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November 28, 2007
Part IV
Department of
Housing and Urban
Development
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24 CFR Parts 200 and 242
Revisions to the Hospital Mortgage
Insurance Program; Final Rule
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details in the proposed regulation reflect
HUD’s actual experience with the
hospital mortgage insurance industry, as
well as statutory developments that
have taken place in the last few years.
The result is a new proposed
comprehensive program of mortgage
insurance for hospitals to replace the
current, much less detailed regulations.
DEPARTMENT OF HOUSING AND
URBAN DEVELOPMENT
24 CFR Parts 200 and 242
[Docket No. FR–4927–F–02]
RIN 2502–AI22
Revisions to the Hospital Mortgage
Insurance Program
Office of the Assistant
Secretary for Housing—Federal Housing
Commissioner.
ACTION: Final rule.
AGENCY:
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SUMMARY: This final rule revises the
regulations governing HUD’s mortgage
insurance program for hospitals. The
rule updates and incorporates some
earlier provisions that currently are not
published as part of the Federal Housing
Administration (FHA) regulations.
Further, the rule adds new provisions to
make them consistent with current
industry practices. The rule also
codifies the relevant regulations that
address hospital mortgage insurance in
one part, thereby making the regulations
more user-friendly.
DATES: Effective Date: January 28, 2008.
FOR FURTHER INFORMATION CONTACT:
Roger E. Miller, Director, Office of
Insured Health Care Facilities,
Department of Housing and Urban
Development, 451 Seventh Street, SW.,
Room 9224, Washington, DC 20410–
8000; telephone (202) 708–0599 (this is
not a toll-free number). Hearing- and
speech-impaired persons may access
this number through TTY by calling the
Federal Information Relay Service at
(800) 877–8339 (this is a toll-free
number).
SUPPLEMENTARY INFORMATION:
I. The January 10, 2005, Proposed Rule
On January 10, 2005, HUD published
a proposed rule intended to revise
HUD’s hospital mortgage insurance
regulations. The proposed rule (70 FR
1750 et seq.) describes in detail the
background and purpose of the hospital
mortgage insurance regulation.
The January publication proposed
eliminating references to hospital
mortgage insurance in 24 CFR part 200,
and proposed codifying the entire
program in 24 CFR part 242. As a result,
users of the regulation would be able to
find everything they need in one
location, and the rule would avoid
unnecessary repetition.
The number of applications for
hospital mortgage insurance has
increased recently, and one purpose of
this new rule is to respond to this
increase with more detailed and
complete regulatory guidance. The new
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II. This Final Rule
This final rule follows publication of
the January 10, 2005, proposed rule, and
takes into consideration the public
comments received. The public
comment period for this proposed rule
closed on March 11, 2005. HUD
received comments from four
commenters on a wide variety of issues
related to the proposed rule.
Commenters included a hospital
industry trade association, a financing
company, and two individuals. The
final rule makes a number of changes to
the proposed rule based on the
comments received. The following
pages present a short, section-by-section
description of the changes HUD made in
the final rule to clarify terminology,
conform to a statutory change, and
address public comments.
Section 242.1 Definitions
The final rule adds new definitions
for the following terms: ‘‘AMPO’’
(Allowance for Making Project
Operational); ‘‘applicant’’;
‘‘construction’’; ‘‘days of cash on hand,’’
in order to clarify terminology used in
the definition of ‘‘surplus cash’’; ‘‘most
recent audited financial statement’’;
‘‘net income’’; ‘‘Secretary’’; ‘‘service
area’’; and ‘‘substantial rehabilitation.’’
The final rule deletes the definitions
of ‘‘Commissioner’’ and ‘‘working
capital’’ because they are no longer
needed. ‘‘Commissioner’’ is not used in
the final rule. ‘‘Working capital’’ has
been replaced by the more commonly
understood phrase, ‘‘initial operating
capital.’’
The final rule clarifies terminology
that was in the proposed rule.
Commenters found the term ‘‘credit
instrument’’ confusing, so this final rule
uses the term ‘‘mortgage note’’ instead.
For ‘‘Debt service coverage ratio,’’ the
formula has been adjusted to include
excess of revenues over expenses as an
option for net income, and to take into
account amortization expense. The
definition of ‘‘identity of interest’’ has
been revised to include examples in
order to provide improved guidance.
The term ‘‘mortgagee’’ has been
clarified. The term ‘‘operating revenue’’
has been revised to state that, at HUD’s
discretion, additional items beyond
those specifically mentioned, and that
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have been historically and reliably
received, may be considered operating
revenue for underwriting purposes.
‘‘Preapplication meeting’’ has been
revised to clarify that the meeting
includes HUD, the potential mortgagee,
and the potential mortgagor. The
definition of ‘‘project’’ has been clarified
by using another defined term,
‘‘substantial rehabilitation,’’ and by
specifying that construction may
include replacement of an existing
facility.
The definition of ‘‘surplus cash’’ has
been clarified by defining the phrase
‘‘days of cash on hand,’’ which
commenters found unclear, and by
defining some terms used in the
definition. In addition, instead of using
the concept of cash earned, as proposed,
the definition now considers surplus
cash to be the cash remaining after
certain conditions have been met.
Section 242.4 Eligible Hospitals:
Transition Provisions
The final rule adds a new paragraph
(b) to clarify when the regulations of
part 242, as revised by this final rule
become applicable, and revises the
heading of this section to reflect the
addition of transition provisions.
Section 242.13 Parents and Affiliates
The final rule clarifies that the
purpose of assurances, guarantees, or
collateral is to protect HUD’s interests.
Section 242.15 Limitation on
Refinancing of Existing Indebtedness
The final rule has substituted the
word ‘‘capital’’ for ‘‘long-term,’’ because
there may be instances where it is
necessary to finance short-term debt.
Section 242.16 Applications
The final rule clarifies an exception to
the 3-year positive operating margin
requirement for hospitals in a
turnaround situation. Under the
exception, only one year is required to
submit an application and 2 consecutive
years of positive operating margin are
required for application approval. The
final rule replaces the word ‘‘applicant’’
with the words ‘‘mortgagor or
mortgagee’’ in § 242.16(a)(4)(i) to reflect
that both may expend resources in
preparing an application.
Section 242.16(b)(6) is revised to take
account of the fact that, as a commenter
stated, complete architectural plans may
not be available at this stage. In the final
rule, architectural plans are to be filed
with the application ‘‘in sufficient detail
to enable a reasonable estimate of cost.’’
A reference to a 12-month timeframe
for a decision on an application in
§ 242.16(f) has been removed in
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response to a comment that the
timeframe could imply that a 12-month
wait for a decision is usual, and thereby
discourage applicants. While HUD
cannot promise a specific timeframe for
its review, the agency endeavors to
respond more promptly than 12 months.
Section 242.21 Refund of Fees
This section along with § 242.45(e) is
revised to make clear that the portion of
inspection fees paid for early
commencement of work is not
refundable.
Section 242.23 Maximum Mortgage
Amounts and Cash Equity Requirements
Section 242.23(c) is revised to permit
a private nonprofit or public mortgagor,
at HUD’s discretion and subject to 24
CFR 242.49, to provide equity in the
form of a letter of credit. Also, the rule
is revised to clarify that cash equity is
in addition to property, plant, and
equipment.
Section 242.24 Working Capital
The final rule clarifies that HUD did
not intend to make an initial cash
deposit a mandatory requirement.
Whether such a deposit is required will
depend in each case on the borrower’s
financial strength.
Section 242.26 Agreed Interest Rate
The final rule clarifies that different
interest rates may be applicable to a
project; for example, construction and
permanent loan rates can differ.
Section 242.28 Allowable Costs for
Consultants
Recognizing that hospital projects can
have long planning times, this rule
changes, from one year to 2 years, the
time limit for allowing consultant’s
costs prior to the application.
Section 242.31 Accumulation of
Accruals
The final rule is slightly revised to
provide greater flexibility for mortgagors
in purchasing fire and hazard insurance.
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Section 242.33 Covenant for
Malpractice, Fire, and Other Hazard
Insurance
This final rule adopts language
requiring the mortgagor to maintain
adequate malpractice, fire, and hazard
coverage acceptable to the mortgagee
and HUD.
Section 242.35 Mortgage Lien
Certifications
The final rule is revised so that, in
exceptional cases, certain personalty
may be excluded from the mortgaged
property or the insured lender may take
a secondary lien position on it.
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Section 242.37 Mortgage Prepayment
The final rule permits the 30-day
advance notice of intent to prepay the
mortgage to be extended with HUD
approval.
Section 242.54 Nondiscrimination
HUD is revising § 242.54 in this final
rule to clarify that the section does not
affect the eligibility of women’s and
children’s hospitals for this program.
Section 242.39 Insurance Endorsement
Section 242.39(c) incorporates subpart
B of 24 CFR part 207, covering contract
rights and obligations of the mortgagor,
mortgagee, and HUD, into this rule. The
cross-reference in § 202.94 of the
proposed rule is therefore no longer
needed and is removed in this final rule.
Section 242.58 Books, Accounts, and
Financial Statements
The final rule allows for the use of
Governmental Accounting Standards in
addition to Generally Accepted
Accounting Principles because a
number of hospitals use Government
Accounting Standards.
Section 242.43 Application of Cost
Savings
The proposed rule required that any
cost savings be used to reduce the
mortgage and the mortgagor’s equity
contribution proportionally. Under this
final rule, the mortgagor can elect to
have a greater proportion of the savings
go to mortgage reduction.
Section 242.62 Releases of Lien
The final rule provides that HUD may
set thresholds ‘‘or other standards’’ for
the sale, disposition, transfer, or
encumbrance of property securing a lien
under this program.
Section 242.45 Early Commencement
of Work
The final rule expands this provision
to allow for early site preparation. It also
provides that the cost of structures may
be refinanced with insured mortgage
proceeds if the work was completed
more than 2 years before application.
Where advance approval is sought for
early site work and construction
activity, HUD will require that key
elements of an application be filed first,
with the understanding that the
remainder of the application will
follow.
Section 242.49 Funds and Finances:
Deposits and Letters of Credit
Section 242.49(a) is revised to give a
fuller explanation of the mortgagor’s
deposit.
Section 242.50 Funds and Finances:
Off-Site Utilities and Streets
For clarity, § 242.50 has been
modified to specify that there must be
adequate funds available to cover cost of
off-site utilities and streets.
Section 242.51 Funds and Finances:
Insured Advances and Assurance of
Completion
This section is revised so that the
amount of surety for completion is
related to the construction contract (or
Guaranteed Maximum Price, in the case
of construction management) rather
than the accepted bid price.
Section 242.53 Excluded Contractors
Section 242.53(c) has been revised in
this final rule to provide for remedial
and enforcement actions other than
refusing to insure further advances.
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Section 242.74 Smoke Detectors
This section is revised to provide that
smoke detectors must comply with local
law.
Section 242.76 Title Evidence
The final rule is revised to state that
the title policy shall include as insureds
not only HUD and the Secretary, but
their successors and assigns.
Section 242.89 Supplemental Loans
This section has been revised to
permit refinancing of debt incurred in
connection with early commencement
of work performed in accordance with
the requirements of this rule.
III. Discussion of Public Comments on
the January 10, 2005, Proposed Rule
The issues that commenters addressed
were numerous. Therefore, this
discussion organizes the comments into
general comments and those addressed
to specific sections of the proposed rule.
The latter are organized by section order
for convenience.
General Comments
Comment: The rule should be reissued as an interim final rule and
additional comments regarding ‘‘any
material concerns that remain after
publication’’ should be solicited. This is
particularly important, since HUD
policy tends to prohibit discussion
about the rule after the close of the
comment period.
Response: HUD believes that the
public comment process provided
sufficient opportunity for comment on
the proposed rule.
Comment: The proposed rule was not
adaptable and flexible enough for the
hospital industry. This commenter
stated that ‘‘the Proposed Rule may
inadvertently limit the application of a
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longstanding and effective underwriting
approach to Section 242 financing,
which recognizes the organic and
evolving nature of hospital delivery
services.’’ This is because hospital
services are typically delivered in an
‘‘evolving regulatory and service
environment’’ reflecting ‘‘particular
needs of a facility’s service area as well
as technological developments and
revenue changes dictated by federal and
state reimbursement rules.’’ Adaptable
underwriting standards will become
more necessary as the program involves
hospitals in new geographical areas.
Absent needed flexibility, the ability of
hospitals to participate in this needed
program could be severely limited.
Response: HUD viewed the lack of
explicit, published underwriting
standards to be a weakness. A principal
reason for publishing the proposed rule
was to correct this weakness, so that
potential participants can know in
advance what HUD’s basic underwriting
standards are and to avoid wasting time
and money on applications with little or
no chance of being approved.
Comment: In order to make the
program sufficiently flexible, HUD
should move portions of the rule to
informal program guidance. This nonregulatory, more flexible approach has
worked well in other FHA programs.
Response: HUD views the program as
being sufficiently flexible to
accommodate a wide range of
circumstances.
Comment: What is HUD’s policy with
regard to interest rate swaps?
Response: The mortgagor may not
engage in interest rate swaps or other
derivative-type transactions, except in
conformance with policies and
procedures to be established by HUD.
HUD does not believe that the detailed
policies and procedures need to be
included in the rule. However, after
consideration of this comment, HUD is
adding clarifying language in the final
rule at § 242.63, so that the section
reads:
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The mortgagor shall not enter into any
long-term debt, short-term debt (including
receivables/line of credit financing),
equipment leases, or derivative-type
transactions, except in conformance with
policies and procedures established by HUD.
Comment: ‘‘Since loan to cost is based
on the value of the mortgaged property
I feel it is not applicable for periods
beyond the date of closing. Distributions
of equity if a concern should be a
separate covenant if deemed a risk
factor.’’
Response: HUD assumes the
commenter is referring to the definition
of surplus cash, because of the reference
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to distributions of equity. Distributions
of equity are controlled by §§ 242.65
and 242.66. There is a separate loan
covenant in the loan documents based
upon these sections.
2. Section 200.40 HUD Fees
Comment: Section 223(f)/242
authority should be kept in effect by
adding the following text from current
regulations to § 200.40(c):
Comments on Specific Sections
For a mortgage being insured under
Section 242 of the Act (12 U.S.C. 1715z–7),
an application fee of $1.50 per thousand
dollars of the amount loaned shall be paid to
HUD at the time the hospital application is
submitted to the Department and the balance
thereof no later than initial endorsement.
Revisions to Part 200
1. Section 200.24
Comment: One commenter stated that,
as a practical matter, this section
eliminates § 223(f) and part 242
refinancing for non-FHA insured loans,
an unfortunate and unnecessary
consequence. The rule should allow
otherwise financially sound non-FHA
hospitals access to much-needed debt
service savings in a rapidly eroding lowinterest rate climate when they have no
present need for new capital
improvements. This change would also
allow FHA to realize additional fees and
Mortgage Insurance Premium (MIP)
revenues without related construction
or start-up risk. This commenter stated
that the application of Section 223(f) to
FHA’s multifamily programs has been
determined to be sound enough to
permit a program MIP reduction. A
223(f)/242 program would be equally
successful.
A commenter stated that if the
proposed deletion of Section 223(f)
authority, which is currently in
regulations, is adopted, and if at a
subsequent date FHA determines
Section 223(f) for hospitals to be in the
public interest, FHA will face a difficult
and time-consuming regulatory process
to implement that result. This
commenter states that there is no public
policy benefit gained by deleting
Section 223(f)/242 financing authority
and that existing regulations should
remain in effect.
Response: The reference to section
223(f) of the National Housing Act, 12
U.S.C. 1715n(f), in 24 CFR part 200, was
never intended to provide program
authority. Should the Department
decide to implement section 223(f) for
hospitals, explicit regulations would be
required to provide program structure.
