Final Rule FR

Vol. 78

Tuesday,

No. 24

February 5, 2013

Part V

Department of Housing and Urban
Development

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24 CFR Part 242
Federal Housing Administration (FHA): Hospital Mortgage Insurance
Program—Refinancing Hospital Loans; Final Rule

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Federal Register / Vol. 78, No. 24 / Tuesday, February 5, 2013 / Rules and Regulations

DEPARTMENT OF HOUSING AND
URBAN DEVELOPMENT
24 CFR Part 242
[Docket No. FR–5334–F–02]
RIN 2502–AI74

Federal Housing Administration (FHA):
Hospital Mortgage Insurance
Program—Refinancing Hospital Loans
Office of the Assistant
Secretary for Housing—Federal Housing
Commissioner.
ACTION: Final rule.
AGENCY:

This rule revises the
regulations governing FHA’s Section
242 Hospital Mortgage Insurance
Program (Section 242 program) for the
purpose of codifying, in regulation,
FHA’s implementation of its authority
to refinance existing loans of hospitals
without FHA-insured mortgages,
without conditioning the exercise of
such authority on the expenditure of
funds for construction or renovation.
Hospitals with FHA’s Section 242
mortgage insurance may refinance
existing debt under section 223(a)(7) of
the National Housing Act, and such
refinancing under section 223(a)(7) is
not conditioned upon the hospital
undertaking new construction or
renovation. When credit availability
contracted considerably in 2008, FHA,
in 2009, commenced the exercise of its
authority to refinance the capital debt of
hospitals without section 242 mortgage
insurance. FHA exercised this authority
through notices issued on July 1, 2009,
and February 22, 2010. FHA initiated
rulemaking to make this refinancing
authority a permanent part of the
Section 242 regulatory program through
a January 29, 2010, proposed rule,
which solicited comment on HUD’s
implementation of this refinancing
authority to date.
This final rule provides for
codification in regulation of HUD’s
refinancing of existing debt and
acquisitions for non-FHA insured loans
of hospitals without conditioning such
refinancing and acquisition on new
construction or renovation. This rule
makes certain changes to the regulations
proposed January 2010 in response to
public comments submitted on the
proposed rule and further consideration
of issues by HUD.
DATES: Effective Date: March 7, 2013.
FOR FURTHER INFORMATION CONTACT:
Roger E. Miller, Deputy Assistant
Secretary for Healthcare Programs,
Office of Healthcare Programs, Office of
Housing, Department of Housing and
Urban Development, 451 7th Street SW.,

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SUMMARY:

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Washington, DC 20410–8000; telephone
number 202–708–0599 (this is not a tollfree number). Hearing- and speechimpaired persons may access this
number through TTY by calling the
Federal Relay Service at 800–877–8339
(this is a toll-free number).
SUPPLEMENTARY INFORMATION:
I. Executive Summary
A. Purpose of the Regulatory Action
FHA’s Section 242 program, by
insuring the mortgages of hospitals,
serves as credit enhancement, offering
borrowers the opportunity to issue
bonds up to the equivalent of an ‘‘AA’’
or ‘‘AAA’’ rating, receive lower interest
rates, lower monthly debt service costs,
and borrow funds for renovations or
new construction. This rule amends the
Section 242 program regulations to
exercise statutory authority to insure
refinancing to hospitals that do not have
FHA-insured mortgages, and to do so
without conditioning such refinancing
on new construction or renovation.
While HUD has long had the authority
to provide such refinancing, HUD had
taken the position that, for hospitals
without FHA-insured mortgages, private
capital for refinancing debt was
sufficient, and the demand for
refinancing existing debt was not as
great as the need for financing new
construction, renovation and
rehabilitation, and equipment
purchases. However, when the credit
markets became more restrictive in
2008, hospitals, organizations
representing hospitals, and members of
Congress appealed to HUD to use its
authority to help hospitals without
FHA-insured financing to refinance
their debt. In 2009, HUD commenced
exercising this authority, initially by
notice. This rulemaking, which
commenced with a January 29, 2010,
proposed rule, reflects HUD’s
commitment to make the refinancing of
debt of hospitals without FHA-insured
mortgages a permanent part of the
Section 242 program. In doing so, HUD
will provide, through clear
requirements, including eligibility
requirements for the refinancing, a
needed source of funding for hospitals
that will aid in reducing interest rates,
eliminating restrictive debt covenants,
and stabilizing the hospital’s financial
situation so that the hospital can
continue to provide healthcare to the
community it serves.
B. Summary of the Major Provisions of
the Regulatory Action
Consistent with implementation to
date, this rule allows for 100 percent of
the mortgage amount to be used for

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refinancing, with less than 20 percent
eligible to be used for construction and/
or equipment. The rule establishes
threshold requirements that are
designed to determine the need of the
hospital for the refinancing that would
not be available through other sources,
and to eliminate from eligibility
hospitals with poor financial
performance. The rule requires that
applicants for refinancing must provide
a description of any repairs,
renovations, and/or equipment to be
financed with mortgage proceeds and
how those repairs, renovations, and/or
equipment will affect the hospital. The
rule allows for insurance of advances in
cases where there is a need for advances
to fund construction activities and the
purchase of equipment. The rule revises
the existing application process to
minimize burden and to also minimize
the possibility that meritorious
applicants will be eliminated before
their application is given full
consideration. The rule also adds
terminology, based on experience to
date, to facilitate understanding how the
Section 242 program works.
C. Costs and Benefits
This rule will not address all
financing needs of hospitals. The
program is not designed for the entire
industry of 5,000 hospitals. The pool of
applicants is limited by eligibility
restrictions. The goal of the rule is to
assist those hospitals saddled with
unexpectedly high interest rates and
where refinancing is urgently needed for
the hospital to continue to remain open
and adequately serve its surrounding
community.
HUD expects the rule to result in a
$1.26 million transfer per year per
healthcare facility. The estimate of
healthcare facilities assisted per year
under the Section 242 program is 10
facilities, resulting in an aggregate
annual impact is $12.59 million. A
multiyear scenario, in which the
number of participants increases to 17,
yields an aggregate annualized transfer
to hospitals of $17.63 million by the
third year of the program. HUD
estimates that this program will raise
net receipts of the Federal Government
by $79 million (from $79 million to
$158 million). Costs of the rule include
up-front application costs, which may
be as high as $870,000 per applicant but
which are likely to be much lower given
that non-FHA insured lenders impose
transaction costs as well. HUD does not
have enough information to quantify or
evaluate the opportunity costs or
distortionary effects of the program.
The primary benefit of this rule is to
keep hospitals with a high degree of

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Federal Register / Vol. 78, No. 24 / Tuesday, February 5, 2013 / Rules and Regulations
financial strength operating in their
communities. Allowing refinancing can
reduce the probability of default and the
expected social cost of hospital
foreclosure. If closure of a hospital were
to occur, the negative economic impacts
would be drastic. In addition to loss of
needed healthcare options, hospitals are
among the largest employers in their
communities. Therefore the benefits of
this rule can be twofold—maintaining
needed healthcare services in a
community as well as avoiding loss of
jobs.
II. Background—The Section 242
Hospital Mortgage Insurance Program

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Section 242 of the National Housing
Act (12 U.S.C. 1715z–7) authorizes FHA
to insure mortgages to finance the
construction or rehabilitation of public
or private nonprofit and proprietary
hospitals, including insurance for major
movable equipment, as well as to
refinance existing debt. Section 242 of
the National Housing Act (NHA)
provides this authority to FHA to: (1)
assist in maintaining the availability of
hospitals needed for the care and
treatment of persons who are acutely ill
or who otherwise require medical care
and related services of the kind
customarily furnished only (or most
effectively) by hospitals (see 12 U.S.C.
1715z–7(a)); and (2) encourage the
provision of comprehensive health care,
including outpatient and preventive
care, as well as hospitalization. In the
case of public hospitals, section 242 of
the NHA is designed to encourage
programs to provide healthcare services
to all members of a community
regardless of ability to pay. (See 12
U.S.C. 1715z–7(f).)
The regulations for the Section 242
program are codified in 24 CFR part
242. Prior to the refinancing changes
proposed to the Section 242 program in
2009, HUD had taken the position that,
for hospitals without FHA insured
mortgages, private capital for
refinancing debt was sufficient, and that
the demand for refinancing debt was not
as great as the need for financing for
new construction, renovation and
rehabilitation, and equipment
purchases. In fact, HUD has long had
the authority, under section 223(f) of the
NHA,1 to provide for refinancing of
1 Section 223(f)(1) of the National Housing Act
provides that ‘‘Notwithstanding any of the
provisions of this Act, the Secretary is authorized,
in his discretion, to insure under any section of this
title a mortgage executed in connection with the
purchase or refinancing of an existing multifamily
housing project or the purchase or refinancing of
existing debt of an existing hospital (or existing
nursing home, existing assisted living facility,
existing intermediate care facility, existing board

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hospital debt to hospitals without FHA
insured mortgages without conditioning
such refinancing on new construction or
renovation (See 12 U.S.C. 1715n(f)).
When the credit crisis emerged, both
the hospital industry and congressional
members, commencing in 2009, urged
HUD to use its statutory authority under
section 223(f) to provide refinancing to
hospitals without FHA insured
mortgages. HUD responded to the credit
crisis promptly by implementing its
authority through notice, Housing
Notice H–09–05, issued July 1, 2009,
which was amended and superseded by
Housing Notice H–10–06, issued
February 22, 2010. On January 29, 2010
(at 75 FR 4964), HUD published a
proposed rule to commence the process
to provide for permanent regulatory
codification of its refinancing authority,
and to seek public comment on the
HUD’s implementation of its 223(f)
refinancing authority, as set out in the
Housing notices.
The January 29, 2010, rule proposed
to establish in regulation the criteria and
procedures set forth in notice, by which
HUD would refinance hospital debt
under section 223(f). The preamble to
the January 29, 2010, proposed rule sets
out in detail the proposed changes to
HUD’s regulations in 24 CFR part 242 to
implement its section 223(f) refinancing
authority, referred to in this preamble as
Section 242/223(f) refinancing.
III. Overview of Key Changes Made at
Final Rule Stage
HUD is making several changes to the
January 29, 2010, proposed rule in
response to public comment, HUD’s
experience in administering its
refinancing authority to date, and
further consideration of issues by HUD.
Changes Made in Response to Public
Comment
Key changes made to the proposed
rule by this final rule in response to
public comment include the following.
The final rule:
• Adopts certain new definitions that
describe the costs that can be insured
under the Section 242 program. Adds
definitions of ‘‘acquisition’’ and
‘‘refinancing’’ to the definitions of
activities eligible for insurance. The
proposed rule listed ‘‘acquisition’’ and
‘‘refinancing’’ as eligible categories, but
did not include definitions for these
terms. Including definitions in the final
regulation is intended to facilitate
borrower’s understanding of the
distinctions between the financing
categories.
and care home, or any combination thereof).’’ (12
U.S.C. 1715n(f).)

