definition to include anything that might be insured under section 232 of the National Housing Act.

Comment:A commenter requested that, in the definition of “Identity of