HUD is not prepared to issue such
regulations at this time, although it
could consider doing so at a later date.
Comment: FHA’s ‘‘Operating Loss
Loans’’ authority has been deleted from
the draft regulations. The commenter
recommends that it be reinstated.
Response: With respect to Section
223(d), HUD’s policy has been not to
authorize any 223(d) loans for hospitals,
and none have ever been authorized.
The exclusion of Section 223(d) from
the rule is consistent with that policy.
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Response: For the same reasons
discussed in connection with comments
regarding hospital loans under section
223(f) of the National Housing Act, HUD
is not adopting this suggested change.
Subpart A—General Eligibility
Requirements
3. Section 242.1 Definitions
Comment: The term ‘‘applicant’’
should be defined as to whether the
term is meant to apply to the lender or
mortgagor throughout the regulations.
The ‘‘applicant’’ should be the mortgage
lender.
Response: HUD agrees that
‘‘applicant’’ should be defined because
of the possibility of confusion between
the roles of lender and mortgagor.
Therefore, a definition of ‘‘applicant’’
has been added.
Comment: The term ‘‘application’’
should be defined.
Response: HUD sees no need for a
definition of this term; ‘‘application’’ is
commonly understood in the industry.
Comment: The definition of cash
should include operating cash, shortterm investments, and funded
depreciation accounts. By definition,
this would exclude all trusteed
accounts. Days of operating expenses
should be defined as total operating
expenses minus depreciation and
interest.
Response: The comment appears to be
a reference to the calculation of ‘‘days
of cash on hand,’’ a term appearing in
the definition of ‘‘surplus cash.’’ In
order to clarify this term, a definition of
‘‘days of cash on hand’’ has been added
as a separate definition.
Comment: The definition of ‘‘chronic
convalescent and rest’’ should be
revised to delete the terms ‘‘respite care
services,’’ ‘‘hospice services,’’ and
‘‘rehabilitation services.’’ Instead, the
definition of ‘‘chronic convalescent and
rest’’ should be tied directly to the types
of services provided in the Section 232
program. There is no evidence that the
term ‘‘chronic care’’ set forth in the
National Housing Act (NHA) includes
respite care, hospice, or rehabilitation,
particularly when delivered on an
independent basis and not in
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connection with chronic convalescent
patients. The proposed definition would
appear to exclude revenues received
from these services from inclusion in
the calculation of acute care patient
days for purposes of determining
whether a proposed project meets the
NHA’s 50 percent chronic care bed
limitation.
Response: The inclusion of respite,
hospice, and rehabilitation patient days
in the definition of ‘‘chronic
convalescent and rest’’ is consistent
with the language in the introductory
paragraph of the statute. That language
would preclude patient days for such
services from being counted for the
purpose of calculating hospital
eligibility based on patient days under
the statute’s ‘‘50 percent rule.’’ The
statute, 12 U.S.C. 1715z–7(a), states:
The purpose of this section is to assist 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.
Respite, hospice, and chronic
rehabilitation services are not acute care
services and do not require the services
furnished only (or most effectively) by
hospitals. Typically, these services are
not provided in hospital beds, but rather
in sub-acute settings. These services are
most accurately included in the broad
category, specified in the statute, of
‘‘chronic convalescent and rest’’ and, in
some cases of rehabilitation, in the
excluded categories of ‘‘drug and
alcoholic’’ and ‘‘mentally deficient.’’
Comment: The rule should include a
definition of ‘‘commitment.’’
Response: HUD sees no need for a
definition; the concept of a HUD
mortgage insurance commitment is well
understood in the industry.
Comment: The rule should include a
definition of ‘‘credit instrument.’’
Response: Where the term ‘‘credit
instrument’’ appeared in the proposed
rule, HUD has substituted the term
‘‘mortgage note’’ in this final rule for
clarity.
Comment: A commenter stated that
the definition of ‘‘debt service coverage
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ratio’’ should be revised to remove the
second and third sentences, which
reference a high coverage ratio. These
sentences are unnecessary and
potentially problematic. The proposed
definition suggests that absent a ‘‘high
debt service coverage ratio,’’ which is
undefined, a project is ineligible. The
language potentially conflicts with
specific coverage standards set forth in
§ 242.16, and as such there would
appear to be no need for a nonspecific
policy statement of this type. At a
minimum, a cross-reference should be
made to § 242.16 to avoid interpretation
conflicts.
This commenter also stated that the
commenter presumes that the formula
in the definition describes the formula
currently in use.
Response: HUD agrees that the second
and third sentences are potentially
problematic and has removed them. The
formula in the definition has been
clarified, as follows: Debt Service
Coverage Ratio (total debt service
coverage on all long-term capital debt)
equals:
Comment: A commenter states that
the rule should add a phrase to the
definition of ‘‘hospital’’ to accommodate
possible future changes, as follows:
follows to permit identity of interest
transactions subject to additional
underwriting criteria, and to give HUD
the ability to set the criteria:
Hospital means a facility that has been
proposed for approval or has been approved
by HUD under the provisions of this subpart,
as this definition may be modified from time
to time pursuant to the Act. * * *
Identity of interest means a relationship
that must be disclosed and may be either
prohibited or subject to additional
underwriting or criteria pursuant to the
requirements of HUD or the Regulatory
Agreement.
The commenter states that possible
future changes may include, for
example, an extension of the exclusion
of Critical Access Hospitals from the 50
percent acute care requirement beyond
its current 2006 sunset, or the
elimination of the 50 percent rule in its
entirety.
Response: The definition of
‘‘hospital’’ is statutory, as is the
exclusion of critical access hospitals
from the 50 percent rule. (See 12 U.S.C.
1715z–7(b)(1).) At the time of the
comment period on the proposed rule,
the statutory exemption for Critical
Access Hospitals ended in 2006. On July
10, 2006, the exemption for Critical
Access Hospitals was extended through
July 31, 2011. The relevant portion of
this final rule has been conformed to
that statutory change. HUD does not
believe further definition is necessary.
Comment: The definition of ‘‘identity
of interest’’ should be modified as
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Response: HUD does not believe that
this concept needs to be explicitly
stated. HUD has the authority to waive
provisions in the Regulatory Agreement
for good cause. However, for clarity,
HUD includes examples of identity of
interest relationships in the definition
in this final rule.
Comment: The definition of
‘‘mortgagee or lender’’ should be revised
to remove material regarding trust
indentures, and to expand the definition
to include the ‘‘proposed lender with
respect to an application for
commitment.’’ Regarding the indenture,
the commenter states that indentures, in
the sense the industry uses the term, are
not involved, and that the FHA
mortgagor would not be a party to the
indenture (the commenter states that
‘‘indenture’’ means a contract between a
government bond issuer and a bond
trustee for loans financed through tax-
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exempt revenue bonds). The suggested
revised definition would read as
follows:
Mortgagee or Lender means the proposed
lender with respect to an application for a
commitment and/or the original lender under
a mortgage, and its successors and assigns,
which is the holder of the governing
mortgage and other related credit instruments
(All official contacts and actions by HUD
shall be with or through a HUD-approved
lender).
Response: The reference to ‘‘trust
indenture’’ in the proposed rule derived
from an obsolete reference. HUD does
not insure trust indentures. Therefore,
use of the term ‘‘trust indenture’’ would
be confusing because many mortgages
are funded with bond issues, pursuant
to trust indentures. Therefore, this final
rule changes the definition of
‘‘mortgagee’’ to:
The original lender under a mortgage, and
its successors and assigns, including the
holders of mortgage notes issued under a
trust mortgage or deed of trust, pursuant to
which such holders act by and through a
trustee therein named.
Comment: The first sentence of the
proposed definition of ‘‘mortgage
reserve fund’’ should be revised to read:
Mortgage Reserve Fund means a trusteeheld account for the benefit of the
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Commissioner to which the mortgagor
contributes funds required by HUD and from
which withdrawals must be approved by
HUD.
Response: The mortgage reserve fund
is not only for the benefit of HUD, it is
also for the benefit of the hospital to
preserve the value of the hospital and to
help prevent default. In order to clarify
this purpose, the first sentence has been
modified to state, ‘‘Mortgage reserve
fund means a trust account, or an
account held by the mortgagee, for and
on behalf of the mortgagor, to which the
mortgagor contributes funds required by
HUD and from which withdrawals must
be approved by HUD.’’
Comment: The second and third
sentences of the definition of ‘‘nonoperating revenues and expenses’’
should be revised, as follows:
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Examples of items classified as nonoperating are State and Federal income tax,
general contributions, gains and losses from
investments, and unrestricted income from
non-designated endowment funds, and
income from related entities received by a
hospital sponsor. Classification of items as
operating or non-operating shall be in
accordance with generally accepted
accounting principles or other applicable
accounting standards.
Response: The suggestion is to insert
‘‘non-designated’’ before endowment
funds to make the wording state that
‘‘unrestricted income from nondesignated endowment funds’’ is
excluded from operating income. HUD
does not agree and would consider
unrestricted income from all
endowment funds to be non-operating
revenue.
The commenter suggests that
generally accepted accounting
principles determine classification of
operating and non-operating revenue
and that investment income should be
included in operating income. It is true
that some endowment funds generate
income for the general benefit of the
hospital. However, the income these
funds generate, depending on the type
of investment and market conditions,
are subject to variance and may not be
available for servicing the mortgage in
future periods. There is no direct
corresponding expense associated with
the investment income that can be
eliminated if the investment income
decreases. Therefore, this final rule
retains the wording without change.
Comment: One commenter suggests a
minor editorial revision to the definition
of ‘‘operating revenue’’ under the
heading of ‘‘operating margin,’’ to add
the phrase ‘‘but not limited to’’ after
‘‘including’’ in the parenthetical
example.
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Response: HUD agrees that the items
listed were intended to be examples and
not an exclusive list.
Comment: The rule should add a
definition of ‘‘acute care patient days’’
and provide for adjustment of ancillary
non-bed hospital services to an acute
care patient day.
Response: This term is not used in the
rule and no definition is necessary.
Also, HUD believes that the calculation
of adjusted patient days is at a level of
detail that is not necessary to include in
the regulation.
Comment: A portion of the definition
of ‘‘personalty’’ (from the third sentence
beginning ‘‘Generally, intangibles
* * *’’ to the end) should be revised, as
follows:
Generally, intangibles shall also include all
cash and cash escrow funds which are not
otherwise pledged in connection with
obligations of the mortgagor outstanding at
initial endorsement, such as, but not limited
to: depreciation reserve fund or mortgage
reserve fund accounts, bank accounts,
residual receipt accounts, all unrestricted
contributions, donations, gifts, grants,
bequests and endowment funds by donors,
and all other revenues and accounts
receivable from whatever source paid or
payable. All personalty shall be securitized
with appropriate UCC filings and any
excluded personalty shall be indicated in the
Regulatory Agreement and the Security
Agreement.
The commenter states that the
language regarding otherwise-pledged
obligations should be added to provide
an exception for funds pledged at or
prior to initial endorsement in
connection with bond-related
obligations (such as construction fund
negative arbitrage) issued to fund the
FHA loan or in connection with other
outstanding obligations of the mortgagor
described in the FHA application. The
qualifier of ‘‘unrestricted’’ should be
added because under state law, donor
restricted funds may be governed by
terms and conditions set by the donor.
Response: HUD does not believe it is
necessary to narrow the definition of
‘‘personalty,’’ because § 242.64 already
permits exclusions for specific
personalty.
Comment: One commenter suggests a
minor clarification to the definition of
‘‘preapplication meeting’’ to specify that
a potential applicant in this case is a
mortgagor or lender, while elsewhere in
the rule the term should refer to a
mortgagee. The commenter suggests
clarification of these usages.
Response: HUD has clarified the
definition.
Comment: The definition of
‘‘preliminary review letter’’ should be
revised, as follows:
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Preliminary Review Letter means a letter
from HUD to a potential mortgagee
communicating the result of the Preliminary
Review. The letter may: (1) State that an
application for mortgage insurance would
result in a rejection and provide the reasons
for this determination, (2) state that there are
factors that need to be further developed
before a determination as to acceptability of
a project for Preliminary Review may be
made, or (3) state that no factors that would
cause an application to be rejected have been
identified, and therefore there appears to be
no bar to the applicant proceeding to submit
an application for insurance.
The commenter states that, even
though an early determination of
eligibility is desirable, the definition
‘‘may be unnecessarily severe’’ as
proposed, and that the rule should
provide for further discussion or the
submission of additional materials at an
early stage, which may present HUD
with sufficient evidence to reverse an
initial rejection. Also, the term ‘‘next
step’’ is too vague and should be
specified.
Response: HUD agrees that ‘‘potential
applicant’’ in the first sentence should
be replaced. HUD has replaced that term
with ‘‘proposed mortgagee or
mortgagor.’’ This language allows HUD
to receive and fulfill requests for a
preliminary review not only from
proposed mortgagees, but also from
proposed mortgagors (hospitals) that are
seeking to determine if they are viable
candidates for an insured loan, before
they retain a mortgage lender.
HUD does not believe it necessary to
insert the language the commenter
proposes as clause (2), because
communication often takes place
between the mortgagee and HUD to
clarify matters during the preliminary
review and because there is already
flexibility in § 242.16 for HUD to
reconsider a negative determination.
HUD agrees that the phrase ‘‘the next
step in the application process’’ is vague
and has replaced it in this final rule
with ‘‘a preapplication meeting.’’
Comment: The definition of ‘‘project’’
should be revised as follows to include
the soft costs of construction (interest,
taxes, MIP, etc.), as follows:
Project means the construction (which may
include a replacement of an existing hospital
facility), rehabilitation, modernization,
expansion, or renovation 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 of existing indebtedness and
other related costs in connection therewith,
if any, plus all related activities involved in
completing the improvements to the
property.
Response: In reviewing the definition
of ‘‘project,’’ HUD realized that the word
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was used to mean different things in
different places. In several instances, the
proposed rule used ‘‘project’’ when
referring to the hospital or mortgagor.
This usage derives from HUD’s
multifamily housing programs, in which
‘‘project’’ is used to refer not only to the
construction project and the financing
thereof, but also to the ongoing
operations of the residential rental
business during the life of the loan. For
clarity, this final rule makes a
distinction between ‘‘project’’ as defined
here and ‘‘hospital’’ or ‘‘mortgagor.’’
HUD also considered the use of terms
such as ‘‘modernization,’’ ‘‘renovation,’’
and ‘‘expansion.’’ The final rule uses the
term ‘‘substantial rehabilitation’’ to
encompass all of these activities, and a
definition of this term has been added
in § 242.1.
Finally, HUD believes that the
definition of ‘‘project’’ is not the
appropriate place to introduce the
concept that a construction project
includes soft costs.
Therefore, the definition of ‘‘project’’
has been revised to specify the meaning
of the word in all contexts in which it
is used in the rule, and to conform the
definition to the final rule’s definition of
‘‘substantial rehabilitation.’’
Comment: The definition of
‘‘regulatory agreement’’ should be
modified to include lessees of the
mortgagor, if applicable, as regulated
entities under the regulatory agreement.
The commenter cites the Shoshone
Medical Center as an example.
Response: HUD disagrees. As a
general policy, leasing of the entire
hospital is not contemplated. However,
HUD does have the authority to approve
leasing, on a case-by-case basis, for good
cause, as was demonstrated in the
example offered.
Comment: One commenter suggests
revisions as follows to the proposed
definition of ‘‘security instrument’’ and
also questions whether the definition is
required, given that there is also a
proposed definition of ‘‘mortgage.’’
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Security instrument means a mortgage,
deed of trust or any other document
evidencing security for the indebtedness
represented by a note endorsed for insurance
by HUD and shall be deemed to be the
mortgage as defined by the National Housing
Act, as amended, implementing regulations,
and HUD directives.
Response: HUD believes that the
definition of ‘‘security instrument’’ is
adequate, and that it is inappropriate to
include discussion of the note in this
definition.