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• Adds a definition of ‘‘capital debt’’
in part in response to comments
requesting that HUD provide flexibility
to allow certain financing costs
approved by HUD to be included as part
of a refinancing mortgage. HUD is
including a definition of ‘‘capital debt’’
as ‘‘the outstanding indebtedness used
for the construction, rehabilitation, or
acquisition of the physical property and
equipment of a hospital, including those
financing costs approved by HUD. This
gives HUD the flexibility to approve
certain financing costs associated with a
refinancing as part of the refinancing
mortgage. Examples of financing costs
are found in the definition of ‘‘soft
costs’’, as provided in the discussion
below.
• Reorganizes § 242.16 to consolidate
certain paragraphs and divide other.
Additionally, revises certain threshold
factors that make an initial
determination of a hospital’s eligibility
for Section 242/223(f) refinancing,
which are designed to enhance
screening for applicant eligibility for
Section 242/223(f) refinancing and
assure that HUD is assisting hospitals
that merit serious consideration based
on need and financial strength. The
revision to the threshold factor includes
a supplement to the factor that requires
the hospital to have an aggregate
operating margin of at least zero
percent, and an average debt service
coverage ratio of at least 1.40, when
calculated from the three most recent
annual audited financial statements.
The supplementary provision to this
factor provides that in performing such
calculations, if HUD finds that
performance in one of the three years
was affected by exceptional, one-time
events that substantially altered
financial performance, HUD may
calculate three-year performance based
on the four most recent years with the
unusual year omitted.
• Requires, consistent with current
practice, that the inspection fee be paid
no later than at the time of initial
endorsement.
• Provides a sliding scale for
inspection fees that is developed based
upon the mortgage amount attributable
to the newly defined ‘‘hard costs.’’
• Specifies insurance upon
completion when advances are not
needed for limited rehabilitation.
• Revises requirements for the
§ 242.16(d) application process to
introduce more flexibility for applicants
and minimize the possibility that
meritorious applicants will be screened
out.

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Changes Initiated by HUD Based on
Section 242/223(f) Refinancing
Experience to Date
In addition to changes that HUD is
making at this final rule stage in
response to public comments, and
which are discussed in detail in Section
III of this preamble, HUD is making the
following changes at this final rule stage
based on HUD’s experience to date in
implementing the Section 242/223(f)
refinancing authority.
To complement a definition of ‘‘hard
costs’’ contained in the proposed rule,
the final rule adds a new definition of
‘‘soft costs’’ and, to complement the
definition of ‘‘substantial
rehabilitation,’’ adds a definition of
‘‘limited rehabilitation’’ incorporating
into the regulation terms that reflect
these categories of Section 242/223(f)
refinancing.
Definitions (Section 242.1)

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Soft Costs. Based on HUD’s
experience to date administering its
Section 242/223(f) refinancing
authority, and in response to questions
from refinancing applicants about the
scope of ‘‘hard costs,’’ HUD determined
that it would be helpful to specify those
costs that constitute ‘‘soft costs.’’
Accordingly, the final rule defines ‘‘soft
costs’’ as follows: ‘‘Soft costs means
reasonable and customary legal,
organizational, consulting, and such
other costs associated with effecting the
proposed project and its financing or
refinancing, including, but not limited
to, interest capitalized during
construction, permanent financing fees,
initial service charge, tax, title and
recording expenses, special tax
assessments, Allowance to Make Project
Operational (AMPO),2 insurance costs
during construction, FHA fees and
charges including application,
commitment and inspection fees;
mortgage insurance premium for
advances during construction,
prepayment penalties associated with
retiring the hospital’s existing bonds;
and termination costs for interest rate
protection facilities that are integrated
2 Allowance to Make Project Operational (AMPO)
relates to nonprofit projects and means a fund that
is primarily for accruals during the course of
construction for mortgage insurance premiums
(MIPs), taxes, ground rents, property insurance
premiums, and assessments, when funds available
for these purposes under the Building Loan
Agreement have been exhausted; and also for
allocation to such accruals after completion of
construction, if the income from the hospital at that
time is insufficient to meet such accruals. AMPO
may also be used for such other purposes as
approved by HUD. Any balance remaining unused
in the fund at final endorsement will be treated in
accordance with 24 CFR 242.43.

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into the original financing, as
applicable.’’
Limited rehabilitation. HUD is also
including a definition of ‘‘limited
rehabilitation’’ in this final regulation,
which describes categories of
construction costs distinguishable from
substantial rehabilitation. As noted, in
§ 242.91(b)(2) of the January 29, 2010,
proposed rule, the proceeds of any
refinancing can be employed to pay for
repairs totaling less than 20 percent of
the mortgage amount. The final rule
adopts the numeric criteria for repairs
that were included in the proposed
regulation as the definition of ‘‘limited
rehabilitation.’’
Funds and Finances; Deposits and
Letters of Credit (Section 242.49)
This section establishes the
requirements mortgagees must meet for
funds deposited to support the project.
HUD did not receive public comment on
this issue. However, in the course of
operating the Section 242 program over
the last several years, HUD has found
that some mortgagees are not able to
hold funds on behalf of the mortgagor.
Several state healthcare finance agencies
have mentioned this problem to HUD
with respect to the Mortgage Reserve
Fund defined in codified § 242.1, stating
that, under their state laws, state
healthcare finance agencies are not
authorized to hold such funds. In such
cases, the deposits must be with a
depository acceptable to the mortgagee
and HUD. HUD recognizes the issues
involved in the state law requirements,
and accordingly is modifying its
regulations in § 242.49 to specify that
the depository which has the funds,
rather than the mortgagee, will be
legally responsible in those cases.
Maximum Mortgage Amounts and Cash
Equity Requirements (Section 242.23)
This section establishes the maximum
mortgage amounts and cash equity
amounts for mortgages insured under
Section 242/223(f). The proposed rule
revised the maximum mortgage amount
to provide that the amount would not
exceed the cost to refinance the existing
indebtedness as defined in § 242.23. The
final rule retains the proposed rule
language but revises this provision to
incorporate the terms that are being
newly defined in this rule.
IV. Discussion of Public Comments and
HUD Responses
The public comment period on the
proposed rule closed March 30, 2010,
and HUD received seven comments. The
public commenters included national
trade associations involved in
healthcare financing, national and state

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hospital and healthcare associations,
national associations of healthcare
financial management professionals,
law professors, and attorneys who are
active in the field. Although one
commenter supported the rule as
proposed, the remaining six
commenters submitted suggestions for
changes to the manner in which HUD
implements its Section 242/223(f)
refinancing authority. The changes
suggested by the commenters included
expansion of the program by, among
other things, relaxing the threshold
financial screening tests to allow more
hospitals to meet the eligibility
requirements for financing, covering
additional costs, and permitting the
leasing of hospitals with Section 242
financing to operators.
HUD did not receive comments on the
following sections of the proposed rule:
§§ 242.4; 242.15; 242.16(b)(3) and (b)(6);
242.16(d); and 24 CFR 242.17(a)(2).
While Section 242.15 is not revised in
this final rule, the other sections are
revised in the final rule to be consistent
with HUD changes to definitions or
other elements of the final rule.
Definitions (Section 242.1)
The proposed rule added the
following three definitions to 24 CFR
part 242: ‘‘hard costs,’’ ‘‘Section 242/
223(f),’’ and ‘‘substantial rehabilitation.’’
The definition of ‘‘Section 242/223(f)’’
was included as an easy way to refer to
HUD’s refinancing authority under
section 223(f) of the NHA as applied to
hospitals financed under section 242 of
the NHA. The term ‘‘hard costs’’ was
defined to mean the costs of the
construction and equipment, including
construction-related fees such as
architect and construction manager fees.
The term ‘‘substantial rehabilitation’’
was defined to address ‘‘cases where the
hard costs of construction and
equipment are equal to or greater than
20 percent of the mortgage amount.’’
HUD did not receive any comments on
these terms and the final rule adopts
these definitions without change.
Commenters proposed changes to
other definitions included in the
proposed rule, and suggested that
additional terms be defined. HUD has
adopted certain of the commenters’
recommendations and made some
additional changes to other definitions
to reflect adoption of the new terms.
Accordingly, the final rule includes
several new terms beyond those
included in the proposed rule:
‘‘acquisition,’’ ‘‘capital debt,’’ ‘‘limited
rehabilitation,’’ ‘‘refinancing,’’ and ‘‘soft
costs.’’ In addition, HUD is revising
definitions already in the current
regulations to respond to the inclusion

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of these categories in the terms
‘‘construction,’’ ‘‘project,’’ and
‘‘substantial rehabilitation.’’
Comment: Include definitions for
‘‘acquisition,’’ ‘‘capital debt,’’ and
‘‘refinancing.’’ Commenters
recommended adding definitions for the
terms ‘‘acquisition,’’ ‘‘capital debt’’ and
‘‘refinancing’’ to ensure clarity with
respect to the indebtedness eligible for
Section 242/223(f) refinancing.
A commenter suggested adding a
definition of acquisition as follows:
‘‘Acquisition’’ means the purchase by an
eligible mortgagor of an existing
hospital facility and ancillary property
associated therewith.’’
A commenter was particularly
concerned that the term ‘‘capital debt’’
be defined to confirm that termination
costs for ‘‘interest rate protection
facilities 3’’ (such as fixed to variable
interest rate swaps used as a hedge
against rising variable interest rates)
constitutes a type of debt eligible for
refinancing. The commenter stated that
the 2007–2008 collapse of the auction
rate and variable rate markets had
created significant issues for those
hospitals which had used ‘‘interest rate
protection facilities’’ to achieve savings,
because they were not shown as ‘‘debt’’
on hospital financial statements under
Generally Accepted Accounting
Principles (GAAP) 4 methodology. The
commenter submitted that instead
Internal Revenue Service guidance
should be used to categorize these
transactions. In addition, the commenter
further stated that ‘‘termination costs’’
for interest rate protection facilities
should be considered the functional
equivalent of prepayment premiums
due in connection with the early
redemption of capital debt. The
commenter stated that those
prepayment premiums are routinely
permitted as eligible program costs by
HUD in connection with the refinancing
of capital debt in the basic Section 242
construction program.
A commenter suggested including the
following definition of ‘‘refinancing’’:
‘‘Refinancing means the discharging of
the existing capital debt of a hospital.’’
3 An interest rate swap is a derivative in which
one party exchanges a stream of interest payments
for another party’s stream of cash flows. Interest
rate swaps can be used by hedgers to manage their
fixed or floating assets and liabilities. They can also
be used by speculators to replicate unfunded bond
exposures to profit from changes in interest rates.
Interest rate swaps are very popular and highly
liquid instruments.
4 The common set of accounting principles,
standards and procedures that companies use to
compile their financial statements. GAAP are a
combination of authoritative standards (set by
policy boards) and simply the commonly accepted
ways of recording and reporting accounting
information.

