LEAN Eligible Debt, AR Financing, Portfolios

FHA Office of Residential Care
Section 232 – Eligible Debt, A/R
Financing, Portfolios, Master Leases
Eligible Debt
• 2 Year Seasoning
• Less than 2 Years seasoned:
– Incurred for construction, purchase, or capital
– Incurred by the Borrower as part of the normal
course of business;
– Unrecorded debt of the Borrower directly
connected to the project
Eligible Debt
• Must not have been created with and Identity
of Interest (IOI) between a Borrower and the
proposed FHA lender.
• Must not exceed existing project debt except
for HUD allowed financing expenses.
• May include fully documented HUD eligible
and recent capital expenditures or structural
• Must not include operator’s debt
Debt Investigation
HUD requires a Debt Investigation of the existing indebtedness when:
– The creation of the debt involved an identity of interest lender,
– The current loan was created less than two years ago,
– Circumstances are present that indicate the previous financing may
have included other forms of non-standard collateral that suggest the
debt was not created in an arms-length transaction,
– The current loan involved alternate financing structures (e.g., pooled
debt, line-of-credit financing, and mezzanine debt) and requires
further explanation, as deemed necessary by HUD,
– The current lender held escrows or compensating balances that will be
released back to the Borrower, or
– Any other non-traditional debt or atypical
obligations/interests/agreements are involved.
Debt Investigation continued
An example of the current lender holding back escrows or compensating balances is:
A commercial lender makes a loan for $8M, but increases the amount of the Note to $8.5M by
holding an escrow of $500,000 (funded by the Borrower) to collateralize the increased
amount. The Lender reports outstanding debt of $8.5M, but with HUD costs of $500,000, the
total eligible costs are $9M and HUD insures a loan for $9M. The commercial lender then releases
the escrow to the Borrower when the commercial loan is paid off. This results in the Borrower
receiving equity cash out from HUD-insured loan proceeds and would violate program intent.
The following are the types of documentation that may be provided to substantiate the eligibility
of existing indebtedness when a Debt Investigation has been conducted:
Fully executed mortgage note, settlement statement, payoff statement, purchase & sale
agreement, purchase contract, option agreement, allonge, capital invoices, fully documented Title
Search, Title Exceptions, release documentation and other updated loan documents
Accounts Receivable Financing –
New Intercreditor Agreement
• March 2013 new documents published
including the Intercreditor Agreement
• AR industry strongly opposed the published
• Formed a Task Force to revise document
• Revision became available for use on February
27, 2014
• Final OMB-numbered form document to be
available by June 2014
Accounts Receivable Financing –
New Intercreditor Agreement
• Changes include:
– Definition of AR Loan Obligations
– Cut-Off Time & Ceased Funding
– Notices and Consent Rights
• Looking further into the “standstill provision”
Accounts Receivable Financing –
Lender Experience
• Latoria
Portfolios – Midsize and Large
• Mortgagee letter 2014-06 published April
• Updated old Notice H01-03 for portfolio
Portfolios – Midsize and Large
New Guidance
• Increases threshold for midsize portfolio from
$75 million to $90 million (triggers corporate
credit review)
• Limits size of a single portfolio to no more
than 5% UPB
Portfolios – Midsize and Large
Formalizes Existing Practice
• List of corporate credit review submission
• 18 month rolling window
• Debt service reserve requirement
• Master lease requirement
Portfolios – Midsize and Large
Mechanics of Review
• Lender contacts ORCF for concept call/intro
• Understand nature of transaction, corporate
structure, etc.
• Make sure review focuses on biggest risk areas
Portfolios – Midsize and Large
Mechanics of Review
Financial strength of the participants
Quality of care
Current debt
Legal issues
Master Lease
• Purpose of the master lease
– Reallocate cash flow
– Bankruptcy protection (indivisible lease)
Master Lease
• Alternative master lease structures need to
protect HUD equivalently
– Multiple minority owners
– Multiple operators
– Multiple lenders
– Legal restrictions
– Contractual restriction
Master Lease
Criteria & Legal Review
• ORCF makes portfolio determinations prior to
assignment to HUD counsel.
• Portfolio: Two (2) or more projects that are under
common control
• Common Control: Is exhibited by any individual(s) or
entity(ies) that controls the borrower and/or operator
regardless of the percentage of ownership interest, so long as
the individual(s) or entity(ies) comprise each borrower and/or
Master Lease Criteria
223(f) purchase or refinance
232 new construction or substantial rehab
223(a)(7) OR
TPA (change of operator, licensee, operating entity)
• Three or more properties and/or $15 million or more in aggregate
mortgage amount
• The borrowers will either be under same ownership or a majority
ownership individual or group will control the properties
• The operators of each property will be a lessee with the same ownership
• Subsequent applications received within 18 months from the last project
with the same ownership and operating structure as an existing FHAinsured portfolio with a master lease in place, that property must be
added to the existing master lease.
Terms of Master Lease & Subleases
• FHA-insured properties only
• Initial term of Master Lease = maturity date of
mortgage or longer
• If long-term lease not feasible, propose alternative
1. Sublease coterminous with one another
2. Addendum to Regulatory Agreement: borrower
to enter into new master lease prior to
Master Lease Review Package
1. Cross-Default Guaranty of Subtenants
2. Guide for Opinion of Master Tenant’s Counsel
3. Healthcare Regulatory Agreement - Master
4. Master Lease SNDA
5. Master Lease Addendum
6. Master Lease Estoppel Agreement
7. Master Tenant Security Agreement
Master Lease: Lender Requirements
1. Terms and conditions of master lease;
2. Waiver requests;
3. Proposed payments to or from master tenant;
4. Lease agreements between borrower and master tenant, and
lease agreements between master tenant and subtenants;
5. Description of the collection and flow of funds from subtenants to
master tenant and from master tenant to borrower. (Include AR flow of
funds, if applicable).
6. Diagram showing flow of funds from each operator to the master tenant
to the borrower. Specify the depositories for each individual project
funds, as well as for the master tenant as applicable
7. Description of legal structure of borrower or master landlord entity, the
master entity, and operating entity/subtenant, including all tiers of
Master Lease: Lender Requirements
1. Names of facilities
2. Proposed mortgage amount for each facility;
3. Recommended appraised value of each facility;
4. Proposed debt service coverage ratio for each facility, including
the mortgage insurance payment;
5. # of beds at each facility;
6. CMS Star Rating at each facility, if applicable;
7. Current balance of each facility's replacement reserve account;
8. Any other reserve funds that will be available to the
owner/operator to fund project costs.
1. Master Lease and Subleases
2. Base rent amount
3. Escrow amounts (for example, taxes, MIP,
property insurance, etc.)
4. Term of the master lease
5. HUD mandated immediate and/or critical repairs
6. HUD required replacement reserves
7. Any other required reserves
• Small portfolio: master lease still required even though portfolio
credit review not required
 The 18-Month Window is a rolling period, meaning that HUD may
reach back or forward to projects assigned within 18 months of:
 The first project to trigger the master lease threshold requirements; or
 The last project added to the master lease
• Subsequent applications received within 18 months from the last
project with the same ownership and operating structure as an
existing FHA-insured portfolio with a master lease in place, that
property must be added to the existing master lease.
• Certification of Multiple Projects (Consolidated Certification –
Borrower): lender must obtain from borrower the current &
proposed project applications within 18-month window.

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