Comment: A commenter asked
whether the rule could provide a
definition of what constitutes the
service area, and stated that some
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hospitals serve patients from all over the
country or all over the state, although
most of their patients come from the
nearby surrounding community.
Response: In order to avoid
ambiguity, a definition of ‘‘service area’’
is added to § 242.1 of this final rule.
Comment: The definition of ‘‘state’’
should be revised to change ‘‘Virgin
Islands’’ to ‘‘United States Virgin
Islands.’’
Response: HUD agrees, and this final
rule adopts this change.
Comment: The definition of ‘‘surplus
cash’’ is a departure from existing
practice, particularly when proprietary
sponsors are involved, in that it would
no longer permit distributions of cash
earned in prior periods that a mortgagor
elected not to distribute. To eliminate
this problem, surplus cash would be
better defined in terms of cash
remaining as opposed to cash earned in
a fiscal period. This change would be in
accordance with HUD Circular 4615.2
and HUD’s draft applicant’s guide. In
addition, the commenter suggests
changes to give HUD more flexibility to
set standards. The commenter also
proposes enlarging the ‘‘days in
accounts receivable’’ portion of the test
because, historically, many hospitals are
unable to meet the proposed test.
Accordingly, this commenter suggests
the following revised language:
Surplus Cash means any cash in the
applicable fiscal period or prior fiscal
periods, including accounts receivable,
remaining after the following have been
achieved:
(1) Mortgage payments for the preceding 12
months have been made when due, including
any grace period;
(2) There is a Debt Service Coverage Ratio
greater than or equal to 1.50 or such other
ratio as HUD may deem appropriate;
(3) Days in Accounts Receivable are less
than or equal to 100 or such other day count
as HUD may deem appropriate;
(4) Days in Accounts Payable are less than
or equal to 120 or such other day count as
HUD may deem appropriate;
(5) The Mortgage Reserve Fund is
compliant with the scheduled balance;
(6) All income, property, and statutory
employer payroll taxes and employee payroll
withholding contributions have been
deposited as required;
(7) The Current Ratio is greater than or
equal to 1.50 or such other ratio as HUD may
deem appropriate;
(8) Days of cash on hand are greater than
or equal to 15 days or such other day count
as HUD may deem appropriate; and
(9) The payment of:
(i) All sums due or currently required to be
paid under the terms of the Mortgage Note
and Regulatory Agreement due on the first
day of the month following the end of the
applicable fiscal period, including, without
limitation, in the Mortgage Reserve Fund or
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any other reserves as may be required by
HUD; and
(ii) All other current obligations of the
hospital (accounts payable except for a 100
day exception and accrued, unescrowed
expenses), unless funds for payment are set
aside or HUD has approved deferment of
payment.
Response: The addition of the
qualifiers, ‘‘or as HUD shall deem
appropriate,’’ negates the intended
purpose of this rule to make clear the
minimum financial standards applicable
to hospitals with insured loans. With
respect to ‘‘surplus cash,’’ HUD agrees
that cash earned in prior periods that a
mortgagor elected not to distribute
would be included and that ‘‘surplus
cash’’ should be defined as earned cash
remaining as opposed to cash earned in
a fiscal period.
This final rule also adds language to
the definition requiring the hospital to
meet particular minimum equity
requirements and restricting
distributions until those requirements
are met. The final rule clarifies that the
most recent audit required under the
regulatory agreement, in conjunction
with the effect of the distribution on the
interim financial statements, will
provide the basis for limitations on
distributions. Items 9(i) and 9(ii) of the
proposed definition were deleted as
being duplicative. Accordingly, the final
rule revises the definition of ‘‘surplus
cash.’’
Comment: One commenter stated:
‘‘We feel that 21 and 15 are very low
standards. We would suggest it be raised
to 30 days.’’
Response: HUD assumes that this
comment is meant to refer to the 15 days
of cash on hand portion of the definition
of ‘‘surplus cash’’ in the proposed rule.
HUD agrees that 15 days cash on hand
is a very low standard and has increased
it to 21 days cash on hand. HUD
considered the commenter’s suggestion
to increase the days of cash on hand to
30. However, HUD did not believe it
necessary to raise the standard that
high. The increase to 21 days
strengthens the prior standard, provides
sufficient liquidity to make a payroll,
and is currently met by 50 percent of the
hospitals in the HUD portfolio.
Comment: One commenter stated that
‘‘average payment period’’ would be a
better measure to use in this definition.
Response: HUD assumes that the
commenter was referring to the use of
the term ‘‘days in accounts payable’’ in
the definition of ‘‘surplus cash.’’ The
measure ‘‘average payment period’’ has
become the standard in the industry
because it is more comprehensive and
less subject to manipulation. HUD
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agrees to the substitution of this
measure for ‘‘days in accounts payable.’’
Comment: One commenter suggests
that the definition of ‘‘working capital’’
be deleted because it is used only once
in the rule (§ 242.24).
Response: HUD agrees with the
comment. This final rule removes the
definition of ‘‘working capital’’ in favor
of a phrase that is better understood,
‘‘initial operating capital,’’ and revises
the title of § 242.24 to ‘‘Initial Operating
Costs.’’
4. Section 242.3 Encouragement of
Certain Programs
Comment: One commenter states that
everything after the word
‘‘hospitalization’’ should be deleted
because the language ‘‘is neither an
eligibility requirement of the
Act.* * *nor, to our knowledge, a
statement of current FHA policy.’’ The
commenter is concerned that this
language may be interpreted as a
mandatory underwriting requirement,
making otherwise eligible projects
ineligible.
Response: The language that the
commenter requests be deleted is
indeed a requirement stated in the
statute, 12 U.S.C. 1715z–7(f). This
section states that:
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The activities and functions provided for
in this section shall be carried out by the
agencies involved so as to encourage
programs that undertake responsibility to
provide comprehensive health care,
including outpatient and preventive care, as
well as hospitalization, to a defined
population, and, in the case of public
hospitals, to encourage programs that are
undertaken to provide essential health care
services to all residents of a community
regardless of ability to pay.
HUD’s underwriting reflected this
requirement in the past and will
continue to do so in the future. HUD
included the words ‘‘and certain not-forprofit hospitals’’ after ‘‘in the case of
public’’ in recognition of the role that
many not-for-profit hospitals fulfill in
providing indigent care in areas where
there are no public hospitals or in
which public hospital capacity is
limited. In response to the commenter’s
concern about mandatory underwriting
requirements, HUD notes that
encouragement of the provision of
comprehensive health care to a
population does not mean that a
hospital is ineligible because it does not
plan to provide comprehensive care or
does not plan to provide services to all
residents regardless of ability to pay. It
does mean, however, that HUD should
consider the provision of care and the
role that a proposed hospital would play
across the service area.
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5. Sections 242.4 and 242.5 Eligible
Hospitals and Eligible Mortgagees
Comment: Section 242.4 should be
revised to conform to the definition of
‘‘project’’ by adding the phrase
‘‘modernization, expansion, or
renovation’’ before the phrase, ‘‘of an
existing hospital.’’
Response: The definition of ‘‘project’’
has been revised in response to other
public comments to mean the
‘‘construction or substantial
rehabilitation’’ of an eligible hospital.
This change also addresses the issue
cited by this commenter. In addition,
HUD has added a paragraph on
transition to these regulations.
Comment: The title to § 242.5 should
be revised to read ‘‘Eligible mortgagees/
lenders.’’
Response: HUD agrees, since this title
reflects the terminology used in the final
rule.
6. Section 242.7
Amounts
Maximum Mortgage
Comment: The following phrase
should be added after the word
‘‘installed’’ and before the period at the
end of the sentence:
* * *and other related project development
costs, including but not limited to capitalized
interest and Commissioner approved fees.
Response: HUD intended this section
to outline broadly the maximum
mortgage amount as a percentage of
replacement cost. The level of detail
sought by the commenter is outside the
scope of this section.
7. Section 242.9
Physician Ownership
Comment: The last sentence of this
section, as proposed, would require an
‘‘unqualified legal opinion’’ regarding
compliance with applicable federal law.
An unqualified legal opinion is difficult
to obtain, and ‘‘an opinion satisfactory
to HUD’’ would be a more appropriate
standard.
Response: HUD has been able to
obtain unqualified legal opinions on all
professionally owned hospitals since
the decision to accept these sponsors
into the program was made in January
2003. It would take an inordinate
amount of time and expertise for staff to
perform the due diligence reflected in
an unqualified opinion. The unqualified
opinion benefits mortgagors that
otherwise would have to obtain an
opinion from the Inspector General at
the Department of Health and Human
Services (HHS). Therefore, in the best
interests of the program, HUD shall
retain the requirement of an
‘‘unqualified legal opinion.’’
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8. Section 242.10 Eligible Mortgagors
Comment: Lessees of mortgagors
should also be included for the same
reason as in the definition of ‘‘regulatory
agreement.’’ The commenter also states
that the section should be revised to
read in its entirety:
The mortgagor shall be a public mortgagor
(e.g., an owner of a public facility), a private
nonprofit corporation or association, or a
profit-motivated mortgagor meeting the
definition of ‘‘hospital’’ in § 242.1. The
mortgagor or a lessee of the mortgagor shall
be approved by HUD and shall possess the
powers necessary and incidental to operating
a hospital. Eligible proprietary or profitmotivated mortgagors may include for-profit
corporations, limited partnerships, and
limited liability corporations and companies.
The commenter states that ‘‘natural
persons, joint ventures and general
partnerships’’ are eligible mortgagors in
other FHA insurance programs and is
unaware of any program or legal basis
for excluding such ownership forms
from Section 242 eligibility if
underwriting criteria are otherwise met.
The sentence beginning ‘‘for new
organizations’’ should be deleted and
‘‘treated as a program, not a regulatory
requirement.’’ Finally, it would also
seem inappropriate that stockholders of
a privately held corporation should be
required to admit other parties to its
board of directors (although it may be
considered for advisory board
purposes), or to otherwise require that
private corporations be treated as public
entities. The term ‘‘broad community
participation’’ is undefined, may be
difficult to precisely define, and should
be treated in a ‘‘more flexible, case by
case non-regulatory fashion.’’
Response: Generally, this section
states the statutory requirements for an
eligible hospital mortgagor. Regarding
the statement that lessees of mortgagors
should also be included, the National
Housing Act makes it clear that HUD
can insure mortgages where long-term
ground leases are involved. However,
HUD generally prohibits leases of the
entire hospital. In those rare instances
where a lease is necessitated by local
law, HUD will continue to evaluate each
situation on a case-by-case basis.
The comments also suggest striking
the latter portion of the section. This
wording was carefully developed and
HUD believes that there is considerable
wisdom in not permitting mortgagor
entities with other obligations that
could interfere with the operation and
stability of the hospital. The same is
true of ensuring the continuity of the
mortgagor entity so that a legal entity is
in place for as long as HUD insures a
mortgage loan. Finally, HUD does not
agree that the language in this section
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11. Section 242.14 Mortgage Reserve
Fund
Comment: One commenter suggests
editorial revisions, as follows:
requires that private corporations be
treated as public entities.
9. Section 242.11 Regulatory
Compliance Required
Comment: One commenter suggests
minor editorial changes, as follows:
An application for insurance of a mortgage
under this part shall be considered only in
connection with a hospital that is in
substantial compliance with regulations of
the Department of Health and Human
Services and the applicable State governing
the operation and reimbursement of
hospitals. A hospital that is under
investigation by any State or Federal agency
for statutory or regulatory violations is not
eligible so long as the investigation is
unresolved, unless HUD determines that the
investigation is minor in nature, that is, the
investigation is unlikely to result in
substantial liabilities or of otherwise
substantially harming the creditworthiness of
the hospital.
Response: HUD adopts these minor
clarifying changes to the final rule.
Noncompliance with HHS and state
regulations can result in significant
liabilities and can increase the risk of
suspension or cutoff of reimbursements
from federal or state payors,
significantly increasing the risk that the
hospital will default on the FHAinsured mortgage loan.
10. Section 242.13
Affiliates
Parents and
Comment: One commenter suggests
editorial revisions, as follows:
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As a condition of issuing a commitment,
HUD may require corporate parents,
affiliates, or principals of the proposed
mortgagor to provide assurances, guarantees,
or collateral with respect to the mortgage
loan. HUD may also require financial and
operational information on the parent, other
businesses owned by the parent, or affiliates
of the proposed mortgagor and may also
require a parent or affiliate to agree that it
will not take any actions which could impact
the financial viability of the hospital and its
ability to repay the mortgage loan.
Response: HUD agrees that more
language is needed to clarify the first
sentence ending in ‘‘collateral.’’
However, the suggested language is too
narrow. In the final rule, the sentence is
revised to read, ‘‘As a condition of
issuing a commitment, HUD may
require corporate parents, affiliates, or
principals of the proposed mortgagor to
provide assurances, guarantees, or
collateral to protect HUD’s interests.’’
HUD interprets the second suggested
revision also as narrowing HUD’s ability
to protect its interests. Thus, the
existing language in the second sentence
will be kept.
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As a condition of issuing a commitment,
HUD may require establishment of a
Mortgage Reserve Fund (MRF), a trustee-held
account to which the mortgagor will
contribute and from which withdrawals must
be approved by HUD. The mortgagor shall be
required to make contributions to the MRF
such that, with fund earnings, the MRF will
build to one year of debt service at five years
following commencement of amortization,
increasing thereafter to two years of debt
service on and after ten years following
commencement of amortization according to
a schedule established by HUD, unless HUD
determines that a different schedule of
contributions is appropriate based on the
mortgagor’s risk profile, reimbursement
structure, or other characteristics. In
particular, hospitals that receive cost-based
reimbursement may be required to have
MRFs that build to more than two years of
debt service. Expenditures from the fund may
be made for such purposes, including the
payment of debt service as HUD may
determine or in accordance with the
mortgagor’s MRF Schedule. Upon
termination of insurance, the balance of the
MRF shall be returned to the mortgagor
provided that all obligations to HUD have
been met.
Response: The benefit of the MRF has
been tested over time, and its
availability has afforded hospitals in
financial distress the time and relief
needed to effectuate a turnaround. For
that reason, HUD disagrees with the
suggested substitution of the word
‘‘shall’’ with ‘‘may.’’ The availability of
an MRF has served HUD, the mortgagee,
and the mortgagor well, and this final
rule continues to require it.
With respect to expenditures from the
fund, HUD believes that the original
language is clear on its face and that the
additional wording is likely to result in
confusion and misinterpretation as to
the primary intent of the MRF, which is
for the payment of debt service.
HUD concurs that the inclusion of
‘‘following commencement of
amortization’’ clarifies the MRF funding
requirement and has made the
appropriate change.
Also, the final rule removes the text
in the first sentence following the
second comma, because the revised
definition of ‘‘mortgage reserve fund’’
makes this language redundant.
12. Section 242.15 Limitation on
Refinancing of Existing Indebtedness
Comment: One commenter states that
the restriction to long-term debt should
be removed and that 15 percent rather
than 20 percent of the mortgage must be
used for hard costs. As to the former
suggestion, the change is necessary to
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permit loans to fund projects completed
prior to initial endorsement and
financed on the basis of short-term
rather than long-term loans. As to the
latter, the 20 percent requirement is not
a statutory requirement, and the lower
standard will allow ‘‘otherwise
necessary’’ projects to be able to utilize
the program. The revised language
would read as follows:
Some existing debt may be refinanced with
the proceeds of a section 242 insured loan;
however, at least 15 percent of the amount
of the mortgage must be used to fund the
hard costs of construction, equipment and
mortgageable costs and expenses related
thereto, including but not limited to interest,
taxes and other Commissioner approved fees
typically included in a commitment.
Response: By deleting but not
replacing ‘‘long-term,’’ the proposed
revision would permit any existing debt
to be refinanced, such as operating debt.