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HUD Response: HUD has added new
definitions to clarify the types of costs
that would be eligible for Section 242/
223(f) refinancing. Rather than adopt
other recommendations of the
commenters pertaining to new
definitions, HUD has developed
alternative definitions that define the
categories of eligible costs which
applicants must identify in their
applications. The definitions and HUD
responses are outlined as follows:
Acquisition: As recommended by a
commenter, HUD has defined
‘‘acquisition’’ to mean ‘‘the purchase by
an eligible mortgagor of an existing
hospital facility and ancillary property
associated with the facility.’’ Through
this definition, the purchase of the
hospital and such items as medical
equipment and ambulances will be
eligible for financing under HUD’s
Section 242 program.
Capital Debt: For some time, HUD has
recognized the risks inherent in interest
rate protection facilities. Consequently,
the regulations at § 242.63 that address
additional indebtedness and leasing
prohibit hospitals with FHA-insured
loans from engaging in such
transactions without prior HUD
approval. Specifically, the regulations
provide that ‘‘the mortgagor shall not
enter into any * * * derivative-type
transactions, except in conformance
with policies and procedures
established by HUD.’’ Also, HUD will
maintain its policy that hospitals with
interest rate protection facilities seeking
FHA-insured financing must terminate
those facilities in order to be eligible for
a mortgage insurance commitment.
Therefore, to address the request for a
definition of ‘‘capital debt’’ and to
provide a definition that also addresses
HUD’s policy concerns, the final rule
defines ‘‘capital debt’’ as ‘‘the
outstanding indebtedness used for the
construction, rehabilitation, or
acquisition of the physical property and
equipment of a hospital, including those
financing costs approved by HUD.’’
Examples of financing costs are
reasonable and customary legal,
organizational, consulting, and such
other costs associated with effecting the
proposed project and its financing or
refinancing, including, but not limited
to, interest capitalized during
construction; permanent financing fees;
initial service charge; tax; title and
recording expenses; special tax
assessments; AMPO; insurance costs
during construction; FHA fees and
charges, including application,
commitment and inspection fees;
mortgage insurance premium for
advances during construction;
prepayment penalties associated with

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retiring the hospital’s existing bonds;
and termination costs for interest rate
protection facilities that are integrated
into the original financing. This gives
HUD the flexibility to consider a range
of financing costs associated with the
refinancing mortgage.
In this regard, HUD also revises the
definition of ‘‘construction’’ to mean
‘‘the creation of a new or replacement
hospital facility, the substantial
rehabilitation of an existing facility, or
the limited rehabilitation of an existing
facility. The cost of acquiring new or
replacement equipment may be
included in the cost of construction.’’
HUD adds a definition for ‘‘limited
rehabilitation,’’ which is defined as
‘‘additions, expansion, remodeling,
renovation, modernization, repair, and
alteration of existing buildings,
including acquisition of new or
replacement equipment in cases where
the hard costs of construction and
equipment are less than 20 percent of
the mortgage amount.’’
Refinancing: In this final rule, HUD is
largely adopting the commenter’s
definition of ‘‘refinancing.’’ The final
rule defines ‘‘refinancing’’ as the
discharging of the existing capital debt
of a hospital through entering into a
new debt.
Eligible Hospitals (Section 242.4)
HUD’s codified regulation in § 242.4,
entitled ‘‘Eligibility for insurance and
transition provision,’’ provides that a
hospital to be financed with an FHA
insured mortgage shall involve the
construction of a new hospital or the
substantial rehabilitation (or
replacement) of an existing hospital.
The proposed rule expanded eligibility
for insurance to include ‘‘refinancing of
the capital debt of an existing hospital
pursuant to section 223(f) of the NHA
(Section 242/223(f)).’’
At this final rule stage, HUD changes
the heading of § 242.4 to read simply
‘‘Eligible hospitals’’ and revises the
definition of eligible hospitals to
accommodate the new definitions of
‘‘limited rehabilitation,’’ ‘‘acquisition,’’
and ‘‘refinancing’’ that are being added
by this final rule.
Applications (Section 242.16)
HUD’s existing regulation at
§ 242.16(a)(2)(ii) provides that hospitals
with an average debt service coverage
ratio of less than 1.25 in the three most
recent audited years are not eligible for
Section 242 insurance, unless HUD
determines, based on the audited
financial data, that the hospital has
achieved a financial turnaround
resulting in a debt service coverage ratio

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of at least 1.40 in the most recent year.5
Section 242.16(a)(2)(ii) further provides
that, in cases of refinancing at a lower
interest rate, HUD may authorize the use
of the projected debt service
requirement in lieu of the historical debt
service in calculating the debt service
coverage ratios for each of the prior 3
years. In cases where HUD authorizes
the use of the projected debt service
requirement in lieu of the historical debt
service to determine the debt service
coverage ratio, hospitals must have an
average debt service coverage ratio of
1.40 or greater.
In implementing its Section 242/
223(f) refinancing authority, HUD relied
on the existing threshold factors in
§ 242.16(a)(2). HUD stated that to
receive consideration for Section 242/
223(f) refinancing, a hospital must meet
two financial thresholds. First, the
hospital must have a 3-year aggregate
operating margin of at least zero percent
and a 3-year average debt service
coverage ratio of at least 1.40. Second,
the hospital must demonstrate that its
financial performance would be
materially improved by refinancing its
existing capital debt. The hospital must
also demonstrate that it provides an
essential healthcare service to the
community in which it operates. The
inclusion of these threshold factors to
determine hospitals eligible for
consideration for Section 242/223(f)
refinancing was designed to assure that
HUD is assisting those hospitals that
merit serious consideration based on
their financial strength and on need—
theirs and that of the communities they
serve.
In implementing its Section 242/
223(f) refinancing authority, HUD took a
conservative approach intended to
attract those hospital applicants that
already meet the minimum operating
margin and debt service coverage ratios
required for application approval under
the current Section 242 program. Under
the existing Section 242 regulations,
HUD also looks at financial feasibility.
As implemented for Section 242/223(f)
refinancing, HUD established a
threshold requirement to determine the
hospital’s need for refinancing that
would not be available through
nongovernmental sources. This
threshold requirement would also
screen out hospitals that would have
little or no chance of having a formal
5 Debt Service Coverage Ratio (DSC).The debt
service coverage ratio measures a hospital’s ability
to pay interest and principal with cash generated
from current operations. A high coverage ratio
indicates that an institution is in a good financial
position to meet its long-term obligations (including
its FHA-insured loan) and service its debt. Higher
values are preferable.

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application approved, based on their
financial performance.
As noted earlier in this preamble,
HUD revised, at this final rule stage, the
structure of § 242.16 and in the
discussion that follows strives to
distinguish the applicable paragraph in
the proposed rule and the redesignated
paragraph in the final rule.
Comment: Calculation of operating
margin excludes qualified applicants. A
commenter stated that using a 3-year
average to calculate the operating
margin 6 and debt service coverage ratio
has the potential to exclude wellqualified providers. The commenter
stated that temporary declines in these
ratios might be a direct result of the
recent economic downturn and credit
market crisis. The commenter suggested
that many providers might need to exit
a financing arrangement in which the
interest rate has already increased
substantially due to problems in the
credit market, causing a decrease in
operating margin and debt service
coverage ratio. The commenter
suggested that using a 5-year average
would provide a more accurate picture
of a hospital’s performance and
financial stability.
Another commenter stated that the
recasting of debt service in proposed
§ 242.16(a)(3)(ii), which involves
recalculating the operating margin and
debt service coverage with a projected
interest rate rather than the historical
rate, should be a mandatory rather than
an optional requirement to avoid the
arbitrary application of this threshold
limitation in the cases of otherwise
eligible projects that would benefit
under the new program.
HUD Response: With respect to the
suggestion made by the first commenter,
HUD recognizes that extending the time
period to calculate the operating margin
and debt service coverage may moderate
vacillations caused by economic
variability and interest rate fluctuations,
but HUD finds a 3-year average to
present a reasonable and preferred time
frame for evaluating potential
borrowers.
In response to the second
commenter’s concern, HUD has revised
proposed § 242.16(a)(3)(iii) (now
§ 242.16(a)(3)(ii) in the final rule) to
make the recasting mandatory rather
than optional. It is HUD’s position that
the commenter’s concern is addressed
by the provision that if the operating
margin and debt service coverage
thresholds are not met, HUD will recast
the operating margin and debt service
coverage ratio for prior periods by using
6 Operating margin is the ratio of operating
income divided by operating expense.

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the estimated projected interest rate in
lieu of the historical interest rate. HUD
agrees that this will provide a uniform
standard that will result in an equitable
standard evaluation of the financial
strength of the hospital.
Comment: More flexible screening
criteria needed. A commenter suggested
that HUD adopt more flexible threshold
criteria. Specifically, the commenter
stated that the requirement that
hospitals meet three of seven
benchmarks will prevent FHA from
considering some meritorious
applications that either narrowly miss
some of the benchmarks, or that could
establish legitimate financial need but
under different criteria. The commenter
requested that FHA consider accepting
evidence that (1) the hospital provides
access to essential health services, (2)
the hospital has few alternative vehicles
for affordable refinancing, and (3) the
financial health of the hospital depends
on refinancing.
HUD Response: The requirement that
a hospital meet only three out of seven
benchmarks provides considerable
flexibility for a hospital to pass the
threshold screening. In particular,
potential program applicants should
recognize that one of the seven
benchmarks provides applicants with an
opportunity to supplement their
application with unique, specific
materials to support their need for
refinancing. Specifically,
§ 242.16(a)(3)(vi)(B)(7) of this final rule
(§ 242.16(a)(3)(iv)(B)(7) of the proposed
rule) states that ‘‘there are other
circumstances that demonstrate that the
hospital’s financial performance would
be materially improved by refinancing
its existing capital debt.’’
However, to improve flexibility and to
reduce the possibility that meritorious
hospitals will be screened out, HUD has
made the following changes:
Section 242.16(a)(3)(iv) in the
proposed rule stated that ‘‘The hospital
must demonstrate that its financial
health depends upon refinancing its
existing capital debt * * *’’ This
requirement could be read to mean that
the hospital must be in desperate
financial trouble to qualify, which was
not HUD’s intent. Therefore, the
wording of § 242.16(a)(3)(iv) in this final
rule has been changed to: ‘‘The hospital
must document that * * * its financial
performance would be materially
improved by refinancing its existing
capital debt.’’ Where the same language
appears in § 242.16(a)(3)(vi)(B))(7) of
this final rule, the same change is made.
Section 242.16(a)(3)(iv)(B) in the
proposed rule would have required the
hospital to demonstrate that ‘‘there are
few alternative affordable financing

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Federal Register / Vol. 78, No. 24 / Tuesday, February 5, 2013 / Rules and Regulations
vehicles available to the hospital.’’ HUD
has retained this provision, with minor
edits, and the provision is now found in
§ 242.16(a)(3)(vi)(A) of this final rule.
Section 242.16(a)(3)(iv)(B)(6) in the
proposed rule would have required that
‘‘The hospital is party to overly
restrictive or onerous bond covenants.’’
Because ‘‘overly restrictive or onerous’’
is not defined and could be interpreted
as referring to only the very worst
covenants (from a hospital’s point of
view), this wording has been replaced
by the following: ‘‘The hospital is party
to bond covenants that are substantially
more restrictive than the Section 242
mortgage covenants,’’ and this provision
is now in § 242.16(a)(3)(vi)(B)(6) in this
final rule.
These changes will provide more
flexibility to hospitals in meeting the
threshold requirements while still
indicating that the hospitals have a
strong business need to refinance.
Comment: Expand the definition of
service beyond health service. A
commenter submitted that
§ 242.16(a)(3)(iv) of the proposed rule
would have required HUD to determine
that the hospital provide ‘‘an essential
service’’ to a hospital’s community. The
commenter stated that an overly narrow
interpretation of the undefined term
‘‘service’’ to apply only to medical
considerations may inadvertently limit
sponsor eligibility. The commenter
stated that hospitals provide other
significant community benefit services,
such as employment, neighborhood
stability, community health initiatives,
and civic educational programs.
Another commenter stated that
hospitals in urban areas that serve
discrete and insular communities, such
as HIV or mental health patients, meet
a special need. The commenter stated
that closure of hospitals that treat these
illnesses would create hardship for
those sectors of the communities.
HUD Response: If a hospital ceases to
operate and its community suffers no
inadequacies in essential medical
services as a result, there is good reason
to believe that there was no market need
for the hospital in the first instance.
HUD has statutory authority to assist in
the provision of urgently needed
hospitals for the care and treatment of
persons who are acutely ill or who
otherwise require medical care and
related services of the kind customarily
furnished only (or most effectively) by
hospitals. (See 12 U.S.C. 1715z–7(a).)
Consistent with this authority, it is
HUD’s position that while hospitals
provide other community benefits, the
medical services provided by hospitals
must be the focus in considering the
need for a facility. Accordingly, in the