This would be contrary to the intended
purpose of the program to insure the
financing of capital projects. However,
HUD understands that there may be
cases where it would be appropriate to
refinance some short-term capital debt.
Therefore, HUD has substituted the
word ‘‘capital’’ for ‘‘long-term.’’
Reducing the 20 percent requirement to
15 percent would blur the distinction
between Section 242 and Section 223(f),
which HUD is not implementing for
hospitals through this rule, and HUD
does not agree to this revision.
Subpart B—Application Procedures and
Commitments
1. Section 242.16
Applications
Comment: One commenter asks
whether HUD determines the need or
the state CON (Certificate of Need)
process does, and states that the rule
should clarify this issue.
Response: HUD conducts the same
analysis of need whether or not the state
has a CON process. There is wide
variation in the methods CON states use
to decide whether or not to issue a
certificate. HUD believes that the Act’s
required need assessment is best
performed using a method that is
applied consistently to hospitals in all
states. Should the state’s CON process
and HUD’s assessment of need reach
differing conclusions on the need for a
proposed project, HUD will review the
case closely to determine if its
conclusion should be changed.
Comment: One commenter suggests a
variety of substantive and editorial
changes to this section. The commenter
would revise § 242.16(a)(1), as follows:
(a) The process for approval of an
application shall include consideration of the
following financial and programmatic factors.
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(1) Market need. The approval process
shall include an analysis of the market need
of the proposed project, on a market-wide
basis, the impact of the proposed facility on,
and its relationship to, other health care
facilities and services; the number and
percentage of any excess beds; and
demographic projections.
Generally, except in cases acceptable to
HUD, Section 242 insurance may support
start-up hospitals or major expansions of
existing hospitals only if existing hospital
capacity or services are not adequate to meet
the needs of the population in the service
area.
(i) If the State has an official procedure for
analyzing need for hospitals, HUD shall
require that such procedure be followed
before the application for insurance is
submitted, and that the application shall
document that need has also been established
under that procedure; provided that in
circumstances acceptable to HUD, an
application may be submitted and review
commenced prior to the issuance of such
State approval.
Response: The commenter suggests
deletion of the requirement that HUD
consider the impact of the proposed
facility on other health care facilities
that ‘‘have a disproportionate share of
Medicaid and uninsured patients,’’
because it is not a program requirement.
However, the statute, 12 U.S.C.
1715z–7, requires HUD to administer
the program ‘‘so as to encourage
programs that undertake responsibility
to provide comprehensive health care
including outpatient and preventive
care, as well as hospitalization, to a
defined population. * * *
Disproportionate share hospitals are a
critical element in providing such care,
acting as a ‘‘safety net’’ for care of the
uninsured. These hospitals typically use
profitable product lines to subsidize
unprofitable activities in a practice
known as ‘‘cost shifting.’’ A new project
that takes profitable business away from
a disproportionate share hospital can
have the effect of reducing its ability to
provide comprehensive health care to
the local population. For this reason,
HUD believes that it should pay
particular attention to the impact of a
proposed project on disproportionate
share hospitals. Also, see HUD’s
response to comments on § 242.3.
The commenter also stated that ‘‘in
circumstances acceptable to HUD’’ the
rule should allow for an application to
be submitted prior to issuance of official
state approval. The commenter stated
that as the program gets broader
national application, there will be
instances where it is ‘‘prudent and
equitable’’ to begin the review of an
application before a certificate of need
is issued, ‘‘particularly when it is
reasonably inferred that a certificate of
need will eventually be issued and the
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mortgagor is willing to pay the required
application fee to reimburse FHA’s
costs.’’ The commenter stated that this
concern is ‘‘particularly important in
the context of the extensive construction
periods associated with hospital
projects, as well as the impact of
escalating costs on project feasibility.’’
However, HUD interprets the statute,
12 U.S.C. 1715z–7, to require that the
certificate of need will be submitted as
part of the application.
Comment: One commenter stated that
§ 242.16(a)(2) should be revised, as
indicated:
Operating margin and debt service
coverage ratio. (i) Hospitals with an aggregate
operating margin of less than 0.00 when
calculated from the three most recent annual
audited financial statements are not eligible
for section 242 insurance, unless HUD
determines, based on the financial data in
those statements or other financial criteria or
empirical information acceptable to HUD,
that the hospital has achieved a financial
turnaround resulting in a positive operating
margin in the most recent year, calculated
using classifications of items as operating or
non-operating in accordance with guidance
that shall be provided in accordance with
generally accepted accounting principles or
HUD is satisfied based on other available
financial information or evidence acceptable
to HUD that the project constitutes a
reasonable underwriting risk.
The commenter stated that this
change would permit flexibility, for
example, in cases such as Critical
Access Hospital applications where
prior financial statements were allowed
to be retroactively restated to reflect
unusual circumstances such as
prospective cost plus reimbursement.
The commenter stated that negative
historical operating margins may not
always be relevant to a determination of
a facility’s prospective viability. For
example, a hospital may have had an
historical negative operating margin
substantially, if not solely, as a result of
excessive debt service, which may be
fully eliminated through the proposed
FHA financing. Similarly, a proposed
mortgagor may be trying to reposition a
struggling hospital and new or
rehabilitated facilities, and equipment
may enable that facility to compete
more effectively, deliver services more
efficiently, provide a higher quality of
services, or offer new services without
which a needed facility might never be
able to improve its financial posture.
The commenter states that negative
historical margins should not result in
automatic disqualification.
Response: HUD believes that in
almost all cases, the proven ability to
operate in the black is an essential
prerequisite for consideration for
mortgage insurance. Hospitals
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transitioning from the prospective
payment system to cost-based
reimbursement may recast financial
results to present them as if they had
been receiving cost-based
reimbursement in prior years. In
unusual circumstances, the applicant
can request a waiver of the regulatory
requirement for a positive operating
margin.
Comment: The commenter states that
there is no requirement that a start-up
hospital (without an operating history)
meet an historical operating margin test.
To apply the standard automatically to
an existing facility would seem
discriminatory when, in fact, the new
FHA financing may in and of itself
allow the facility in question to meet or
exceed required standards. HUD should
also consider giving special financial
consideration to Critical Access
Hospitals, sole community, and
disproportionate share providers where
other financing options are prohibitively
expensive or unavailable.
Response: It is true that start-up
hospitals have no operating history to
examine, and for that reason other
factors become more important in
HUD’s review of the potential start-up
mortgagor. However, when a hospital
has an operating history, HUD must
examine that history in evaluating the
hospital’s creditworthiness. HUD
believes that demonstrated ability to
operate in the black is the single most
important indicator of financial strength
and ability to repay debt. Note that an
exception to the 3-year positive average
operating margin may be granted in
demonstrated financial turnaround
situations.
This exception has been clarified in
§ 242.16(a)(2)(i). A hospital that has
achieved a financial turnaround
resulting in a positive operating margin
in the most recent year may be
considered eligible to apply for section
242 insurance. However, HUD does not
anticipate approving an application
unless the hospital has achieved two
consecutive years of positive operating
margin immediately prior to issuance of
an insurance commitment. Accordingly,
the following sentence has been added
to the end of § 242.16(a)(2)(i):
In any event, HUD shall not issue an
insurance commitment for any hospital that
has not achieved two consecutive years of
positive operating margin immediately prior
to issuance of the commitment.
Comment: Section 242.16(a)(2)(ii)
should be revised, as follows:
(ii)(A) 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
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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 1.25 in its
prior 12 month period, or other period
acceptable to HUD, or HUD is satisfied based
on other available financial information or
evidence acceptable to HUD, that the project
constitutes a reasonable underwriting risk.
(B) 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 in calculating the debt
service coverage ratios for each of the prior
three years. In cases where HUD authorizes
the use of the projected debt service
requirement in lieu of the historical debt to
determine the debt service coverage ratio,
hospitals must have an average debt service
coverage ratio of 1.40 or greater, or such
lesser ratio as may be acceptable to HUD.
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As to the first of these suggested
changes, the commenter stated that the
1.40 standard should be revised to
reflect the ‘‘underlying 1.25 standard,’’
particularly in situations where special
financial consideration may be
warranted, as described above. As to the
allowance of a lesser debt service ratio,
such a change would help promote
flexibility as described above.
Response: HUD believes that the cash
that was available historically to service
debt is an important factor in
considering a hospital’s ability to
service debt in the future. A debt service
coverage ratio of 1.25 is considered
quite low. The prospective debt service
coverage ratio of 1.40 is generally the
minimum HUD will tolerate in its
underwriting of a mortgage insurance
application. It is also quite low. The
reason HUD will consider applications
for hospitals with such low debt service
coverage is that the Department
recognizes its role in providing
affordable financing to needed hospitals
that are not financially robust enough to
be of interest to private insurers.
However, HUD believes that to accept
even lower ratios would not be prudent.
Comment: Sections 242.16(a)(3) and
(4) should be revised, as indicated:
(3) Financial Feasibility. The process for
reviewing an application shall include an
analysis of the financial feasibility of the
proposal, i.e., an analysis indicating that it is
probable that the proposed mortgagor will be
able to meet its debt service requirements
during the period projected. It includes
analysis of the reimbursement structure of
the proposed hospital (including patient/
payer mix); actions of competitors; and the
probable projected impact on the proposed
hospital of general health care system trends,
such as the development of alternative health
care delivery systems and new
reimbursement methods. In addition to
historical operating margin, analysis of
financial feasibility includes, but is not
limited to, evaluation of the following
factors. The application must address, and
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HUD will review, each of the following
factors:
(i) Current and projected gains from
operations and a manageable debt load using
reasonable assumptions;
(ii) Current average debt service coverage
ratio over a period determined acceptable by
HUD of 1.25 or higher and projected debt
service coverage ratio of 1.40 or higher, or
such lesser ratio as may be acceptable to
HUD;
(iii) Cushion in the balance sheet sufficient
to demonstrate the ability to withstand short
periods of net operating losses without
jeopardizing financial viability;
(iv) Patient utilization forecasts (including
average length of stay, case intensity,
discharges, area-wide use rates) that are
consistent with the hospital’s historical
trends, future service mix, market trends,
population forecasts, and business climate;
(v) The hospital’s demonstrated ability to
position itself to compete in its marketplace;
(vi) Organizational affiliations or
relationships that help optimize financial,
clinical, and operational performance;
(vii) Management’s demonstrated ability to
operate effectively and efficiently, and to
develop effective strategies for addressing
problem areas;
(viii) Systems in place to monitor hospital
operations, revenues, and costs accurately
and in a timely manner;
(ix) A Board that is appropriately
constituted and provides effective oversight;
(x) Required licensures and approvals; and
(xi) Favorable ratings from the Joint
Commission on Accreditation of Healthcare
Organizations or other organization
acceptable to HUD.
(4) Preliminary Review. A Preliminary
Review is a general overview of the
acceptability of a potential mortgagor
performed at the request of a lender, to
identify any factors that would likely cause
an application to be rejected, should an
application be submitted.
(i) The purpose of the preliminary review
is for HUD to identify any obvious factors
that would cause an application to be
rejected, before the potential mortgagor
expends the resources needed to prepare an
application and before HUD expends
resources to review it. The lender shall
submit a preliminary information package to
HUD that provides evidence of statutory
eligibility, market need, financial strength,
and such other documentation as HUD may
require.
(ii) If HUD identifies factors that would
cause an application to be rejected, HUD
shall issue a Preliminary Review Letter
notifying the potential applicant that an
application for mortgage insurance would
result in a rejection and providing the
reasons for this decision. Also, no further
request from the proposed applicant for a
Preliminary Review shall be entertained for
a period of one year from the date of HUD’s
notification. HUD may grant an exception to
this one-year limitation if, during the year,
there is a major change in the circumstances
that caused HUD to determine that the
project would be rejected or if additional
material information is provided with respect
to the reasons on which a rejection is based
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and which justifies reconsideration of an
adverse Preliminary Review Letter. For
example, if the sole reason for HUD’s
determination was the hospital’s failure to
meet the historical operating margin test, and
a new audited annual financial statement
contains results that would cause the
hospital to meet the test, then the lender may
request a new Preliminary Review within one
year of HUD’s notification.
As to the projected debt service
coverage ratio, the commenter stated
that application of the proposed 1.40
standard for these purposes without a
provision permitting Commissioner
discretion to accept a lower projection,
particularly where the FHA calculation
deletes earnings and contributions, may
preclude otherwise viable hospitals
from program eligibility. As to the
suggested change regarding
consideration of additional material
information, the commenter cited
fairness given the potential one-year bar.
Response: The commenter had a
number of suggestions. First, the
commenter proposed language that says
the application review will include an
‘‘analysis of the financial feasibility of
the hospital’’ instead of a
‘‘determination of the financial
feasibility.’’ HUD believes this change is
unnecessary, as the meaning of
‘‘determination’’ is discussed
immediately thereafter.
The commenter suggests using
‘‘during the period projected’’ instead of
‘‘during the life of the proposed
mortgage’’ when highlighting the period
in which HUD will determine financial
feasibility. This change is accepted.
The commenter suggested lowering
the standard of the debt service coverage
requirement by adding language stating
that HUD may consider a lesser ratio.
HUD rejects this response; please see
the response to the previous comment
on § 242.16(a)(2)(ii) for more
information.
The commenter suggests requiring
that only lenders (as opposed to a
hospital, a financial consultant
representing a hospital, or a lender)
request a preliminary review. HUD has,
in the past, accepted requests for
preliminary reviews from hospitals and
consultants. In some cases, hospitals
wish to assess their eligibility prior to
retaining a mortgage banker. HUD will
keep the existing language and notes
that pre-application meetings for
projects with a positive preliminary
review require the participation of the
proposed mortgagor’s mortgage banker.
The commenter suggests replacement
of the word ‘‘applicant’’ in (4)(i) with
the word ‘‘mortgagor.’’ HUD has
replaced ‘‘applicant’’ with the words
‘‘mortgagor or mortgagee’’ to reflect that
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both may expend resources in preparing
an application.
The commenter suggests adding
language further describing under what
circumstances HUD may reconsider an
adverse preliminary review. In its
current form, the ‘‘Commissioner may
grant an exception * * * if there is a
major change in circumstances that
caused’’ the rejection. Specifically, the
commenter suggests adding ‘‘or if
additional material information is
provided with respect to the reasons on
which a rejection is based and which
justifies reconsideration of an adverse
Preliminary Review.’’ HUD considers
this added language to be repetitive.
Thus, the existing language will remain.
Comment: In accordance with a
comment to § 242.1, above, the term
‘‘mortgagor’’ should be substituted for
the term ‘‘applicant’’ in proposed
§ 242.16(a)(5).
Response: HUD agrees that the term
‘‘mortgagor’’ is clearer and the change
has been made.
Comment: One commenter stated as
to § 242.16(b)(6) that the following
should be added to the current
‘‘architectural plans and specifications’’:
‘‘* * * to the extent available when the
application is filed.’’ The commenter
stated that usually architectural plans
are not available when the application
is submitted.
Response: HUD does not intend to
require that complete architectural
plans and specifications be submitted
when a complete application is
received. However, the addition of
language stating that the drawings and
specifications may be submitted ‘‘to the
extent available when the application is
filed,’’ as suggested by the commenter,
is insufficient. Accordingly, the
language in 242.16(b)(6) will be
changed, as follows: ‘‘Architectural
plans and specifications in sufficient
detail to enable a reasonable estimate of
cost.’’
Comment: One commenter stated that
§ 242.16(b)(8) should be revised, as
indicated:
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If the State has an official procedure for
determining need for hospitals, evidence that
such procedure has been followed and that
need has been established under that
procedure; provided that as set forth in
Section 242.16(a)(1)(i) hereof, HUD may
allow an application to be filed in certain
circumstances acceptable to HUD.