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proposed rule, HUD offered language in
§ 242.16(a)(3)(iv) consistent with the
language in currently codified
regulations in § 242.16(a)(1), Market
Need, which emphasizes the healthcare
services provided by the hospital.
However, to eliminate any possible
ambiguity, the final rule revises
§ 242.16(a)(3)(iv) to include the word
‘‘healthcare’’ before ‘‘service’’ and,
therefore, confirm that the test of
‘‘essential service’’ applies to healthcare
services.
Comment: Applicants should meet
several of the threshold screening
elements. A commenter suggested that a
typographical correction is needed to
insert an ‘‘and’’ after proposed
§ 242.16(a)(3)(iv)(B) and before
§ 242.16(a)(3)(iv)(C).
HUD Response: HUD agrees with the
commenter and adopted the
recommendation. However, in the final
rule, the ‘‘and’’ is now found after
242.16(a)(3)(vi)(A) and before
§ 242.16(a)(3)(vi)(B). Inserting the word
‘‘and’’ clarifies that a hospital
demonstrating that its financial health
depends upon refinancing would have
to document all elements of the
threshold test rather than individual
discrete elements. Specifically, the
hospital would have to document that
(1) the community would suffer from
inadequate access to an essential service
that the hospital provides, (2) there are
few alternative financing vehicles, and
(3) three of the additional seven criteria
are met. Review of all of these elements
will assure that there will be strong
justifications for the refinancing.
Comment: Expand the covenant test
to include the hospital system. A
commenter stated that the concept of
‘‘overly restrictive or onerous’’
covenants in proposed
§ 242.16(a)(3)(iv)(C)(6) is appropriate in
determining the need for refinancing,
and suggested clarifications to cover
situations in which a hospital is subject
to such covenants as a member of a
system and not independently.
HUD Response: Because ‘‘overly
restrictive or onerous’’ is not defined
and could be interpreted as referring to
only the very worst covenants (from a
hospital’s point of view), this wording
has been replaced by the following:
‘‘The hospital is party to bond
covenants that are substantially more
restrictive than the Section 242
mortgage covenants,’’ and this provision
is now in § 242.16(a)(3)(vi)(B)(6) in this
final rule.
Comment: Provide a separate
threshold test for acquisitions. One
commenter stated that the threshold
requirements in proposed § 242.16(a)(3)
provide guidance for determining the

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need for a ‘‘refinancing.’’ The
commenter stated that its application to
‘‘acquisitions’’ requires clarification.
HUD Response: The same
requirements that apply to the basic
Section 242 program apply to
acquisitions. Therefore, changes have
been made in this final rule to clarify
that the basic Section 242 program
requirements apply to acquisitions.
These clarifying amendments are made
in the following sections: §§ 242.1,
242.4, 242.17, and 242.23 to reflect
appropriate differences.
Comment: Market Need study
requirements should be revised. Section
242.16(b)(5) of the proposed rule
provided that the study of market need
may not be required, subject to HUD’s
discretion, for an application for Section
242/223(f) mortgage insurance.
However, HUD anticipated that, in most
cases, this study would be required. In
addition, although HUD may determine
not to require a study of market need
with respect to a Section 242/223(f)
refinance transaction, HUD will always
consider market need in the preliminary
threshold requirement phase, as
discussed in § 242.16(b)(5). In the
proposed rule, HUD emphasized that
market need varies from case to case.
A commenter stated that needy
hospitals would be screened out
because of the strong emphasis the
threshold requirements put on the
financial strength of a hospital. The
commenter contended that the language
demonstrates that the program is not
focused on helping the most struggling
hospitals, even though they are the
hospitals most likely serving the
neediest populations. The commenter
suggested that the market need study
should include a more detailed look at
discrete, vulnerable populations.
HUD Response: HUD declines to
adopt the commenter’s
recommendation. Section 242 is a
mortgage insurance program, not a grant
program. As an insurance program,
there is a need to weigh the public
benefit provided by a hospital facility
against the risk that the hospital may
not be able to meet its mortgage debt
service obligations. While the program
emphasizes market need, the program
also emphasizes—and must—emphasize
financial strength of the hospital.
Comment: Need analysis should
address refinancing and hard costs. The
proposed rule at § 242.16(b)(5) provides
that a study of market need may be
required in the case of a Section 242/
223(f) refinancing. A commenter
expressed recognition that a market
need analysis for new construction
projects is required, but submitted that
a sponsor’s compliance with the

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threshold requirements under
§ 242.16(a)(3) should be sufficient to
establish the need for the refinance
portion of the project. The commenter
recommended that HUD bifurcate its
need analysis into two parts. The first
inquiry would be the need for the
refinancing portion, and the second
would be the need for the ‘‘hard costs’’
portion of the project, if any. The
commenter stated that, if the threshold
requirements of § 242.16(a)(3) are
satisfied, the hospital should be deemed
to have satisfied the need requirement
as to the refinance portion of the
proposed project.
HUD Response: The assessment of
market need should be consistent in the
Section 242 program and not vary
according to the amount of refinancing
versus hard costs proposed for insured
financing.
Section 242.16(d) was revised in this
final rule to specify that an application
for Section 242/223(f) mortgage
insurance shall be on an approved FHA
form submitted jointly by an approved
mortgagee and the prospective
mortgagor. HUD has determined, at this
point, that specifying this requirement
is not necessary, and that the current
regulatory requirements are sufficient.
The proposed revision eliminates the
name of the HUD office that takes these
applications in order to eliminate the
need for future regulatory changes if the
name of the office is revised.

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Commitments (Section 242.17)
Section 242.17(a) (Issuance of
Commitment) of the proposed rule
included a new paragraph (a)(2) that
provided, in the case of an application
for Section 242/223(f) refinancing and
where advances are not needed for
funding any limited rehabilitation of the
hospital, a commitment for insurance
upon completion shall include the
mortgage amount, interest rate, mortgage
term, date of commencement of
amortization, and other requirements
pertaining to the mortgage.7 The final
rule retains new paragraph (a)(2) with a
modification to accommodate inclusion
of limited rehabilitation.
Section 242.17(a) provides for
insurance of advances in cases where
there is a need for advances to fund
construction activities and the purchase
of equipment. This type of insurance is
provided for section 242 projects and
7 Note that since there is an existing paragraph
(a)(2) in § 242.17, the existing paragraph ((a)(2)) and
the paragraphs that follow will be redesignated
accordingly). This rule amends § 242.17(b) (Type of
Commitment) to provide that in the case of a
commitment for Section 242/223(f) insured
refinancing, the commitment will provide for
insurance upon completion.

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section 242 projects insured pursuant to
section 241of the NHA. Section 241
insures mortgage loans to finance
repairs, additions, and improvements to
multifamily rental housing and
healthcare facilities with FHA-insured
first mortgages or HUD-held mortgages.
However, in section 242 projects
insured pursuant to section 223(f), the
circumstances of each case will
determine whether the commitment will
be for insurance of advances or
insurance upon completion. In a pure
refinancing or acquisition, or a
refinancing with minor limited
rehabilitation that can be funded from
operations and cash reserves, there is no
need for advances and the commitment
will be for insurance upon completion.
However, if a significant portion of the
mortgage proceeds (subject to the 20
percent limitation) is to be used for
limited rehabilitation, and the hospital
cannot fund these from its own cash,
then the commitment may provide for
insurance of advances.
Comment: Require insurance upon
completion when advances are not
needed for construction. A commenter
submitted that the proposed language in
§ 242.17(b) appeared somewhat
inconsistent with the language of
§ 242.17(a)(2), which states: ‘‘In the case
of an application for Section 242/223(f)
insurance where advances are not
needed for funding any limited
rehabilitation, a commitment for
insurance upon completion will be
issued.’’ The commenter states that
there is no provision for HUD discretion
in § 242.17(a)(2), but there is allowance
for HUD discretion in proposed in
§ 242.17(b), which provided HUD
discretion for issuing the commitment.
The commenter suggested that language
of § 242.17(b) be revised to eliminate
HUD discretion in those instances
where insured advances are not needed
for funding limited rehabilitation
approved by HUD.
HUD Response: HUD agrees with the
commenter and has added language to
§ 242.17(b) to clarify that HUD shall
issue the commitment.
Comment: Make insurance upon
completion available for acquisitions. A
commenter suggested that HUD clarify
in § 242.17(b) that the option of
insurance upon completion should be
made available for acquisition as well as
refinancing transactions. The
commenter suggested that an advantage
of insurance upon completion is that it
could potentially enable a
determination to be made in advance of
loan closing that the FHA-insured loan
will qualify for Real Estate Mortgage
Investment Conduit (REMIC)
securitization and the lower interest

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rates that REMIC status provides. The
commenter suggested that this potential
advantage should be made available for
acquisition as well as refinancing
transactions.
HUD Response: As a result of the
commenter’s suggestion, HUD has
reexamined its proposed rule language.
HUD agrees that the option of insurance
upon completion should, consistent
with HUD’s statutory authority, be
expanded beyond refinancing
transactions to acquisition transactions.8
Accordingly, HUD has revised the
commitment language in § 242.17 to
cover acquisitions. A corresponding
change is also made in paragraph (b) of
§ 242.39 (Insurance Endorsement). HUD
is refraining from commenting on the
impact of these changes for REMIC
eligibility of the insured loans as
interpretation of the tax code does not
fall within HUD’s statutory authority.
Inspection Fee (Section 242.18)
The proposed rule included an
amendment to § 242.18 to provide that,
in the case of mortgages insured under
Section 242/223(f), the inspection fee
shall be paid at endorsement, as
provided in § 242.39, which is
discussed below. In the traditional
Section 242 program, the inspection fee
is generally 50 basis points on all loans.
This fee covers such activities as review
of architectural plans and specifications,
and periodic inspection during
construction. For applicants seeking
refinancing only, an inspection fee that
would involve generally no more than a
site visit by HUD architects and
engineers will not exceed 10 basis
points on the loan.
Comment: Pay the inspection fee no
later than the time of initial
endorsement. A commenter suggested
that the inspection fee be paid no later
than the time of initial endorsement
because many projects involve
precommitment or early start of
construction work.
HUD Response: HUD agrees with this
recommendation. The language change
is consistent with FHA’s current
procedures. FHA currently charges an
inspection fee if precommitment or
early start work is undertaken prior to
initial endorsement.
Comment: Modify the inspection fee
to account for hard costs. A commenter
8 Section 223(f)(1) of the National Housing Act
provides that ‘‘Notwithstanding any of the
provisions of this Act, the Secretary is authorized,
in his discretion, to insure under any section of this
title a mortgage executed in connection with * * *
the purchase or refinancing of existing debt of an
existing hospital (or existing nursing home, existing
assisted living facility, existing intermediate care
facility, existing board and care home, or any
combination thereof).’’ (12 U.S.C. 1715n(f).).