Response: The additional language is
not necessary since HUD interprets the
statute, 12 U.S.C. 1715z–7, to require
that the certificate of need will be
submitted as part of the application.
Comment: One commenter stated that
§ 242.16(b)(9) should be revised, as
indicated:
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If HUD has authorized the Department to
conduct the environmental study required as
a condition of mortgage insurance, evidence
of compliance with Federal and State
environmental regulations; if HUD has not
commissioned such study, the study shall be
commissioned and completed prior to the
issuance of a commitment.
Response: HUD does not perform the
initial environmental site assessment;
this is the responsibility of the
mortgagor or mortgagee. The application
must include a Phase I environmental
report and, if Phase I indicates that
further study is required, evidence and
results of the further study.
Comment: One commenter stated that
§ 242.16(e) should be revised, as
indicated:
Complete application. Only materially
complete applications will be processed.
Except as otherwise provided in this subpart,
partial applications cannot be processed.
Upon determination that an application is
complete, HUD shall issue a Completeness
Letter to the applicant stating that the
application is complete. Such letter shall be
issued within two weeks of the receipt of an
application which is in compliance with this
section.
The commenter states that the term
‘‘technically complete’’ is unnecessarily
vague and that ‘‘materially complete’’ is
an appropriate and common industry
standard.
Response: Regarding the first
comment, HUD does not see an
advantage in using the term
‘‘materially’’ complete over
‘‘technically’’ complete. Maintaining the
term ‘‘technically’’ is a higher standard
that will ensure applications are
deemed complete only when all the
information has been received in a
satisfactory form. In certain cases, HUD
will deem an application complete
when only very minor items are missing
and the applicant has agreed to supply
HUD with these items in less than 2
weeks’ time.
Concerning the second change, HUD
will not commit to a 2-week deadline
for the return of a Completeness Letter.
It is an internal guideline that staff will
make every effort to meet; however,
factors beyond HUD’s control may at
times prevent the Department from
meeting that guideline.
Comment: The last sentence of
§ 242.16(f) should be revised, as
indicated:
(f) * * *. It is the intent to communicate
HUD’s decision with respect to a project as
promptly as possible after receipt of a
completed application in the form of a
Commitment Letter or a Rejection Letter, but
HUD shall be under no obligation to issue
such letter within a predetermined
timeframe.
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The commenter stated that, although
the completion of a Section 242
application is not subject to predictable
timeframes and that unreasonable
borrower expectations have been
created when timeframes have been
expressed, the inclusion of a 12-month
timeframe standard will be extremely
detrimental to the program and
discouraging to borrowers. As a
practical matter, the simple and clear
statement suggested above would allow
FHA to accomplish its objectives
without the negative and dispiriting
implication represented by a 12-month
timeframe.
Response: HUD agrees that
referencing a 12-month timeframe may
discourage borrowers by causing them
to believe that 12 months are routinely
required. That reference has been
removed.
2. Section 242.17 Commitments
Comment: Section 242.17(a)(1) should
be revised to permit insurance upon
completion, as well as insurance upon
advances. According to the commenter,
this would maintain ‘‘maximum levels
of flexibility to deal with the multiple
and unique circumstances of healthcare
providers.’’
Response: Insurance upon completion
was considered by HUD, but left out of
the rule. HUD has never had a request
for insurance upon completion and does
not have procedures in place to allow
applicants to use this procedure.
Therefore, the final rule has not been
changed to include insurance upon
completion.
Comment: Section 242.17(c)(2) should
be revised to permit commitments to be
extendable beyond 180 days with the
approval of HUD. The commenter states
that a commitment period of more than
180 days may occasionally be required
to permit a mortgagor to comply with
commitment terms and conditions and
to complete arrangements in connection
with the financing of the insured loan,
particularly when the financing source
is revenue bond proceeds.
Response: After 6 months, factors
such as construction costs, interest
rates, the hospital’s actual financial
performance, and others that were
considered by HUD as reasons for
issuing a commitment, can change.
Substantial resource expenditure can be
involved in HUD’s re-evaluation of the
financial feasibility of the project in
light of changing circumstances.
Further, an analysis of insured hospital
mortgages that were initially endorsed
during the prior 3 years indicates that in
only one case did the hospital require
more than 6 months between
commitment and initial endorsement.
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Therefore, HUD believes that if the
mortgagor cannot be prepared to go to
initial endorsement within 6 months
after receiving a commitment, and later
determines that it is ready to proceed to
initial endorsement, the procedures
described in § 242.20 should be
followed to request a reopening of an
expired commitment. For these reasons,
HUD does not adopt this comment.
Comment: Section 242.17(d) should
be revised, as indicated:
Commitment fee. A commitment fee
which, when added to the application fee,
will aggregate $3.00 per thousand dollars of
the amount of the loan set forth in the
commitment, shall be paid at or prior to
initial endorsement.
Response: It is possible that an
applicant who receives a commitment
may find other means of financing prior
to initial endorsement. Under the
commenter’s proposal, HUD would not
collect a commitment fee in this case.
HUD sees no need to encourage a
situation where HUD does not collect a
commitment fee after expending
considerable resources in review of an
application.
3. Section 242.18 Inspection Fee
Comment: Section 242.18 should be
revised, as indicated:
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The commitment may provide for the
payment of an inspection fee in an amount
not to exceed $5 per thousand dollars of the
commitment amount. In determining the
amount of such inspection fee, HUD shall
consider the amount of the loan that is being
applied to the refinancing of the hospital’s
existing indebtedness. The inspection fee
shall be paid at the time of initial
endorsement or in the case of a start of
construction prior to initial endorsement,
such earlier time as HUD may require.
The commenter states that, unlike
most multifamily housing projects,
Section 242 hospital mortgages often
include refinancing components
substantially exceeding new
construction costs and related expenses.
To charge the inspection fee on the full
mortgage amount in such cases would
seem inappropriate. HUD Handbook
4480.1 specifies that in the case of
rehabilitation or reconstruction of an
existing structure, the HUD-FHA
Inspection Fee is computed on the cost
of new improvements and mortgageable
equipment. The commenter states that
specific language to this effect should be
included in the new regulation.
Response: Regardless of the amount of
the refinancing, HUD’s mortgage on the
property demands that it perform a full
inspection of the property. Because of
the complexity of hospital facilities, the
inspection involves a great amount of
work regardless of whether there is a
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refinancing component. The inspection
fee reflects this effort. Basing the
inspection fee on the full amount of the
proposed mortgage is consistent with
long-standing practice. The final rule,
therefore, retains the proposed language
concerning inspection fees.
4. Section 242.19
Fees on Increases
Comment: Section 242.19 should be
revised, as indicated:
(a) Increase in commitment prior to
endorsement. An application, filed prior to
initial endorsement, for an increase in the
amount of an outstanding commitment, shall
be accompanied by an additional application
fee of $1.50 per thousand dollars computed
on the amount of the increase requested. Any
increase in the amount of a commitment
shall be subject to the payment of an
additional commitment fee which, when
added to the additional application fee, will
aggregate $3.00 per thousand dollars of the
amount of the increase. The additional
commitment fee shall be paid at initial
endorsement of the related mortgage
increase. If an inspection fee was required in
the original commitment, an additional
inspection fee shall be paid in an amount not
to exceed $5.00 per thousand dollars of the
costs of construction represented in the
increase in commitment. The additional
inspection fee shall be paid at the time of
initial endorsement.
(b) Increase in mortgage between initial
and final endorsement. Upon an application,
filed between initial and final endorsement,
for an increase in the amount of the
mortgage, by amendment, supplemental
consolidated mortgage or by substitution of a
new mortgage, an additional application fee
of $1.50 per thousand dollars computed on
the amount of the increase requested shall
accompany the application. The approval of
any increase in the amount of the mortgage
shall be subject to the payment of an
additional commitment fee which, when
added to the additional application fee, will
aggregate $3.00 per thousand dollars of the
amount of the increase granted. If an
inspection fee was required in the original
commitment, an additional inspection fee
shall be paid in an amount not to exceed
$5.00 per thousand dollars of the amount of
the increase granted based on the amount of
construction set forth in the mortgage
increase ratio. The additional commitment
and inspection fees shall be paid within 30
days after the date that the increase is granted
or at the endorsement of such mortgage
increase by HUD.
Response: Delay of payment of the
additional commitment and inspection
fees is not in the best interest of the
program, for the reasons given in the
responses to comments on §§ 242.17(d)
and 242.18. The proposed change to add
‘‘supplemental consolidated mortgage’’
has been implemented by adding
‘‘consolidation agreement’’ in
§ 242.19(b). The remaining changes
proposed to this section have not been
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included in the final rule for reasons
described above.
5. Section 242.20 Reopening of
Expired Commitments
Comment: One commenter states that
this section should be revised to permit
waiver of the reopening fee ‘‘solely on
grounds acceptable to HUD.’’
Response: In the proposed regulation,
a commitment expires after 90 days and
may be extended to 180 days. If a
commitment expires, the proposed rule
provides that within 90 days of
expiration, the applicant may request a
reopening. In this case, 6 to 9 months
will have passed since the original
commitment. With the passage of so
much time, the basis for HUD’s issuance
of the commitment may no longer be
valid. HUD would have to review
changes in construction cost, interest
rates, actual performance of the
hospital, and other factors to determine
whether to grant the request for
reopening. That review would require
an expenditure of HUD resources, for
which a fee is appropriate. HUD
believes that a waiver process would not
be productive. Therefore, HUD does not
adopt the comment.
6. Section 242.21 Refund of Fees
Comment: The regulation should
address whether the portion of the
inspection fee that is related to precommitment work or early start is
refundable if the conditions described
in § 242.21 are met as the government
has expended resources prior to the
initial closing at the request of the
hospital.
Response: The inspection fee in the
case of early commencement of work
will be non-refundable. For a full
discussion of issues concerning early
commencement of work, see the
response to comments on § 242.45, as
well as the final version of that section.
7. Section 242.22 Maximum Fees and
Charges by Mortgagee
Commenter: The subject section
should be revised, as indicated:
The mortgagee may collect from the
mortgagor a total financing fee for origination
and placement of a mortgage loan in an
amount not to exceed five and one half
percent of the original principal amount of
the mortgage, as agreed upon by mortgagee
and mortgagor and approved by HUD. Any
additional charges or fees, unless paid from
non-mortgage sources, collected from the
mortgagor shall be subject to prior approval
of HUD and shall be disclosed in the
Mortgagee’s Certificate.
This commenter states that, as a
practical matter, the traditional
multifamily separate categorization of
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FHA financing fees as origination and
placement have been effectively
eliminated in the Section 242 program,
where such fees are often aggregated
into a single financing fee. This
aggregate approach has been
particularly helpful for hospital loans
financed with tax-exempt revenue
bonds, where placement-related costs
are generally higher than those for
taxable financings and origination fees
are lower. FHA should consider
describing the fee structure as a single
aggregate line item not to exceed 5.5
percent.
Response: Current policy in the
Section 242 program is to limit
financing and placement fees to a total
of 3.5 percent, with an exception to
allow a total of 5.5 percent, on a caseby-case basis, when so requested by the
mortgagee. The proposed rule brings the
Section 242 program in agreement with
all other Multifamily Mortgage
Insurance programs. The maximum
financing fee the mortgagee may charge
is 3.5 percent of the mortgage amount,
with a maximum of 2 percent for the
initial financing charge and the
remainder of the 3.5 percent for the
permanent financing fee.
Higher fees up to 5.5 percent are
permissible in bond transactions. Where
the proposed financing is through the
sale of either taxable or tax-exempt
bonds, the maximum financing fees
allowable in the mortgage computation
and recognizable for cost certification
purposes is 5.5 percent of the mortgage
amount. Any cost beyond the 5.5
percent must be paid from sources
outside the mortgage.
The maximum financing fee the
mortgagee may retain for its own
account is 3.5 percent (for the initial
financing fee and permanent financing
fee, as indicated above). The remaining
2 percent (or such greater percentage as
may result from the lender reducing its
maximum retainable 3.5 percent fee)
may be used to offset the cost of bond
fees.
Comment: In some states, for example
New York, state and local governments
charge fees in connection with taxexempt revenue bonds and certificates
of need. Therefore, HUD should
consider a separate capitalized line item
for state and local government fees.
Response: A new capitalized line item
to cover such costs would be beyond the
scope of the proposed rule.
8. Section 242.23 Adjusted and
Reduced Mortgage Amounts
Comment: One commenter states that
rehabilitation projects under this section
should explicitly include project
expansion, and suggests inserting
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language in § 242.23(a) and
§ 242.23(a)(2)(i) to this effect.
Additionally, in § 242.23(a)(3)(ii), the
commenter states that the phrase ‘‘value
of’’ should be deleted.
Response: The term ‘‘substantial
rehabilitation’’ is broad and
encompasses projects that expand the
facility. See comments and responses to
§ 242.4 and to the definition of ‘‘project’’
at § 242.1. The first occurrence of the
phrase ‘‘value of’’ in proposed
§ 242.23(a)(3)(ii) was superfluous and is
removed in this final rule.
Comment: Section 242.23(c) on cash
equity should be revised, as indicated:
Cash equity. Depending upon the financial
circumstances of each hospital facility, HUD
shall have the discretion to evaluate, on a
case-by-case basis, the amount of cash equity
that a mortgagor must supply in addition to
the value of plant, property and equipment
and other values recognized as loan security
in the commitment process. Exercise of this
discretion shall never cause a loan to exceed
90 percent of estimated replacement cost,
although it may cause it to be less than 90
percent. The equity contribution may not be
made from borrowed funds. A private
nonprofit or public mortgagor, but not a
proprietary mortgagor, in the mortgagee’s
discretion and subject to 24 CFR 242.49, may
provide any such required equity in the form
of a letter of credit or surety bond issued by
an insurance company acceptable to HUD.
The commenter states that
historically, nonprofit hospitals have
been permitted to post required nonPPE (property, plant, and equipment)
equity at Initial Endorsement in the
form of a letter of credit, a privilege
stated in Section 242(d) of the NHA.
The commenter states that the letter of
credit privilege should be augmented to
permit equity to be posted in the form
of ‘‘surety bonds’’ issued by an
acceptable insurance company such as
AMBAC, FGIC, MBIA, or FSA. The
surety bond alternative would represent
an opportunity for institutions to fund
equity at more competitive costs.
Response: HUD agrees with the
suggested changes to the first and
second sentences. However, HUD does
not agree to delegate to the mortgagee
the determination of the form the equity
should take. Nor does HUD agree that
surety bonds are an acceptable form of
equity. Such delegation and use of
surety bonds for equity do not offer the
level of protection the Department
considers necessary.
§ 242.23(c) is revised as indicated:
Cash equity. Depending upon the financial
circumstances of each hospital facility, HUD
shall have the discretion to evaluate, on a
case-by-case basis, the amount of cash equity
that a mortgagor must supply in addition to
the value of plant, property, and equipment
and other values recognized as loan security
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in the commitment process. Exercise of this
discretion shall never cause a loan to exceed
90 percent of estimated replacement cost,
although it may cause it to be less than 90
percent. The equity contribution may not be
made from borrowed funds. A private
nonprofit or public mortgagor, but not a
proprietary mortgagor, in HUD’s discretion
and subject to 24 CFR 242.49, may provide
any such required equity in the form of a
letter of credit.
To further clarify § 242.23, HUD has
changed its title to ‘‘Maximum Mortgage
Amounts and Cash Equity
Requirements.’’
9. Section 242.24 Working Capital
Comment: The title of this section
should be revised to ‘‘Reserve for startup costs.’’
Response: The title is changed to
‘‘Initial Operating Costs,’’ as discussed
in the response to a comment on the
definition of ‘‘Working Capital’’ in
proposed § 242.1.
Comment: The section should be
revised, as indicated:
In the case of a new hospital or a hospital
expansion, HUD shall establish, on a case-bycase basis, the amount of capital, if any, that
must be deposited in cash, a letter of credit
or surety bond (or any combination thereof)
to be available to the new hospital upon
commencement of operations. Generally, the
working capital other than AMPO shall not
be borrowed funds unless HUD determines
that there are offsetting financial strengths to
compensate for the risk associated with
borrowing.
The term ‘‘hospital expansion’’ as
used in this section is unclear and the
mandatory nature of the section is a
concern. If the term ‘‘expansion’’
includes substantial rehabilitation, cash
(or letters of credit) capital escrows are
often not required, depending on the
borrower’s financial wherewithal.
Moreover, even if the term does not
include substantial rehabilitation, but
only new construction or an expansion,
the mandatory nature of the requirement
would not be necessary if existing
operations demonstrated that such
capital was available from other sources.
The commenter states that AMPO
(Allowance to Make Project
Operational) in the case of nonprofit
sponsors would also be a source of such
capital. The commenter suggested that
the phrase ‘‘if any’’ be added to allow
for a case-by-case determination based
on the general financial condition of a
sponsor.
Response: HUD did not intend to
make an initial cash deposit a
mandatory requirement. The amount of
cash deposit, or whether HUD will
require such a deposit at all, depends on
the borrower’s financial strength and
will be a case-by-case determination.
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For this reason, HUD agrees with the
addition of ‘‘if any.’’
HUD disagrees with the notion of
allowing the use of surety bonds, as
HUD does not believe that they provide
sufficient protection. HUD also believes
that the commenter’s treatment of
AMPO is correct, and this final rule
adds a definition of AMPO to § 242.1.
Subpart C—Mortgage Requirements
1. Section 242.25 Mortgage Form and
Disbursement of Mortgage Proceeds
Comment: Section 242.25(b) should
be revised, as indicated:
Disbursement of mortgage proceeds. The
mortgagee shall be obligated, as a part of the
mortgage transaction, to disburse the
principal amount of the mortgage in
accordance with the governing building loan
agreement acceptable to HUD in the case of
a construction or rehabilitation mortgage and
in the case of refinancing of mortgages
without construction or rehabilitation, in
accordance with procedures acceptable to
HUD.
Response: The commenter assumes
that § 242.25(b) of the regulation intends
to implement section 223(f) of the
National Housing Act, 12 U.S.C.
1715n(f), which is not the case. The
proposed language is clear and is
retained in this final rule.
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2. Section 242.26 Agreed Interest Rate
Comment: The term ‘‘rate’’ in this
section should be revised to ‘‘rate or
rates’’ to reflect the fact that
construction and permanent interest
rates often differ, as well as to allow for
circumstances that arise, when a state
agency (for example, the New York
Department of Health) requires that
refinanced debt be repaid pursuant to a
schedule shorter than the FHA
amortization period. In either event, it is
understood that the project interest rate
will not exceed the rate stated in the
governing FHA commitment.
Response: HUD agrees that more than
one rate may be applicable, and
therefore makes the suggested change in
this final rule.
3. Section 242.27 Maturity
Comment: The maturity date should
be up 35 years, rather than the proposed
25. The commenter states that, as a
means of reducing a hospital’s monthly
debt service burden, Section 242 (and
Section 241) amortization periods
should approach those used in
multifamily housing programs,
including nursing homes. Although the
amortization of Section 242 loans has
historically been 25 years, that standard
is not a requirement of the NHA.
Moreover, other FHA programs,
including FHA’s Section 232 program,
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permit post-construction amortization
periods as long as 40 years postamortization, thereby permitting lower
annual debt service as well. The
commenter states that longer
amortization periods are commonly
used in non-FHA commercial hospital
finance programs.
Response: Congress has always
understood the maximum term to be 25
years and it has been 25 years since the
inception of the program, when it was
established by regulation. It was
deliberately set at 25 when rental
project terms were 30 to 40 years,
because hospitals become obsolete faster
and the equipment (a major component)
ages much faster. HUD believes that
these reasons support continuation of
the current policy, as stated in the
proposed rule.
4. Section 242.28 Allowable Costs for
Consultants
Comment: Section 242.28 should be
revised, as indicated:
Consulting fees for work essential to the
development of the project may be included
in the insured mortgage. Allowable
consulting fees include those for analysis of
market demand, expected revenues, and
costs; site analysis; architectural and
engineering design; fees paid in connection
with obtaining a state required certificate of
need and other governmental required fees;
and such other fees as HUD may determine
to be essential to project development. Fees
for work performed more than one year prior
to preliminary review of a proposed
application are not allowable unless such
work is directly attributable to and for the
benefit of the project as determined by HUD,
such as architectural fees. Fees for work
performed by any party with an identity of
interest with the proposed mortgagor or
mortgagee are not allowable unless such fees
are determined to be reasonable by HUD.
The commenter disagrees with the
one-year limitation and believes that in
certain situations the limitation may be
unreasonable, particularly in connection
with fees for project architects, debt
capacity, financial feasibility or
planning consultants, and construction
managers. These firms are often retained
for project development purposes prior
to the one-year limitation.
Response: With respect to certificate
of need and other government fees, see
the response to the second comment on
§ 242.22, regarding fees. In addition,
HUD considered the commenter’s
suggestion regarding fees paid in
connection with obtaining a staterequired Certificate of Need. The fees
associated with conducting a feasibility
study to determine need for
construction or substantial
rehabilitation of a hospital, as part of the
Certificate of Need process, are not
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includable as costs in the insured
mortgage. This step pertains to the
submission of an application to the state
to determine if the proposed project is
required to serve the health needs of the
community. However, fees associated
with a Study of Market Need and
Financial Feasibility can be included in
the insured mortgage, because the HUDrequired study is used primarily by
HUD to determine the need for the
hospital and the ability of the hospital
to service its mortgage debt.
With respect to the one-year
limitation, HUD notes that in some
cases several years can pass between
preliminary review and application
submission, making it difficult to verify
the relevance to the application and the
cost of consultant services. However,
recognizing that hospital projects can
require long lead times for planning,
HUD has increased the proposed oneyear limitation to 2 years in this final
rule. With respect to identity of interest,
HUD believes that consultants by their
very nature should be independent of
the mortgagor and the mortgagee. For
these reasons, this final rule does not
adopt the commenter’s suggested
changes concerning identity of interest
consultants.
5. Section 242.29 Payment
Requirements
Comment: Section 242.29 should be
revised to include interest in arrears, as
follows:
The mortgage shall provide for payments
including interest in arrears on the first day
of each month in accordance with an
amortization plan agreed upon by the
mortgagor, the mortgagee and HUD.
Response: HUD does not consider this
level of detail to be necessary in the
final rule.
6. Section 242.31 Accumulation of
Accruals
Comment: One commenter states that
§ 242.31(b) should be revised to permit
greater flexibility in purchasing fire and
hazard insurance, as follows:
The mortgage shall provide for such equal
monthly payments by the mortgagor to the
mortgagee as will amortize the ground rents,
if any, and the estimated amount of all taxes,
water charges, special assessments, and fire
and other hazard insurance premiums,
within a period ending one month prior to
the dates on which the same become
delinquent. The mortgage shall further
provide that such payments shall be held by
the mortgagee, for the purpose of paying such
items before they become delinquent. The
mortgage shall also make provision for
adjustments in case such estimated amounts
shall prove to be more, or less, than the
actual amounts so paid therefore by the
mortgagor. Notwithstanding the foregoing, in
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certain circumstances, a mortgagor may
purchase required fire and hazard insurance
through a consortium of affiliated institutions
or related organizations or in the case of
public institutions, through required state
purchasing arrangements. In such
circumstances, the mortgage accrual
requirement may be modified to reflect such
circumstances.
should address whether or not the
insurance carriers meet minimum rating
standards.
Response: The language of the final
rule provides sufficient flexibility to
consider alternative sources of
insurance, and to provide that insurance
is adequate and acceptable.
The commenter states that in some
situations, property insurance may be
purchased and paid for through a
consortium of affiliated hospitals or a
state system under state required
arrangements, and the rule should allow
for this flexibility.
Response: The commenter’s point is
well taken and HUD agrees to the
language proposed for addition, with a
change in the last sentence, as follows:
8. Section 242.35 Mortgage Lien
Certifications
Comment: Section 242.35 should be
deleted in the final rule, because the
certifications required are more in the
nature of legal opinions to be rendered
by counsel in the jurisdiction where a
project is located. If the section is not
deleted, it should be revised to provide
for such exclusions, liens, and security
instruments as are acceptable to HUD.
In accordance with existing practice,
exceptions should be provided for such
items as prior leased equipment, utility
easements, and other title exceptions
acceptable to HUD.
Response: HUD sees no reason to
exclude certain property from the
mortgage lien. The language in the final
rule is needed to implement the statute
and fully protect the interests of HUD.
However, the proposed language of this
section is changed in this final rule so
that in exceptional cases certain
personalty may be excluded from the
mortgaged property or the insured
lender may take a secondary lien
position on it. Also, the final rule
removes the requirement for formal
certification.
In such circumstances, the mortgage
accrual requirement may be modified to
reflect circumstances in which it is
inappropriate for the mortgagee to collect
monthly payments and to make payments on
behalf of the mortgagor.
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7. Section 242.33 Covenant for
Malpractice, Fire, and Other Hazard
Insurance
Comment: FHA’s required mortgage
form, a real estate-oriented security
document, appropriately requires
insurance coverage related to real and
personal property interests that secure
repayment of a loan. Malpractice
insurance on the other hand is not real
estate-related and would be more
appropriately covered in the project
Regulatory Agreement. The commenter
also notes that malpractice insurance
may on occasion be covered in part
under self-insurance vehicles.
Flexibility should be allowed for those
purposes, as well. Finally, the concept
of ‘‘adequate * * * coverage’’ should be
clarified, possibly to reflect the advice
of an insurance consultant or other
experienced industry expert.
Response: Regardless of local practice,
HUD must be able to require an
assurance that adequate malpractice
coverage be maintained. This final rule
adopts language requiring the mortgagor
to maintain adequate coverage
acceptable to the mortgagee and HUD.
This language will maintain flexibility
while protecting the mortgagee and the
insurance fund.
Comment: Commenter (3) stated that
there should be language included to
ensure that appropriate amounts of
insurance are funded. State pools
should be acceptable, and offshore
insurance accounts should be
acceptable if approved by HUD. Risk
retention groups and captive insurance
companies should also be acceptable if
approved by HUD. The regulation
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9. Section 242.37 Mortgage
Prepayment
Comment: Section 242.37(a) should
be revised, as follows:
Prepayment privilege. Except as provided
in paragraph (c) of this section or otherwise
established by HUD, the mortgage note or
credit instrument shall contain a provision
permitting the mortgagor to prepay the
mortgage note or credit instrument in whole
or in part upon any interest payment date,
after giving the mortgagee a minimum of 30
days notice in writing in advance of its
intention to so prepay.
The purpose of these revisions is to
provide for alternative notice
requirements where required to comply
with investor financing arrangements.
For example, in order to obtain AA/
AAA ratings for bonds that provide the
source to finance Section 242 mortgages,
prepayments must be bankruptcy-proof
(held for periods between 90 and 125
days, depending on state or federal law).
In order for mortgage prepayments to be
protected, therefore, a longer notice and
tendering period should be permitted.
Response: HUD has retained the
language in § 242.37(a), but in order to
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accommodate the scenario that the
commenter identifies has added a
sentence permitting HUD to extend the
notice.
Comment: The term ‘‘mortgage’’ in
this section should be revised to read
‘‘mortgage note or credit instrument.’’
Response: ‘‘Mortgage’’ is a defined
term in the rule. HUD considers the
existing definition of ‘‘mortgage,’’ which
includes appropriate credit instruments,
to be sufficient, and it is not necessary
to repeat the definition with each
individual usage of the word.
Comment: One commenter stated that
§ 242.37(b)(1) should be deleted because
‘‘the provision is virtually unknown in
the commercial sector and may affect
the marketability of the FHA debt in
secondary markets, particularly in the
case of tax-exempt bonds, resulting in
higher than necessary interest rates.’’
Additionally, the commenter stated that
the rule or an accompanying publication
should contain additional guidance
regarding acceptable prepayment
restrictions and premiums to eliminate
‘‘field office counsel uncertainty.’’ The
terms and conditions should be similar
to those for multifamily projects and
should provide for Commissioner
exceptions where warranted to deal
with investor market conditions and
preferences.
Response: This concern is addressed
in 242.37(c), which provides that the
mortgage may contain prepayment
restrictions acceptable to HUD in the
case of mortgage-backed securities or
bond funding.
Comment: Section 242.37(d) should
be revised to read ‘‘mortgage default’’
instead of ‘‘default.’’
Response: HUD needs to have the
ability to take the appropriate action if
there are regulatory agreement defaults,
not only a mortgage default. Thus, the
broad proposed language (‘‘default’’ as
opposed to ‘‘mortgage default,’’ as
suggested) is maintained in the final
rule.
Subpart D—Endorsement for Insurance
1. Section 242.39 Insurance
Endorsement
Comment: The term ‘‘credit
instrument’’ used in the section is
undefined and at a minimum should
include a mortgage or deed of trust note
or other evidence of indebtedness
secured by a mortgage. The commenter
also suggested editing § 242.39(c) to
read, as follows:
Contract rights and obligations. HUD and
the mortgagee or lender shall be bound from
the date of initial endorsement by the
provisions of the Contract of Mortgage
Insurance set forth in subpart B of Section
207 of 24 CFR part 200.
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Response: HUD has replaced the term
‘‘credit instrument’’ with ‘‘mortgage
note,’’ to be consistent with the
definition of ‘‘mortgage’’ in § 242.1.
HUD agrees with the suggestion to
revise § 242.39(c). That revision, which
is adopted in this final rule, makes
proposed § 242.94 unnecessary;
therefore, that section is omitted from
this final rule.
2. Section 242.43
Savings
Application of Cost
Comment: One commenter states that
this section should be revised, as
indicated:
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Any cost savings identified through the
cost certification process shall be used to:
(a) Reduce the principal amount of the
mortgage and the mortgagor’s cash equity
contribution proportionally or in such other
manner as may be approved by HUD subject
to the program’s 90 percent loan to cost
requirement, and/or
(b) Fund in whole or part, any additional
construction, modernization, rehabilitation,
purchase of equipment or costs related
thereto approved by HUD.
The commenter states that in addition
to proportional allocation, the rule
should allow HUD to allocate higher
amounts to project equity based on the
financial circumstances of a particular
mortgagor, provided that the loan-tocost ratio is sustained. In some
circumstances, particularly where
mortgagor liquidity may be an issue
post-construction, this result may be of
benefit both to FHA and the hospital. In
other cases, mortgagors may have
voluntarily committed more equity to
project construction than FHA would
have required.
Response: HUD agrees that a
proportional reduction of the mortgage
amount and the equity contribution
should not necessarily be the
mortgagor’s only option. The final rule
would allow the mortgagor, at HUD’s
sole discretion, to elect to apply a
greater percentage of the cost savings to
reduce the principal amount of the
mortgage. The mortgagor should not be
required to borrow funds that are not
needed for the project. HUD does not
agree that higher amounts should be
allocated to project equity, because to
do so would amount to using borrowed
funds for working capital, which is not
a permitted use of mortgage proceeds.
Additionally, HUD has revised
§ 242.43(b) to make that section
consistent with the definition of
‘‘substantial rehabilitation’’ in this final
rule.