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stated that the proposed language in
§ 242.18 limits the inspection fee
amount only in connection with
projects which have no applicable hard
costs. The commenter suggested that
this would mean that the full 50 basis
point inspection fee would otherwise
apply, even if the hard costs were
minimal; e.g., 1 percent of the
commitment amount. The commenter
suggested that an additional inspection
fee, if any, should be based on the
amount of actual hard costs exclusive of
equipment, calculated at five dollars per
thousand dollars of the hard costs.
HUD Response: HUD agrees that the
inspection fee should better reflect the
portion of the mortgage amount that will
be used for hard costs. In the basic
Section 242 program, in which hard
costs must amount to 20 percent or
more of the mortgage amount, the
maximum inspection fee of 50 basis
points is routinely charged. For a pure
refinancing with zero hard costs, the
proposed rule set a maximum
inspection fee at 10 basis points
(reflecting that even with no hard costs,
the facility must be inspected to assess
its condition). HUD has determined that
where hard costs are between zero and
20 percent, an inspection fee that is
between 10 and 50 basis points would
be reasonable, and accordingly is
including a schedule in the final rule.
However, HUD does not agree to
exclude the cost of equipment from
‘‘hard costs.’’ Equipment is included in
‘‘hard costs’’ for the basic Section 242
program and equipment should also be
included for refinancing. Major medical
equipment has implications for facility
design, and can complicate review of
plans and construction. Accordingly,
HUD has revised the inspection fees to
correlate with hard costs.
Maximum Mortgage Amounts and Cash
Equity Requirements (Section 242.23)
One of the key changes proposed to
the regulations in 24 CFR part 242 is the
change proposed to § 242.23, which
establishes the maximum mortgage
amounts and cash equity amounts for
mortgages insured under Section 242/
223(f). The proposed rule revised the
maximum mortgage amount to provide
that the amount would not exceed the
cost to refinance the existing
indebtedness as defined in § 242.23. The
final rule adopts this language but
revises this formula to coordinate those
provisions with the new definitions.
Comment: Modify the financing terms
to coordinate with the new definitions.
Section 242.23(a) and new paragraphs
(b) and (c) identified the amounts that
would be included in the Section 242/
223(f) loan. A commenter stated that

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further clarification was needed to
coordinate those provisions with the
definitions that commenters proposed
be included in the final rule. (Please see
earlier discussion under ‘‘Definitions’’
of Section IV of the preamble, in which
commenters recommended that the final
rule define additional terms such as
‘‘acquisition,’’ ‘‘capital debt,’’ and
‘‘refinancing.’’)
HUD Response: HUD agrees with the
commenter’s general concerns, and has
revised applicable definitions to specify
potential costs in § 242.23(a), which
establishes the adjusted mortgage
amount for rehabilitation projects, and
§ 242.23 (b), which establishes the
adjusted mortgage amount for
refinancing and acquisitions.
This final rule revises paragraph (a) of
§ 242.23 to reflect the definition of the
new term ‘‘capital debt’’ and revises
new paragraph (b) of § 242.23, which
was included in the proposed rule to
reflect new terminology defined in this
rule. In this final version, language has
been added to paragraph (b), which uses
new definitions for ‘‘soft costs’’ and
replaces ‘‘indebtedness’’ with ‘‘capital
debt’’ in the list of items that will
provide the total mortgage amount in a
rehabilitation project with an existing
mortgage. Paragraph (b) is further
revised in the final rule to cover
acquisitions, and address the categories
of hard and soft costs.
Mortgage Lien Certifications (Section
242.35)
This section requires the mortgagor to
notify HUD in writing of unpaid liens
prior to initial or final endorsement of
the mortgage note. Although the
proposed rule did not contain a revision
to this section, the final rule modifies
the mortgagor’s responsibilities to
include notification of liens in
conection with limited rehabilitation,
which term is defined by this final rule.
Insurance Endorsement (Section 242.39)
The final rule amends § 242.39 to
divide this regulatory section into two
main parts. The existing section is
designated as paragraph (a) and entitled
‘‘New Construction/Substantial
Rehabilitation.’’ A new paragraph (b),
entitled ‘‘Section 242/223(f)
Refinancing/Acquisition,’’ is proposed
to be added to address the Section 242/
223(f) process. The Section 242/223(f)
process, as presented in the proposed
rule, provided that, in cases that do not
involve advances of mortgage proceeds,
endorsement shall occur after all
relevant terms and conditions have been
satisfied, including, if applicable,
completion of any limited
rehabilitation, or upon assurance

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acceptable to the FHA that all required
limited rehabilitation will be completed
by a date certain following
endorsement. Proposed new paragraph
(b) provided that, in cases where
advances of mortgage proceeds are used
for limited rehabilitation, endorsement
shall occur as described in § 242.39(a)
(Insurance Endorsement) for the initial
endorsement for new construction/
substantial rehabilitation.
The final rule adopts these provisions,
with modifications to include the new
categories of definitions and to address
the commenter’s concerns about
insurance upon completion described in
the following section.
Comment: Make the option of
insurance upon completion available for
acquisition. As noted previously under
the comments to § 242.17(b), a
commenter suggested that the final rule
clarify that the option of insurance upon
completion of any rehabilitation should
be made available for acquisition as well
as refinancing transactions. The
commenter stated that an advantage of
insurance upon completion is that it
could potentially enable a
determination to be made, in advance of
loan closing, that the FHA-insured loan
will qualify for REMIC securitization
and the lower interest rates that REMIC
provides. The commenter stated that
this potential advantage should be made
available for acquisition as well as
refinancing transactions.
HUD Response: HUD agrees that there
is no reason to limit the option of
insurance upon completion to
refinancing transactions. Therefore, in
this final rule, HUD has revised this
regulatory section, as was § 242.17, to
include acquisitions. These changes do
not address the commenter’s statements
regarding REMIC eligibility as
interpretation of the tax code is not
within HUD’s statutory authority.
Early Commencement of Work (Section
242.45)
Comment: Remove the 2-year aging
requirement. A commenter submitted
that in § 242.45 (Early Commencement
of Work), the requirement that existing
capital debt be at least 2 years old is a
serious threshold impediment to many
hospitals that need, and would
otherwise be eligible for, Section 242/
223(f) refinancing. The commenter
suggested language that, if added to
§ 242.45(b), would allow hospitals with
construction less than 2 years old to
apply for mortgage insurance on the
same basis as hospitals whose structures
are more than 2 years old.
The commenter stated that they had
no disagreement with the basic purpose
of § 242.45(b), which was initially

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implemented by HUD in connection
with its sections 221(d)(4)/223(f) and
232/223(f) multifamily and skilled
nursing programs. The commenter
stated that it understood that HUD’s
rationale was to preclude projects that
were intentionally constructed with
conventional short-term bank financing
in order to avoid prevailing wage,
inspections, and other federal
construction requirements from using a
section 223(f) loan as a source of
refunding the sponsor’s conventional
financing with long-term FHA fixed rate
debt.
The commenter suggested that
hospitals that had and have no intention
of avoiding HUD construction
requirements should not be restricted.
The commenter stated that any
conclusion to the contrary would
directly conflict with the proposed
rule’s public purpose to ‘‘contribute to
alleviating financial stress on hospitals
and maintaining the availability of
hospitals in many communities.’’ The
commenter submitted that conditioning
eligibility on the 2-year rule developed
for an entirely different fact pattern
would contravene this intention.
The commenter stated that the FHA
Commissioner has waived a similar
requirement in the multifamily housing
program to address the lack of
refinancing alternatives in the current
marketplace.9 The commenter suggested
extending a similar policy to hospitals
where a hospital can demonstrate that
there was no attempt to circumvent
federal requirements.
HUD Response: HUD declines to
adopt the commenter’s
recommendation. The change would
encourage developers to build facilities
with conventional short-term bank
financing in order to avoid prevailing
wage, inspections, and other federal
construction requirements, then attempt
to refinance their short-term debt with
long-term FHA-insured financing. The
commenter suggests that only applicants
who had no intention of avoiding the
federal requirements would be allowed.
HUD should not be put in the difficult,
if not impossible, position of judging
intent. It is HUD’s position that if a
hospital can demonstrate that it has no
access to capital—so that the hospital
may refinance to lower its debt-service
burden and secure permanent long term
financing—other than an FHA insured
loan, the hospital may request a waiver
of § 242.45(b) in connection with its
request for a preliminary review.
9 Copies of these documents and other HUD
notices are available on HUD’s Web page http://
portal.hud.gov/hudportal/HUD?src=/
program_offices/administration/hudclips/notices/
hsg.

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Addressing these situations with
waivers allows HUD to assess the
unique circumstances presented by a
hospital and make a determination
whether granting of a waiver would be
appropriate.
Labor Standards (Section 242.55)
Comment: Remove the Davis-Bacon
requirements for refinancing. The
January 29, 2010, rule proposed an
amendment to § 242.55(c) to reflect that
the labor standards referenced in that
regulatory section, Davis-Bacon
requirements, were applicable to a
refinancing loan under section 223(f) of
the NHA. The commenter proposed that
financing be provided if the mortgagor
provides a certification or other
evidence that construction was
undertaken in good faith without intent
to avoid any requirement of section 242.
HUD Response: HUD determined that
Davis-Bacon requirements were
presently inapplicable to limited
rehabilitation in connection with
refinancing and, accordingly, is
removing this language in the final rule.
Leasing of Hospital (Section 242.72)
Comment: Establish an Operating
Lease Ownership structure to meet
REMIC requirements. A commenter
stated that in cases where insurance of
advances is needed for a project
(whether in the basic Section 242 new
construction/substantial rehabilitation
program or with respect to Section 242/
223(f) refinancing or acquisition) the
existing regulations prevent HUD from
implementing a solution that would
permit the insured loans to become
REMIC eligible.
The commenter stated that the socalled ‘‘80 percent test’’ of the Internal
Revenue Service provides that, as of
loan origination, the value of real
property securing the FHA-insured loan
must be at least equal to 80 percent of
the loan amount. The commenter stated
that the problem is that, with insurance
of advances, there is a time lag between
the date of initial endorsement and the
date upon which the certification of
costs of improvements funded with loan
advances becomes incontestable (final
endorsement), during which time the
value of the underlying real property
can change. The commenter stated that
since one cannot be assured as of the
initial endorsement date whether the
loan will be in compliance at the later
final endorsement date, the REMIC
sponsor will not provide a pricing
commitment to the FHA lender
reflective of REMIC eligibility and the
lender in turn cannot pass on the benefit
of REMIC pricing to the hospital
borrower.

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The commenter suggested an
‘‘alternative test’’ for REMIC
securitization which would provide that
an obligation ‘‘is principally secured by
an interest in real property if
substantially all of the proceeds of the
obligation were used to acquire or to
improve or protect an interest in real
property that, at the origination date, is
the only security for the
obligation* * *’’
The commenter suggested that FHAinsured loans could qualify under the
alternative test if § 242.72 would permit
a hospital to separate ownership of real
property from non-real property (i.e.,
equipment). The commenter stated that
this would involve an operating lease
ownership structure where substantially
all of the section 242 or section 242/
223(f) loan proceeds would be used for
financing real estate owned by the
mortgagor and for improvements made
to real estate. The commenter stated that
the operator, not the mortgagor, would
own the hospital equipment used in
operating the hospital. The commenter
stated that no non-real estate assets
would be pledged as security for the
loan, nor would any loan proceeds be
used to pay for non-real estate costs.
HUD Response: HUD declined to
adopt the commenter’s
recommendations. Limiting security to
real estate assets would expose FHA to
unacceptable risk of loss in the event of
an insurance claim. Accordingly, there
is no change § 242.72 as currently
codified in the CFR.
Eligibility of Refinancing Transactions
(Section 242.91)
The proposed rule amended § 242.91
to consolidate existing § 242.91 into a
new paragraph (a) and to add a new
paragraph (b) to provide that a mortgage
given to refinance the debt of an existing
hospital under section 242 of the NHA
could be insured pursuant to section
223(f) of the NHA. The proposed new
paragraph (b) also provided that a
mortgage could be executed in
connection with the purchase or
refinancing of an existing hospital
without substantial rehabilitation. In
addition, new paragraph (b) provided
that the FHA Commissioner should
prescribe such terms and conditions as
the Commissioner deemed necessary to
assure that: (1) the refinancing is
employed to lower the monthly debt
service costs (taking into account any
fees or charges connected with such
refinancing) of such existing hospital;
(2) the proceeds of any refinancing
would be employed only to: (a) Retire
the existing indebtedness; (b) pay for
limited rehabilitation totaling less than
20 percent of the mortgage amount; and

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(c) pay the necessary cost of refinancing
on such existing hospital; (3) such
existing hospital is economically viable;
and (4) the applicable requirements of
section 242 for certificates, studies, and
statements have been met.
In response to comments submitted
on this regulatory section, HUD made
several revisions at the final rule stage,
as described in this discussion of
§ 242.91.
Comment: Revise the calculation of
debt service costs. One commenter
suggested three additions to provide
details on the calculation of the monthly
debt service cost savings required by
§ 242.91(b)(1). First, the commenter
suggested that HUD exclude the
monthly debt service on the new 242/
223(f) insured loan attributable to any
new hard costs included in the insured
loan. Second, the commenter suggested
that HUD consider additional factors
that will predictably increase monthly
debt service on the loan to be refinanced
above the monthly payment in effect at
the time of the commitment, such as
default interest rates upon the
expiration of any credit enhancement
facility. Third, the commenter suggested
that, if the existing capital debt to be
refinanced consists of more than one
loan, the determination of debt service
cost savings take into account the
weighted average of the monthly debt
service payments of the loans to be
refinanced.
HUD Response: HUD notes that the
commenter’s second point is addressed
elsewhere in the regulations. HUD
declines to adopt the commenter’s other
suggestions. Namely, § 242.16(a)(3)
already provides that refinancing
candidates demonstrate that the interest
rate is very likely to increase by one
percentage point within one year of the
date of application. Although they do
not appear unreasonable, HUD has
determined that the issues concerning
exclusion of the monthly debt service
on the new 242/223(f) insured loan
attributable to hard costs and issues
related to refinancing multiple loans
should be addressed in subsequent
guidance. Accordingly, this section has
only been revised from the proposed
regulation to reflect the newly adopted
definitions of capital debt and limited
rehabilitation.
V. Applicability of Revised Part 242
Regulations
This final rule, when issued and in
effect, will apply to applications
submitted for Section 242/223(f)
refinancing authority following the
effective date of the rule.

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VI. Findings and Certifications
Regulatory Review—Executive Orders
12866 and 13563
Under Executive Order 12866
(Regulatory Planning and Review), a
determination must be made whether a
regulatory action is significant and
therefore, subject to review by the Office
of Management and Budget (OMB) in
accordance with the requirements of the
order. Executive Order 13563
(Improving Regulations and Regulatory
Review) directs executive agencies to
analyze regulations that are ‘‘outmoded,
ineffective, insufficient, or excessively
burdensome, and to modify, streamline,
expand, or repeal them in accordance
with what has been learned.’’ Executive
Order 13563 also directs that, where
relevant, feasible, and consistent with
regulatory objectives, and to the extent
permitted by law, agencies are to
identify and consider regulatory
approaches that reduce burdens and
maintain flexibility and freedom of
choice for the public.
With respect to Executive Order
12866, this rule was determined to be a
‘‘significant regulatory action’’ as
defined in section 3(f) of the Executive
Order (although not an economically
significant regulatory action, as
provided under section 3(f)(1) of the
Executive Order). The final rule will not
have costs, benefits, or transfers greater
than $100 million.
As discussed in this preamble, this
rule revises the regulations governing
FHA’s Section 242 Hospital Mortgage
Insurance Program for the purpose of
codifying, in regulation, FHA’s
implementation of its authority that
allows hospitals to refinance existing
loans and provide for acquisitions,
without requiring such actions only in
conjunction with the expenditure of
funds for construction or renovation.
The section 223(f) is not designed for
the entire industry of 5,000 hospitals.
The pool of applicants is limited by
eligibility restrictions. At the time the
proposed rule was published on January
29, 2010 (75 FR 4964), industry experts
estimated that FHA would receive from
25 to 40 applications during the first
year that Section 242/223(f) refinancing
was offered. In fact, FHA received only
15 preliminary stage applications, and
most of those were eliminated based on
a failure of the hospital to meet the
threshold requirements in Section 242.
FHA issued only one insurance
commitment for Section 242/223(f)
refinancing in the amount of $29
million.
For this final rule, HUD expects the
rule to result in a $1.26 million transfer
per year, per hospital, and if refinancing

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8339

is provided to over 10 hospitals, the
aggregate annual impact is $12.59
million. A multiyear scenario, in which
the number of participants increases to
17, yields an aggregate annualized
transfer to hospitals of $17.63 million by
the third year of the program. HUD
estimates that this program will raise
net receipts of the Federal Government
by $79 million (from $79 million to
$158 million). Costs of the rule include
up-front application costs, which may
be as high as $870,000 per applicant but
which are likely to be much lower given
that non-FHA insured lenders impose
transaction costs as well. HUD does not
have enough information to quantify or
evaluate the opportunity costs or
distortionary effects of the program
With respect to Executive Order
13563, HUD is offering needed
refinancing authority to hospitals
without FHA-insured loans. By offering
this product to such hospitals, the
hospitals are able to reduce their capital
costs by refinancing into a lower interest
rate loan through the proposed program.
The opportunity to refinance to lower
interest rates can also make the
difference of whether a hospital can
continue operating in the community it
serves. The opportunity for an FHAinsured loan to refinance existing debt
can reduce a hospital’s probability for
default and possible foreclosure and
thereby also reduce the social welfare
loss, in healthcare services and in jobs
that result from foreclosure.
The complete regulatory impact
analysis (also referred to as a costbenefit analysis) is published at
www.regulations.gov along with this
final rule, under docket number FR–
5334–F–02.
The docket file is available for public
inspection at www.regulations.gov
under docket number FR–5334–F–02.
Paperwork Reduction Act
The information collection
requirements contained in this final rule
have been submitted for review and
approval by OMB under the Paperwork
Reduction Act of 1995 (PRA) (44 U.S.C.
3501 et seq.). The information collection
requirements for the Hospital Mortgage
Insurance (Section 242) program are
assigned OMB control number 2502–
2602. The information collection
requirements in this final rule do not
introduce new information collection
requirements but make modifications to
existing requirements to reflect the
inclusion of regulatory text to provide
refinancing for hospitals without
existing FHA-insured mortgages. The
sections in this rule that contain the
current information collection
requirements and the estimated adjusted

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time to fulfill each requirement that is
affected by this rule are set forth in the
following table. The following table
includes only the revisions to burden
hours affected by the codification of the
changes to HUD’s regulations included
in this rule to implement Section 223(f)
refinancing and acquisition for
hospitals.
Recently, HUD conducted a review of
the paperwork burden associated with
the hospital mortgage insurance
program. As a result of that review,
there were changes to the number of
respondents, frequency of response,
burden hours per response, and hourly
cost per response for many data
collection items affecting various
aspects of the program. HUD believes
that the changes lead to a much more

realistic estimate of burden hours. A
modified supporting statement
incorporating the results of HUD’s
review shows, for the same assumed
annual volume of 15 Section 242
applications, 74,825 annual burden
hours for an annual cost of $7,471,875.
This modified estimate of burden hours
and cost became the new baseline
against which program changes, or
changes in program volume, were
assessed.
This final rule contains provisions
that increase the number of applications
for Section 242 refinancing. HUD
expects initially to insure five Section
242/223(f) loans per year, increasing
application volume from 15 to 20, and
is changing some forms and procedures.
When the modified estimates of burden
Respondent
universe
(mortgages)

CFR Section (related forms referenced)

hours and cost are applied to the
additional volume, the results are
98,819 burden hours for an annual cost
of $9,882,200. These are the numbers
that appear in the modified Supporting
Statement OMB Number 2502–0602 that
HUD has submitted for OMB approval.
These information collection documents
can be found at http://www.reginfo.gov/
public/do/PRAMain.
The difference between the 15
applications and the 20 applications is
an additional 23,994 burden hours and
$2,410,325 in cost. This is the PRA
impact of introducing Section 223(f)
refinancing and acquisition loans as part
of the Section 242 hospital mortgage
insurance program and processing five
additional Section 242/223(f)
applications per year.
Total annual
responses*

Average time
per response**
(hours)

Total annual
burden hours**

Subpart B—Application Procedures and Commitments
242.16. Applications—Prepare full application for hospital mortgage insurance. (HUD–92013–HOSP) .........................................................................
242.17. Commitments—Review HUD insurance commitment. Negotiate desired changes with HUD, and accept commitment. (HUD–92453, HUD–
92432, HUD–92580) ....................................................................................

20

20

4,664

93,280

20

40

18

720

20

40

1

40

20

1.5

30

Subpart C—Mortgage Requirements
242.35. Mortgage lien certifications. Paragraph (d) requires the mortgagor
to notify HUD in writing of all unpaid obligations in connection with the
mortgage transaction, among other things. (Information is provided to
HUD in a letter, not a form) .........................................................................

Subpart D—Endorsement for Insurance
242.39 Request final endorsement (HUD–92023) ..........................................

20

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* The total annual response assumes15 Section 242 loans (including Section 241 supplemental loans and Section 223(a)(7) refinancing loans)
and 5 Section 223(f) refinancing or acquisition loans.
**The average response times for the sections of the rule are based on a review of recent program applications. The resulting increases in
total annual burden hours reflect the adjusted average response time and the increase in the loan volume of five additional loans due to 223(f).