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Subpart E—Construction
1. Section 242.45 Early
Commencement of Work
Comment: One commenter states that
a new § 242.45(a) entitled ‘‘Preapplication work’’ should be added and
that a number of other revisions to the
section should be made. The entire
section would read, as follows:
(a) Pre-application work. (1) Project work
may be undertaken and completed by the
mortgagor prior to filing an application. Such
work must meet all applicable local and state
requirements for the type of work undertaken
and completed and be at the sole risk and
responsibility of the mortgagor. At the
discretion of HUD, and upon such terms as
HUD may prescribe, a loan made to
mortgagor in connection with such work may
be refinanced from mortgage loan proceeds,
or, in the alternative, HUD, in its sole
discretion, may recognize all or part of such
cost as a mortgagor contribution to any equity
requirement set forth in the commitment.
(2) With the prior approval of HUD, preapplication work that will not be completed
before the filing of an application may be
undertaken by mortgagor at its sole risk and
responsibility, provided that all applicable
local, state and federal requirements,
including the payment of prevailing wages,
environmental review under § 242.79,
inspections by appropriate federal agencies,
payment of FHA inspection fees, and such
other requirements as may be imposed by
HUD are met as if such work were to be
approved for mortgage insurance. If, with
HUD’s approval, a loan to mortgagor in
connection with such pre-application work
will be re-financed with mortgage proceeds,
that work must be completed to the
satisfaction of HUD before initial
endorsement of the mortgage loan. If, with
HUD’s approval, such project work will
continue beyond the date of initial
endorsement, the expense of such work may,
in HUD’s sole discretion, be included in the
mortgage loan or recognized in whole or in
part as a mortgagor contribution to any equity
requirement set forth in the commitment,
upon such terms and conditions as HUD may
prescribe.
(b) Pre-commitment work. After an
application has been filed, but prior to the
issuance of a commitment by HUD, the
mortgagor may request for good cause the
commencement of work on the project within
legal guidelines and State law. Such work,
and the request therefor, shall be subject to
the same requirements, conditions and
provisions set forth in Section 242.45(a)(2).
(c) Early Start. Subsequent to the issuance
of a commitment, if the mortgagor requests
the commencement of the project, the work
may commence after the review of the
request by HUD, including the environmental
review under Section 242.79, and the
agreement to certain conditions by the
mortgagor. Prior to the initial endorsement,
the work is accomplished at the sole risk of
the mortgagor.
(d) Prepayment of inspection fee. The
mortgagor shall pay the inspection fee to
HUD before pre-application work pursuant to
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Section 242.45(a)(2), pre-commitment or
early start work commences.
(e) Work started prior to application
submission. HUD has the sole discretion to
allow such work to be incorporated into the
application if, except for work undertaken
and completed as set forth in Section
242.45(a)(1), HUD has reviewed and
approved the drawings and specifications
and has inspected the work.
(f) No expressed or implied intent.
Approval to proceed under paragraphs (a),
(b), and (c) of this section shall in no way be
construed as indicating any intent, expressed
or implied, on the part of HUD to approve,
disapprove, or make any undertaking or
promise whatsoever with respect to the
application or with respect to any
commitment for mortgage insurance. Any
work under paragraphs (a), (b) and (c) of this
section shall be accomplished at the sole risk
and responsibility of the mortgagor.
These revisions would allow for work
on an insured hospital to be done at
various times, including prior to an
application being filed. The commenter
states that at various times over the
course of many years of dealing with the
Section 242 program, there has been a
need for hospitals to begin different
types of project-related construction or
preparation for such construction for a
host of reasons. For example, in some
cases construction needed to be
commenced early in order to preserve
favorable bids from subcontractors or to
be ‘‘under roof’’ before the onset of
winter weather. In other, more
complicated phased construction
situations, overall completion timing
depended on the timely sequential start
of each phase, particularly if patient,
office, or other service ‘‘decanting’’ from
one building to another was required.
This was particularly true if a building
within a fully operational hospital
needed to be vacated before it could be
rehabilitated, expanded, or demolished
to make way for a new structure. In
other instances, state or local
governmental requirements came into
play; for example, the expiration of a
building permit or a certificate of need
if work were not started by a particular
date. The impact of rising interest rates
and construction costs has also been a
factor in a hospital’s decision to
undertake and finance pre-application
or pre-commitment work (and FHA’s
decision to approve such work), since
such work is at the hospital’s risk and
expense with no assurance that FHA
financing will be available at a later
date. Finally, nonprofit hospitals
involved in fund-raising campaigns to
cover required Section 242 equity and
other requirements (or to avoid
mortgage loans greater than might
otherwise be necessary) have learned
that donor interest and levels of
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philanthropy will often be higher if
potential benefactors can see tangible
evidence of new construction or
rehabilitation through early
construction activity.
All of these considerations have been
addressed by HHS and FHA over the
years in one form or another as the basis
of approving various arrangements for
early construction within the confines
of governing regulations and statute.
Congress also appears to have
recognized one of these concerns, the
timing of fund-raising activities, by
permitting letters of credit in lieu of
cash to be utilized to fund project equity
by public and nonprofit sponsors under
Section 242(d) of the NHA.
Beginning in the early 1980s and
continuing to date, a series of HUD
opinions and approvals (starting with
those for South Nassau Communities
Hospital) have been issued to permit
variations of pre-application, precommitment, and early start work
without artificial or unnecessary
restrictions beyond meeting governing
law, regulations, or other requirements
reasonably established to protect the
soundness of the mortgage insurance
program. The Committee’s proposed
revisions to Section 242.45 are intended
to assure that policies approved to date
for these purposes are continued, as
well as to provide latitude for
reasonable policy adjustments to be
made in the future on a case-by-case
basis, so long as they comport with
federal, state, and local requirements
and do not increase FHA’s insurance
risk.
Response: HUD understands that
there are situations such as those
described by the commenter in which it
is to the advantage of the proposed
mortgagor to begin construction prior to
receipt of an insurance commitment. At
the same time, HUD is concerned that
a regulation encouraging such work
could result in pre-application and precommitment work becoming the rule
rather than the exception. Gradually, the
focus of the program could become
insurance upon completion. HUD’s
long-standing policy has been not to
implement insurance upon completion
for Section 242. A second concern is
that HUD’s authority to expend
resources on reviews and inspections of
construction is questionable in cases
where HUD has received no application.
HUD believes that there is a solution
that addresses HUD’s concerns while
permitting limited project construction
to be started in cases such as those
described in the comment. That solution
would be for the mortgagee and
mortgagor together to file an application
consisting, at minimum, of: The
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approved FHA form, the application
and inspection fees, a project
description, architectural plans and
specifications for the initial
construction, previous participation
review information, a Phase I
environmental report, and a certificate
of need for the pre-commitment work if
required by the state. The remainder of
the application could be submitted at a
later date. The application would be
accompanied by a request for the initial
construction to be financed with
insured mortgage proceeds and
assurance that, should the full
application be denied, the mortgagor
will not experience significant financial
hardship.
With respect to construction
completed prior to application, HUD
does not intend to implement insurance
upon completion, as stated above.
However, HUD recognizes that hospitals
are dynamic entities that have a need for
construction or rehabilitation from time
to time, and that a proposed mortgagor
may have completed construction or
rehabilitation in the recent past. HUD
believes that a reasonable balance is
achieved by allowing completed
construction or rehabilitation to be
refinanced with insured mortgage
proceeds if the work was completed
more than 2 years before application.
The cost of work completed less than 2
years before application could be
refinanced only with a regulatory
waiver on a case-by-case basis.
Therefore, this final rule substantially
revises § 242.45 to provide for early
commencement upon a minimal
application and assurance. The final
rule also provides for the refinancing
opportunity for work completed more
than 2 years prior to the application.
2. Section 242.47 Insured Advances
for Building Components Stored OffSite
Comment: One commenter states that
§ 242.47(b)(3) should be revised as
follows:
Storage costs, if any, shall be borne by the
contractor (which shall include a
construction manager).
Response: HUD does not believe that
this provision should be limited to the
construction manager form of
construction, but rather that it should
apply generally.
Comment: Section 242.47(d)(1)(ii)
should be revised to provide that the
mortgagee ‘‘or its counsel’’ may make
the warranty regarding the security
instruments.
Response: This final rule does not
adopt this comment. Historically, HUD
has required such warranties to be made
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by the mortgagee itself, since HUD’s
contractual relationship is directly with
the mortgagee. The representation is
made by the mortgagee in the
mortgagee’s certificate.
Comment: In the last sentence of
§ 242.47(d)(4), the phrase ‘‘insurance of
components’’ should be revised to
‘‘insurance of advances for
components.’’
Response: HUD agrees with the
change suggested by the comment,
because the resulting language is more
precise.
3. Section 242.49 Funds and Finances:
Deposits and Letters of Credit
Comment: One commenter states that
this section should be revised, as
indicated:
(a) Deposits. Where HUD requires the
mortgagor to make a deposit of cash or
securities, such deposit (other than the
Mortgage Reserve Fund or other funds held
for the benefit of HUD) shall be with the
mortgagee or a depository acceptable to the
mortgagee. The deposit shall be held by or for
the benefit of the mortgagee in a special
account or by the depository under an
appropriate agreement approved by HUD.
(b) Letter of credit or surety bond. Where
the use of a letter of credit or surety bond is
acceptable to HUD in lieu of a deposit of cash
or securities, the letter of credit shall be
issued to the mortgagee by a banking
institution with a National Rating Agency
acceptable to HUD in the BBB category or its
industry equivalent or equivalent or by
another entity acceptable to HUD and shall
be unconditional and irrevocable and a
surety bond shall be issued to the mortgagee
by an insurance company with the rating of
a National Rating Agency acceptable to HUD
in the BBB category or its industry
equivalent. The mortgagee shall be
responsible to HUD for collection under the
letter of credit or surety bond.
(c) Mortgagee not issuer. The mortgagee of
record, unless a trustee in connection with
bonds issued to fund the FHA mortgage loan,
may not be the issuer of the letter of credit
without the prior written consent of HUD.
The commenter’s suggestion of a letter
of credit option is in accordance with
the comment to § 242.23. The
commenter stated that the surety bond
option would ‘‘represent an opportunity
for institutions to fund equity at more
competitive costs.’’
The commenter suggested revision to
the allowed rating agencies because
there are other rating agencies. The
commenter mentioned two other
national rating agencies specifically,
and stated that there may be other
acceptable ones. Moreover, the
commenter stated, requiring an AA
rating may limit the availability and
increase the cost of credit facilities. The
commenter stated that FHA recently
amended its Section 232 liability
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insurance requirements to permit a
rating in the AM Best (a liability
insurance company rating agency) B++
category. The commenter suggested that
analogous criteria could be applied in
this instance.
The commenter stated that the
proposed requirement to ‘‘immediately’’
meet a demand for payment is
troublesome, and that such an
immediate timeframe has not been
previously established for this purpose.
The commenter stated that HUD should
consider a reasonable timeframe, for
example, that the funds are available
when needed for the intended purposes.
Response: HUD agrees with the
concept of including more explanatory
language about the mortgagor’s deposit
in 242.49(a), but this final rule adopts
slightly different language, which HUD
believes is more accurate than the
language suggested by the comment.
In response to comments to
§ 242.23(c), HUD stated that surety
bonds are not an acceptable form of
equity, and do not offer the level of
protection the Department considers
necessary. For this reason, the
commenter’s suggestion to allow the use
of surety bonds in 242.49(b) is not
accepted in this final rule.
The commenter also suggested
changing the allowable credit quality of
an acceptable letter of credit provider to
B++. Because of the multiplicity of
entities that provide ratings and the lack
of uniformity among them, HUD has
decided to provide in the rule that the
lender can choose a financial institution
acceptable to it. The lender is
responsible for ensuring that any letter
of credit is tantamount to cash. HUD has
revised § 242.49(b) accordingly.
The commenter also suggested
deleting the last sentence of § 242.49(b).
HUD views the letter of credit the same
as cash, and believes that the lender
must have cash available when cash is
necessary, so the final rule retains the
proposed rule language.
jlentini on PROD1PC65 with RULES2
4. Section 242.50 Funds and Finances:
Off-Site Utilities and Streets
Comment: This section should be
revised to allow the cash escrow to be
in the form of a letter of credit or surety
bond. The commenter also stated that
‘‘the application of the sentence
beginning ‘Where such assurance’ seems
unclear. If mortgage proceeds are to be
retained for these purposes without an
offsetting cash or cash equivalent
deposit with mortgagee at closing, in
certain (e.g. where a mortgagor failed to
provide needed cash at a later date),
there would not be enough funds to
complete the FHA project (sic).’’
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Response: With respect to surety
bonds, HUD does not believe that surety
bonds provide adequate protection (see
also response to comment to § 242.23).
For clarity, § 242.50 has been modified
to specify that there must be adequate
funds available to cover cost of off-site
utilities and streets regardless of
whether the funds come from escrow or
mortgage proceeds for land, or both.
5. Section 242.51 Funds and Finances:
Insured Advances and Assurances of
Completion
Comment: Section 242.51(a) should
be revised, as indicated:
Where the estimated cost of construction,
expansion or rehabilitation is more than
$500,000, the mortgagor shall furnish
assurance of completion in the form of
corporate surety bonds for payment and
performance, each in the minimum amount
of 100 percent of the construction contract or
Guaranteed Maximum Price in the case of
construction management satisfactory to
HUD and consistent with assurances
permitted in connection with multifamily
housing projects.
Response: The first sentence is
changed to ‘‘* * * cost of construction
or substantial rehabilitation * * *’’
because expansion is included in the
term ‘‘substantial rehabilitation’’ as
defined in § 242.1 in this final rule. The
substance of the additional suggested
change has been incorporated into the
revised language in this final rule.
6. Section 242.53
Contractors
Ineligible
Comment: Section 242.53(b), which
prohibits identity of interest contracts,
should be deleted, because identity-ofinterest construction contracts are
generally permitted in FHA multifamily
programs so long as the contract is
based on cost-plus, cost-certified
methodology. Although this is an
unlikely scenario in the Section 242
program, the structure should
nevertheless be permitted.
Response: HUD believes allowing
identity-of-interest projects would
introduce unnecessary risks.
Comment: One commenter states that
§ 242.53(c) should be revised to remove
the provision that allows HUD to refuse
to insure advances, as well as make a
conforming change by deleting the
cross-reference to paragraph (b) of that
section.
The commenter states that, although it
agrees that FHA should have recourse in
the event of inappropriate contracting,
the list of eligible contractors is
maintained and established by the
federal government and not by
mortgagors or lenders. Moreover, as part
of the application process, FHA can
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screen contractors for these purposes
before initial endorsement. As such, a
remedy involving a refusal to insure
further advances after endorsement not
only appears unnecessary, but worse
still, may precipitate extremely
undesirable results and possibly
jeopardize the completion of the project
and the availability of secondary
financing that provides the source of
construction funds.
A still more serious problem would
result if under these circumstances the
mortgagee’s funding obligation under
the related Building Loan Agreement
were not also terminated with FHA
consent; otherwise, the mortgagee
would continue to have a funding
obligation under the governing Building
Loan Agreement, but no ability to fund
the loan. In other words, if FHA were to
exercise this type of privilege, FHA
would most likely have to agree to
process an insurance claim if insured
advances were withheld by FHA.
The termination of advances would be
particularly problematic in cases
financed with tax-exempt revenue
bonds, the proceeds of which must be
invested at initial endorsement so as to
keep the bonds fully current until
monies are disbursed through the FHA
mortgage, and interest accruing on the
mortgage is thereupon due for these
purposes. Delays in disbursement could
result in potential bond defaults and
certainly impact the costs of financing.
Because agencies of the federal
government establish and maintain the
list of ineligible contractors and review
and approve construction contracts and
contractor eligibility as part of the
application process, any FHA remedies
in this instance should be structured to
avoid harm to mortgagors, lenders, or
the project involved.
Response: HUD agrees with the
commenter’s concern. In order to
provide for the completion of projects
and to protect the insurance fund,
proposed § 242.53(c) has been revised in
this final rule to provide for remedial
and enforcement actions other than
refusing to insure further advances.