All estimates include the time for
reviewing instructions, searching
existing data sources, gathering or
maintaining the needed data, and
reviewing the information.
The docket file is available for public
inspection. For information or a copy of
the submission to OMB, contact Colette
Pollard at 202–708–0306 (this is not a
toll free number) or via email at
[email protected].
In accordance with the Paperwork
Reduction Act, an agency may not
conduct or sponsor, and a person is not
required to respond to, a collection of
information, unless the collection
displays a currently valid OMB control
number.
Environmental Impact
A Finding of No Significant Impact
(FONSI) with respect to the

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environment was made at the proposed
rule stage in accordance with HUD
regulations at 24 CFR part 50, which
implement section 102(2)(C) of the
National Environmental Policy Act of
1969 (42 U.S.C. 4332(2)(C)). The FONSI
remains applicable to this final rule and
is available for public inspection at
www.regulations.gov under docket
number FR–5334–F–02.
Unfunded Mandates Reform Act
The Unfunded Mandates Reform Act
of 1995 (2 U.S.C. 1531–1538) (UMRA)
establishes requirements for federal
agencies to assess the effects of their
regulatory actions on state, local, and
tribal governments and on the private
sector. This rule would not impose a
federal mandate on any state, local, or
tribal government or on the private
sector, within the meaning of UMRA.

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Regulatory Flexibility Act
The Regulatory Flexibility Act (5
U.S.C. 601 et seq.) generally requires an
agency to conduct a regulatory
flexibility analysis of any rule subject to
notice and comment rulemaking
requirements, unless the agency certifies
that the rule will not have a significant
economic impact on a substantial
number of small entities. At the
proposed rule stage, HUD certified that
this rule, if issued in final, would not
have a significant economic impact on
a substantial number of small entities,
within the meaning of the Regulatory
Flexibility Act (See 75 FR 4969). HUD
continues to stand by its findings on
this issue.
This final rule will expand the
availability of financing for hospitals
and healthcare facilities, both large and
small, by FHA’s offer of Section 242/

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223(f) refinancing. HUD defines a small
hospital entity similar to the definition
used by the Centers for Medicare and
Medicaid Services, U.S. Department of
Health and Human Services, as a
hospital of 50 or fewer beds. As noted
earlier in this preamble, hospitals, large
or small, are eligible for Section 242/
223(f) refinancing. HUD has approached
development of its eligibility for section
223(f) refinancing to take into
consideration criteria that all hospitals,
large or small, can meet. The basis for
FHA’s implementation of its refinancing
authority, as has been discussed in this
preamble, is to assist hospitals that
provide valuable services needed by the
communities in which they are located,
and for which other refinancing sources
are not available. It is HUD’s position
that the criteria presented in this rule
strikes the appropriate balance.
Executive Order 13132, Federalism
Executive Order 13132 (entitled
‘‘Federalism’’) prohibits an agency from
publishing any rule that has federalism
implications if the rule either imposes
substantial direct compliance costs on
state and local governments and is not
required by statute or the rule preempts
state law, unless the agency meets the
consultation and funding requirements
of section 6 of the Executive Order. This
rule does not have federalism
implications and does not impose
substantial direct compliance costs on
state and local governments nor
preempt state law within the meaning of
the Executive Order.
List of Subjects in 24 CFR Part 242
Hospitals, Mortgage insurance,
Reporting and recordkeeping
requirements.
Accordingly, for the reasons described
in the preamble, HUD amends 24 CFR
part 242 to read as follows:
PART 242—MORTGAGE INSURANCE
FOR HOSPITALS
1. The authority citation for 24 CFR
part 242 is revised to read as follows:

■

Authority: 12 U.S.C. 1709, 1710, 1715b,
1715n(f), and 1715u; 42 U.S.C. 3535(d).

2. In § 242.1, definitions for
‘‘acquisition,’’ ‘‘capital debt,’’ ‘‘hard
costs,’’ ‘‘limited rehabilitation,’’
‘‘refinancing,’’ ‘‘Section 242/223(f), and
‘‘soft costs,’’ are added in alphabetical
order, and the definitions of
‘‘construction,’’ ‘‘project,’’ and
‘‘substantial rehabilitation’’ are revised
to read as follows:

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■

§ 242.1

*

*

Definitions.

*

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*

*

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Acquisition means the purchase by an
eligible mortgagor of an existing
hospital facility and ancillary property
associated therewith.
*
*
*
*
*
Capital debt means the outstanding
indebtedness used for the construction,
rehabilitation, or acquisition of the
physical property and equipment of a
hospital, including those financing costs
approved by HUD.
*
*
*
*
*
Construction means the creation of a
new or replacement hospital facility, the
substantial rehabilitation of an existing
facility, or the limited rehabilitation of
an existing facility. The cost of
acquiring new or replacement
equipment may be included in the cost
of construction.
*
*
*
*
*
Hard costs means the costs of the
construction and equipment, including
construction-related fees such as
architect and construction manager fees.
*
*
*
*
*
Limited rehabilitation means
additions, expansion, remodeling,
renovation, modernization, repair, and
alteration of existing buildings,
including acquisition of new or
replacement equipment, in cases where
the hard costs of construction and
equipment are less than 20 percent of
the mortgage amount.
*
*
*
*
*
Project means the construction (which
may include replacement of an existing
hospital facility), or the substantial or
limited rehabilitation of an eligible
hospital, including equipment, which
has been proposed for approval or has
been approved by HUD under the
provisions of this subpart, including the
financing and refinancing, if any, plus
all related activities involved in
completing the improvements to the
property. However, in particular closing
documents, ‘‘project’’ may be used to
mean the mortgagor entity, the
operation of the mortgagor, the facility,
or all of the mortgaged property,
depending on the context in which the
term ‘‘project’’ is used.
*
*
*
*
*
Refinancing means the discharging of
the existing capital debt of a hospital
through entering into new debt.
*
*
*
*
*
Section 242/223(f) refers to a loan
insured under Section 242 of the Act
pursuant to Section 223(f) of the Act.
*
*
*
*
*
Soft costs means reasonable and
customary legal, organizational,
consulting, and such other costs
associated with effecting the proposed

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8341

project and its financing or refinancing,
including, but not limited to, interest
capitalized during construction;
permanent financing fees; initial service
charge; tax; title and recording
expenses; special tax assessments;
AMPO; insurance costs during
construction; FHA fees and charges,
including application, commitment, and
inspection fees; mortgage insurance
premium for advances during
construction; prepayment penalties
associated with retiring the hospital’s
existing bonds; and termination costs
for interest rate protection facilities that
are integrated into the original
financing, as applicable.
Substantial rehabilitation means
additions, expansion, remodeling,
renovation, modernization, repair, and
alteration of existing buildings,
including acquisition of new or
replacement equipment, in cases where
the hard costs of construction and
equipment are equal to or greater than
20 percent of the mortgage amount.
*
*
*
*
*
■ 3. In § 242.4, the section heading and
paragraph (a) are revised to read as
follows:
§ 242.4

Eligible hospitals.

(a) The hospital to be financed with
a mortgage insured under this part shall
involve the construction of a new
hospital, the substantial rehabilitation
(or replacement) of an existing hospital,
the limited rehabilitation of an existing
hospital, the acquisition of an existing
hospital, or the refinancing of the
capital debt of an existing hospital
pursuant to Section 223(a)(7) or Section
223(f).
*
*
*
*
*
■ 4. Section 242.15 revised to read as
follows:
§ 242.15 Limitation on refinancing existing
indebtedness.

(a) Some existing capital debt may be
refinanced with the proceeds of a
section 242-insured loan; however, the
hard costs of construction and
equipment must represent at least 20
percent of the total mortgage amount.
(b) In the case of a loan insured under
Section 242/223(f), there is no
requirement for hard costs. However, if
there are hard costs, such costs must
total less than 20 percent of the total
mortgage amount.
5. Amend § 242.16 as follows:
a. Revise paragraph (a)(2)(ii),
redesignate paragraphs (a)(3) through
(a)(5) as (a)(4) through (a)(6), and add
new paragraph (a)(3).
■ b. Revise redesignated paragraph
(a)(6) introductory text.
■
■

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c. Revise paragraphs (b (3), (5), and (6)
and paragraph (d) to read as follows:

■

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§ 242.16

Applications.

(a) * * *
(2) * * *
(ii) Hospitals with an average debt
service coverage ratio of less than 1.25
in the 3 most recent audited years are
not eligible for Section 242 insurance,
unless HUD determines, based on the
audited financial data, that the hospital
has achieved a financial turnaround
resulting in a debt service coverage ratio
of at least 1.4 in the most recent year.
In cases of refinancing at a lower
interest rate, HUD may authorize the use
of the projected debt service
requirement in lieu of the historical debt
service in calculating the debt service
coverage ratios for each of the prior 3
years. In cases where HUD authorizes
the use of the projected debt service
requirement in lieu of the historical debt
service to determine the debt service
coverage ratio, hospitals must have an
average debt service coverage ratio of
1.4 or greater.
(3) Threshold requirements—
refinancing candidates. For an
application to be considered for
refinancing pursuant to Section 223(f), a
hospital must meet the following
requirements in lieu of those described
in paragraph (a)(2) of this section:
(i) The hospital must have an
aggregate operating margin and average
debt service coverage ratio as follows:
(A) The hospital must have an
aggregate operating margin of at least
zero percent, when calculated from the
three most recent annual audited
financial statements.
(B) The hospital must have an average
debt service coverage ratio of at least 1.4
when calculated from the three most
recent annual audited financial
statements; or
(ii) If the requirements of paragraphs
(a)(3)(i)(A) and/or (B) of this section are
not satisfied, HUD will recast the
operating margin and debt service
coverage ratio for prior periods by
applying its estimate of the projected
interest rate at the time the mortgage is
expected to close in lieu of the historical
interest rate(s).
(iii) In performing the calculations
called for in paragraphs (a)(3)(i)(A) and
(B) of this section, if HUD finds that
performance in one of the three years
was affected by exceptional, one-time
events that substantially altered
financial performance, HUD may
calculate the three-year performance
based on the four most recent years with
the unusual year omitted.
(iv) The hospital must document that
it provides an essential healthcare

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service to the community in which it
operates and that its financial
performance would be materially
improved by refinancing its existing
capital debt.
(v) The hospital may show that it
provides an essential healthcare service
to the community in which it operates
by submitting an analysis quantifying
how the community in which it
presently operates would suffer from
inadequate access to an essential
healthcare service that the hospital
presently provides if the hospital were
no longer in operation.
(vi) The hospital may show that its
financial performance would be
materially improved by providing
documentation of the following:
(A) There are limited comparable
affordable refinancing vehicles available
to the hospital; and,
(B) The hospital meets three of the
following seven criteria:
(1) The proposed refinancing would
reduce the hospital’s total operating
expenses by at least 0.25 percent;
(2) The interest rate of the proposed
refinancing would be at least 0.5
percentage points less than the interest
rate on the debt to be refinanced;
(3) The interest rate on the debt that
the hospital proposes to refinance has
increased by at least one percentage
point at any time since January 1, 2008,
or is very likely to increase by at least
one percentage within one year of the
date of application;
(4) The hospital’s annual total debt
service is in excess of 3.4 percent of
total operating revenues, based on its
most recent audited financial statement;
(5) The hospital has experienced a
withdrawal or expiration of its credit
enhancement facility, or the lender
providing its credit enhancement
facility has been downgraded, or the
hospital can demonstrate that one of
these events is imminent;
(6) The hospital is party to bond
covenants that are substantially more
restrictive than the Section 242
mortgage covenants; and
(7) There are other circumstances that
demonstrate that the hospital’s financial
performance would be materially
improved by refinancing its existing
capital debt.
*
*
*
*
*
(6) Preapplication meeting. The next
step in the application process is the
preapplication meeting (this step is
optional, at HUD’s discretion, in Section
242/223(f) cases). At HUD’s discretion,
this meeting may be held at HUD
Headquarters in Washington, DC, or at
another site agreeable to HUD and the
potential applicant. The preapplication

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meeting is an opportunity for the
potential mortgagor to summarize the
proposed project and refinancing, if any;
for HUD to summarize the application
process; and for issues that could affect
the eligibility or underwriting of the
project to be identified and discussed to
the extent possible. Following the
meeting, HUD may:
*
*
*
*
*
(b) * * *
(3) A description of the project, the
business plan of the hospital, and how
the project will further that plan, or, for
applications pursuant to Section 223(f),
a description of any limited
rehabilitation to be financed with
mortgage proceeds and how that limited
rehabilitation will affect the hospital;
*
*
*
*
*
(5) A study of market need and
financial feasibility, addressing the
factors listed in paragraphs (a)(1)(ii) and
(a)(2), or (a)(3) of this section,
(whichever applies), with assumptions
and financial forecast clearly presented.
The study should be prepared by a
certified public accounting firm
acceptable to HUD. In the case of an
application for Section 242/223(f)
mortgage insurance, the study may not
be required to address market need and
there may be no requirement for
involvement of a certified public
accounting firm;
(6) Architectural plans and
specifications in sufficient detail to
enable a reasonable estimate of cost (not
applicable to a Section 242/223(f)
application, except when architectural
plans and specifications are requested
by HUD);
*
*
*
*
*
(d) Filing of application. An
application for insurance of a mortgage
on a project shall be submitted on an
approved FHA form, by an approved
mortgagee and by the sponsors of such
project, to FHA.
*
*
*
*
*
■ 6. In § 242.17, paragraphs (a)(2), (a)(3),
(a)(4), and (a)(5) are redesignated as
paragraphs (a)(3), (a)(4), (a)(5), and (a)(6)
respectively, a new paragraph (a)(2) is
added. and paragraph (b) is revised to
read as follows:
§ 242.17

Commitments.

(a) * * *
(2) In the case of an application for
Section 242/223(f) insurance where
advances are not needed for funding any
limited rehabilitation: a commitment for
insurance upon completion, reflecting
the mortgage amount, interest rate,
mortgage term, date of commencement
of amortization, and other requirements

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Federal Register / Vol. 78, No. 24 / Tuesday, February 5, 2013 / Rules and Regulations
pertaining to the mortgage and to any
limited rehabilitation;
*
*
*
*
*
(b) Type of commitment. The
commitment will provide for the
insurance of advances of mortgage funds
during construction. In the case of a
commitment for Section 242/223(f)
insured refinancing or acquisition
financing of an existing hospital, the
commitment shall provide for insurance
upon completion unless insured

advances are needed for funding any
limited rehabilitation approved by HUD,
in which case the commitment shall
provide for insurance of advances.
*
*
*
*
*
■ 7. Section 242.18 is revised to read as
follows:
§ 242.18

Inspection fee.

(a) The commitment may provide for
the payment of an inspection fee in an
amount not to exceed $5 per thousand

dollars of the commitment. The
inspection fee shall be paid no later
than the time of initial endorsement.
(b) In the case of mortgages where the
applicant is seeking only refinancing or
acquisition, the inspection fee will not
exceed 10 basis points on the loan. For
applicants seeking a loan for refinancing
or acquisition that also involves limited
rehabilitation, the commitment shall
provide for an inspection fee according
to the following schedule:
Inspection fee limit
(basis points)

Hard cost % of mortgage amount
Less than 5% .......................................................................................................................................................................
5% or greater but less than 10% ........................................................................................................................................
10% or greater but less than 15% ......................................................................................................................................
15% or greater but less than 20% ......................................................................................................................................
20% or greater .....................................................................................................................................................................

8. In § 242.23, paragraph (a)(2)(ii) is
revised, paragraphs (b) and (c) are
redesignated as (c) and (d) respectively,
and new paragraph (b) is added to read
as follows:

■

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§ 242.23 Maximum mortgage amounts and
cash equity requirements.

(a) * * *
(2) * * *
(ii) Such portion of the capital debt as
does not exceed 90 percent of HUD’s
estimate of the fair market value of such
land and improvements prior to
substantial rehabilitation.
*
*
*
*
*
(b) Section 242/223(f) refinancing and
acquisition—additional limits. (1) In
addition to meeting the requirements of
§ 242.7, if the hospital’s existing capital
debt is to be refinanced by the insured
mortgage (i.e., without a change in
ownership or with the hospital sold to
a purchaser who has an identity of
interest as defined by the Commissioner
with the seller), the maximum mortgage
amount must not exceed the cost to
refinance the existing indebtedness,
which will consist of the following
items, the eligibility and amounts of
which must be determined by the
Commissioner:
(i) The amount required to pay off the
existing capital debt;
(ii) The estimated hard costs, if any,
totaling less than 20 percent of the
mortgage amount; and
(iii) Soft costs that would normally be
allowable in a Section 242 insured loan.
(2) In addition to meeting the
requirements of § 242.7, if mortgage
proceeds are to be used for an
acquisition, the maximum mortgage
amount must not exceed the cost to
acquire the hospital, which will consist
of the following items, the eligibility

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and amounts of which must be
determined by the Commissioner:
(i) The actual purchase price of the
land and improvements or HUD’s
estimate (prior to repairs, renovation,
and/or equipment replacement) of the
fair market value of such land plus the
replacement cost of improvements,
whichever is the lesser;
(ii) The estimated hard costs, if any,
totaling less than 20 percent of the
mortgage amount; and
(iii) Soft costs that would normally be
allowable in a Section 242 insured loan.
*
*
*
*
*
■ 9. In § 242.35, paragraph (d) is revised
to read as follows:
§ 242.35

Mortgage lien certifications.

*

*
*
*
*
(d) The mortgagor has notified HUD
in writing of all unpaid obligations in
connection with the mortgage
transaction, the purchase of the
mortgaged property, the construction,
limited rehabilitation, or substantial
rehabilitation of the project, or the
purchase of the equipment financed
with mortgage proceeds.
10. Section 242.39 is revised to read
as follows:

■

§ 242.39

Insurance endorsement.

(a) New construction/substantial
rehabilitation. Initial endorsement of
the mortgage note shall occur before any
mortgage proceeds are insured, and the
time of final endorsement shall be as set
forth in paragraph (a)(2) of this section.
(1) Initial endorsement. The
Commissioner shall indicate the
insurance of the mortgage by endorsing
the original mortgage note and
identifying the section of the Act and
the regulations under which the

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8343

10
20
30
40
50

mortgage is insured and the date of
insurance.
(2) Final endorsement. When all
advances of mortgage proceeds have
been made and all the terms and
conditions of the commitment have
been met to HUD’s satisfaction, HUD
shall indicate on the original mortgage
note the total of all advances approved
for insurance and again endorse such
instrument.
(b) Section 242/223(f) refinancing/
acquisition. (1) In cases that do not
involve advances of mortgage proceeds,
endorsement shall occur after all
relevant terms and conditions have been
satisfied, including, if applicable,
completion of any limited
rehabilitation, or upon assurance
acceptable to the Commissioner that all
limited rehabilitation will be completed
by a date certain following
endorsement.
(2) In cases where advances of
mortgage proceeds are used to fund
limited rehabilitation, endorsement
shall occur as described in paragraph (a)
of this section immediately above, for
new construction/substantial
rehabilitation.
(c) Contract rights and obligations.
The Commissioner and the mortgagee or
lender shall be bound from the date of
initial endorsement by the provisions of
the Contract of Mortgage Insurance
stated in subpart B of part 207, which
is hereby incorporated by reference into
this part.
11. In § 242.49, paragraph (a) is
revised to read as follows:

■

§ 242.49 Funds and finances: deposits and
letters of credit.

(a) Deposits. Where HUD requires the
mortgagor to make a deposit of cash or
securities, such deposit shall be with

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the mortgagee or a depository acceptable
to the mortgagee and HUD. Any such
deposit shall be held in a separate
account for and on behalf of the
mortgagor, and shall be the
responsibility of that mortgagee or
depository.
*
*
*
*
*
■ 12. In § 242.55, paragraph (c) is
revised to read as follows:
§ 242.55

Labor standards.

*

*
*
*
*
(c) Each laborer or mechanic
employed on any facility covered by a
mortgage insured under this part (except
under 24 CFR 242.91), but including a
supplemental loan under section 241 of
the Act made in connection with a loan
insured under this part) shall receive
compensation at a rate not less than one
and one-half times the basic rate of pay
for all hours worked in any workweek
in excess of 8 hours in any workday or
40 hours in the workweek.
*
*
*
*
*
■ 13. Section 242.91 is revised to read
as follows:
§ 242.91 Eligibility of refinancing
transactions.

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(a) Refinancing an FHA-insured
mortgage. A mortgage given to refinance
an existing insured mortgage under
Section 241 or Section 242 of the Act
covering a hospital may be insured
under this subpart pursuant to Section
223(a)(7) of the Act. Insurance of the
new, refinancing mortgage shall be
subject to the following limitations:

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(1) Principal amount. The principal
amount of the refinancing mortgage
shall not exceed the lesser of:
(i) The original principal amount of
the existing insured mortgage; or
(ii) The unpaid principal amount of
the existing insured mortgage, to which
may be added loan closing charges
associated with the refinancing
mortgage, and costs, as determined by
HUD, of improvements, upgrading, or
additions required to be made to the
property.
(2) Debt service rate. The monthly
debt service payment for the refinancing
mortgage may not exceed the debt
service payment charged for the existing
mortgage.
(3) Mortgage term. The term of the
new mortgage shall not exceed the
unexpired term of the existing mortgage,
except that the new mortgage may have
a term of not more than 12 years in
excess of the unexpired term of the
existing mortgage in any case in which
HUD determines that the insurance of
the mortgage for an additional term will
inure to the benefit of the FHA
Insurance Fund, taking into
consideration the outstanding insurance
liability under the existing insured
mortgage, and the remaining economic
life of the property.
(4) Minimum loan amount. The
mortgagee may not require a minimum
principal amount to be outstanding on
the loan secured by the existing
mortgage.
(b) Refinancing capital debt not
insured by FHA. A mortgage given to

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refinance the capital debt of an existing
hospital that is not insured under
section 241 or section 242 of the Act
may be insured under this subpart
pursuant to Section 223(f) of the
National Housing Act. The mortgage
may be executed in connection with the
purchase or refinancing of an existing
hospital without substantial
rehabilitation. A mortgage insured
pursuant to this subpart shall meet all
other requirements of this part. The
FHA Commissioner shall prescribe such
terms and conditions as the FHA
Commissioner deems necessary to
assure that:
(1) The refinancing is employed to
lower the monthly debt service costs
(taking into account any fees or charges
connected with such refinancing) of
such existing hospital;
(2) The proceeds of any refinancing
will be employed only to retire the
existing capital debt; pay for limited
rehabilitation totaling less than 20
percent of the mortgage amount; and
pay the necessary cost of refinancing on
such existing hospital;
(3) Such existing hospital is
economically viable; and
(4) The applicable requirements of
Section 242 for certificates, studies, and
statements have been met.
Dated: January 29, 2013.
Carol J. Galante,
Assistant Secretary for Housing—Federal
Housing Commissioner.
[FR Doc. 2013–02404 Filed 2–4–13; 8:45 am]
BILLING CODE 4210–67–P

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