Subpart F—Nondiscrimination and
Wage Rates
1. Section 242.54
Nondiscrimination
Comment: The provisions on sex and
age discrimination should be removed
because women and children’s hospitals
are eligible for federal and state
reimbursement; however, the reference
to ‘‘sex’’ and ‘‘age’’ in the regulation,
absent clarification, may preclude such
facilities from being eligible under this
program.
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Response: The provisions on civil
rights are required by federal law and
cannot be removed from the rule. HUD
is revising § 242.54 in this final rule to
clarify that the section does not affect
the eligibility of women’s and children’s
hospitals for this program.
Subpart G—Regulatory Agreement,
Accounting and Reporting, and
Financial Requirements
1. Section 242.56
Form of Regulation
Comment: The term ‘‘mortgagor’’ in
the third sentence should be revised as
‘‘mortgagor’’ (and/or its lessee, if any)
where it occurs:
* * * The mortgagor (and/or its lessee, if
any) shall be subject to monitoring by HUD
and the U.S. Department of Health and
Human Services, and their agents,
employees, and contractors, on an ongoing
basis for the life of the insured mortgage to
ensure against the risk of default, and the
mortgagor (and/or its lessee, if any) must
make its financial records available to the
monitoring agencies upon request.
This suggestion is in accordance with
similar comments made with respect to
the definition of ‘‘regulatory agreement’’
and § 242.10.
Response: As discussed in the
response to the comment to § 242.10,
HUD will consider a lease in the rare
instances when it is made necessary by
state or local law. However, HUD does
not consider this situation common
enough to require specific regulatory
language in the final rule. No addition
of language to include lessees will be
made. This final rule makes a technical
correction to the last sentence to clarify
that monitoring may be conducted by
various agents and contractors on HUD’s
behalf.
2. Section 242.57
Hospital Facility
Maintenance of
Comment: The section should be
revised to add lessees, as follows:
The mortgagor (and/or its lessee, if any)
shall maintain the hospital’s grounds and
buildings and the equipment financed with
mortgage proceeds in good repair and shall
promptly complete such repairs and
maintenance as HUD considers necessary.
Response: The final rule does not add
language regarding lessees for the reason
stated in the response to comments on
§ 242.56.
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3. Section 242.58 Books, Accounts,
and Financial Statements
Comment: The section should be
revised throughout to include
mortgagors ‘‘and/or their lessees, if
any.’’
Response: The final rule does not add
language regarding lessees for the reason
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stated in the response to comments on
§§ 242.10 and 242.56.
Comment: Proposed § 242.58(b)(ii)
should be revised, as follows:
(ii) Quarterly unaudited financial reports,
within 60 days following the end of each
quarter of the mortgagor’s (and/or its lessee,
if any) fiscal year if requested by HUD.
Response: In HUD’s experience, 40
days is sufficient time for mortgagors to
prepare, review, and submit interim
financial statements.
Comment: Proposed § 242.58(b)(iv)
should be revised to make the boardcertified financial results due within
180 days following the close of the fiscal
year, rather than 120 days.
Response: In HUD’s experience, 120
days is a sufficient time frame.
Comment: Proposed § 242.58(f)
should be revised where it requires
books and records to be maintained in
accordance with Generally Accepted
Accounting Principles (GAAP) to allow
flexibility. In the first sentence, the
commenter would add the following
phrase after ‘‘(GAAP)’’: ‘‘* * * or such
other accounting principles as may be
customary for such persons and
acceptable to HUD.’’ Some managers
and public facilities may use different
accounting rules.
Response: Some governmental
hospitals use accounting rules under
Governmental Accounting Standards.
Therefore, the final rule permits the use
of Governmental Accounting Standards.
Comment: The regulatory agreement
provides: ‘‘If the Mortgagor has any
business or activity other than the
project and operation of the mortgaged
property, it shall maintain all income
and other funds of the project segregated
from any other funds of the mortgagor
and segregated from any funds of any
other corporation or persons.’’ This
requirement does not appear in the
proposed regulation. The commenter
asked whether this omission is a change
in policy.
Response: This requirement is
included in the regulatory agreement,
and is therefore legally effective and
binding on program participants.
Participants in HUD’s programs are
expected to comply with regulatory
agreements and contracts pertinent to
the programs in which they participate,
as well as with program rules. There is
no change in policy as to the
requirement of segregation of funds.
4. Section 242.61
Management
Comment: Proposed § 242.61(a)
should be revised to eliminate the
provision for termination without cause
and substitute in its place a requirement
that termination be for cause and
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without penalty. The ‘‘without cause’’
provision would result in fewer
qualified companies being willing to
make the investment required to
undertake the management of a project.
Second, management fees in view of the
uncertainties of termination without
cause would likely be significantly
higher than otherwise. There would
seem to be no legitimate policy objective
to justify a termination without cause in
such instances.
Also, the commenter states that it will
be difficult if not impossible for FHA to
be given the right to terminate existing
agreements (often on a multi-year basis)
in place prior to initial endorsement.
Response: In the past, this clause has
served the program well and HUD has
received no indications that
management companies are less willing
to manage a hospital, nor that
management fees are increased as a
result of this clause. HUD needs to be
in a position to move quickly and
decisively. For agreements existing at
the time of commitment, HUD does not
require termination but does require an
amendment to permit termination by
HUD with or without cause.
Comment: The introductory
paragraph of § 242.61 and §§ 242.61(a)
and 242.61(b) should be revised to
include lessees of mortgagors, in
accordance with other similar
comments.
Response: As discussed in the
response to the comment in § 242.10
and other similar comments, HUD will
consider leases in the rare instances in
which local law makes them necessary;
however, this situation is not common
enough to merit inclusion in the final
rule.
Comment: The section should be
clarified to apply to a management
agreement executed in connection with
an entire facility and not specified
services such as pharmacy, cafeteria, or
laundry.
Response: HUD believes the language
‘‘for management of the hospital’’ is
clear and would not preclude contracts
for management of ancillary services
such as pharmacy, cafeteria, or laundry.
Comment: The term ‘‘principals’’ used
in § 242.61(b) should be defined. In the
case of proprietary mortgagors, the term
should not include shareholders.
Response: 24 CFR 24.995 defines
‘‘principal’’ and the term is also well
understood in the mortgage insurance
industry. No additional definition is
required.
5. Section 242.62 Releases of Lien
Comment: The first sentence of
§ 242.62 should be revised as shown
below, and the second sentence, dealing
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with partial releases of lien, should be
deleted:
The mortgagor shall not sell, dispose of,
transfer, or permit to be encumbered any
security property without the prior approval
of the lender and Commissioner, subject to
thresholds or such other standards HUD may
establish for the approval requirement.
The commenter states that the
determination required for partial
releases of liens should be made by
HUD, which was responsible for the
original determination for these
purposes in the pre-commitment
process, as lenders, particularly bond
trustees or lenders by assignment and
not involved in loan origination, will
more than likely lack the expertise for
these purposes.
Response: The words ‘‘or such other
standards’’ have been added, as
suggested. With respect to the second
point on partial releases, HUD believes
that the lender should have the
capability to make this decision, subject
to prior approval by HUD.
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6. Section 242.63 Additional
Indebtedness and Leasing
Comment: This section should be
revised to include the mortgagor’s
lessees, in accordance with other similar
comments.
Response: HUD does not believe lease
situations warrant inclusion in the final
rule. See previous response to
comments on §§ 242.10 and 242.56.
7. Section 242.64 Current and Future
Property
Comment: The requirement that ‘‘all
current or future property or personalty
* * * on or off the mortgaged real estate
* * * will be considered as part of the
HUD-insured hospital and subject to all
provisions of the HUD regulatory
agreement’’ is ‘‘troublesome’’ and
should be reconsidered. In many
instances, this requirement precludes a
hospital from making timely business
decisions and arranging for financing
with respect to acquisitions or off-site
properties that might complement the
business plan of the FHA facility,
particularly given the timeframe
sometimes required to obtain required
FHA approval. Hospitals, for example,
frequently purchase residential space
for nurses and doctors and frequently
purchase office buildings in peripheral
areas to maintain market share and the
like. Future purchases for these
purposes and the ability to mortgage
such ventures should be permitted.
Flexibility should be included in this
requirement. While this requirement is
appropriate for on-site property, when
off the mortgage site and independent of
hospital operations, the requirement is
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more problematic and should be
eliminated or, alternatively, made
subject to particular pre-determined
financial ratios or standards for release
that would allow a transaction to move
forward without additional FHA
consent.
Response: Even though hospitals
meeting particular economic thresholds
have the power under the regulatory
agreement and covenants to acquire and
transfer particular property without the
prior written approval of HUD, the
regulation does clearly and properly
indicate that HUD will regulate the
operation of the hospital and will not
permit hospitals to acquire property that
is crucial to the operation of the
hospital, but to which the lender and/
or HUD would not have access in the
event of default and foreclosure.
Therefore, there is no change to the final
rule as a result of this comment.
Comment: The last sentence of this
paragraph should be revised to allow
HUD’s first lien to be subordinated as
acceptable to HUD. Other provisions of
these regulations permit exceptions to
FHA’s first lien requirement based on
Commissioner discretion. The
requirement in this sentence should
parallel those provisions.
Response: It is not legally possible for
HUD to subordinate its first lien
position on a § 242 mortgage. Section
242(b)(2) of the Act, 12 U.S.C. 1715z–
7(b)(2), states that ‘‘mortgage’’ shall have
the meaning stated in 12 U.S.C. 1713(a).
That section defines ‘‘mortgage’’ as ‘‘a
first mortgage on real estate in fee
simple.’’ Therefore, HUD must have a
first lien position on hospital mortgages
under this program. For clarity, the
wording of the first sentence of § 242.64
has been slightly revised.
8. Section 242.66
Transactions
Affiliate
Comment: The phrase ‘‘with
affiliates’’ should be added at the
beginning of the first sentence after
‘‘Transactions.’’
Response: HUD agrees with the
suggested change, as it clarifies the
meaning. Also, the last phrase, ‘‘in
accordance with such policies and
procedures as HUD shall prescribe,’’ is
removed in this final rule as
superfluous.
Subpart H—Miscellaneous
Requirements
1. Section 242.68 Disclosure and
Verification of Social Security and
Employer Identification Numbers
Comment: The word ‘‘applicants’’
should be deleted and ‘‘mortgagors’’
used instead.
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Response: While a similar change has
been made elsewhere in the rule, in this
section it is inappropriate. The language
being referenced specifically quotes the
requirements of 24 CFR 5.210 et seq.,
which refers to ‘‘applicants for and
participants in’’ covered programs,
rather than mortgagors. This final rule
revises § 242.68 slightly to make this
usage clear.
2. Section 242.72 Leasing of Hospital
Comment: One commenter states that
this section should be revised to permit
leasing of an entire hospital, including
lease-back transactions, with HUD’s
consent. The specific language would be
as follows:
Leasing of a hospital in its entirety is
prohibited without Commissioner consent.
Notwithstanding this prohibition, any
proposal in which leasing (and related
subleasing back to lessor, or transactions of
a similar nature) of the entire facility is a
factor due to State, county or other
governmental law prohibitions against the
mortgaging of health care facilities by such
State, county or other governmental entities
shall be considered on a case-by-case basis.
Also, leasing of a hospital that has an existing
Section 242 insured loan is permitted if HUD
determines that leasing is necessary to reduce
the risk of default by a financially troubled
hospital.
The commenter states that the
prohibition of operator lessees, with the
exception of publicly owned entities,
should be eliminated, and the eligibility
of projects with operating leases should
be permitted for all forms of
sponsorship on a case-by-case basis,
whether nonprofit, public, or
proprietary owners. Language that
precludes nonprofit and proprietary
sponsors from utilizing an operating
lease approach, particularly when that
arrangement has legitimate functional
advantages and the proposed project
otherwise complies with FHA financial
standards, discriminates against these
other forms of ownership and is
inconsistent with statutory policy that
permits financing for each of these
ownership forms. The commenter states
that operator lease arrangements have
been routinely permitted in the case of
proprietary and nonprofit sponsors in
the Section 232 program and that there
is no public policy served by a
prohibition against these types of
sponsors when the public interest can
be protected and an operator properly
regulated by FHA.
Response: See responses to comments
on § 242.10 and § 242.56.
3. Section 242.74 Smoke Detectors
Comment: This section should be
removed because not only may the rule
conflict with state or local requirements,
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but because the specific requirement
may be superseded by evolving
technology or law.
Response: The section is amended to
read:
Each occupied room must include such
smoke detectors as are required by law.
4. Section 242.75 Title Requirements
Comment: This section should be
revised as follows, in accordance with
comment to § 242.72 above to permit
hospital leaseholds.
In order for the mortgaged property,
including leasehold estates, to be eligible for
insurance, HUD shall determine that
marketable title thereto is vested in the
mortgagor, lessee, or lessor, as appropriate, as
of the date the mortgage is filed for record.
The title evidence shall be examined by HUD
and the endorsement of the credit instrument
for insurance shall be evidence of its
acceptability.
Response: HUD does not adopt this
comment in the final rule for the
reasons stated in response to comments
on §§ 242.10 and 242.56.
5. Section 242.76 Title Evidence
Comment: The second sentence of
§ 242.76(a) should be revised to read:
The policy shall name as the insureds the
mortgagee and the Secretary of Housing and
Urban Development, their successors and
assigns, as their respective interests may
appear.
Response: The final rule adds
‘‘successors and assigns,’’ as suggested.
6. Section 242.77 Liens
Comment: One commenter stated that
§ 242.77(a) should be revised to allow
parity liens, as follows:
An inferior or parity lien made or held by
a Federal, State, or local government
instrumentality;
The commenter stated that such liens
have been approved in at least two
cases, one involving another federal
agency, the former federal Farmers
Home Loan Administration, with the
other involving another FHA loan, and
that flexibility for such limited purposes
should be provided.
Response: HUD has no statutory
authority to insure loans that are on a
parity basis with other loans.
Comment: Section 242.77(b) should
be revised, as follows:
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An inferior lien required in connection
with a supplemental loan insured pursuant
to section 241 or Section 223(a)(7) of the Act;
Response: HUD disagrees with the
comment. Including § 223(a)(7) would
be confusing because these financings
must have first liens, with the exception
of those made pursuant to Section 241
loans.
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Comment: Section 242.77(c) should
be revised to incorporate state law
considerations, as follows:
An inferior or superior lien on equipment
as may be approved in connection with an
equipment leasing program approved by
HUD, as required by governing state law, in
connection with existing financed equipment
at the time of initial endorsement or as may
or as otherwise may be approved by HUD.
The commenter states that in New
York, for example, as a matter of law,
equipment purchased pursuant to a
lease-purchase or purchase money
arrangement will be superior to the
insured mortgage, albeit upon the payoff
of the underlying financing, the
equipment could be covered by the FHA
lien instruments.
Response: HUD believes this section
is sufficiently flexible, as written.
7. Section 242.89 Supplemental Loans
Comment: This section should be
revised to include refinancing of
indebtedness resulting from the early
start of construction:
A loan, advance of credit, or purchase of
an obligation representing a loan or advance
of credit made for the purpose of financing
improvements or additions (including the
refinancing of any indebtedness incurred in
connection with the early start of
construction of such improvements or
additions) to a hospital covered by a
mortgage insured under this section of the
Act or for a Commissioner-held mortgage, or
equipment for a hospital, may be insured
pursuant to the provisions of section 241 of
the Act and under the provisions of this part
as applicable and such additional terms and
conditions as established by HUD. See
subpart B of 24 CFR part 241 with respect to
the contract of mortgage insurance for all
loans insured under section 241 of the Act.
See 24 CFR part 241, subpart C, for energy
improvements.
Response: In order to make this
section consistent with the final rule
provisions on early commencement of
work and refinancing of indebtedness,
HUD has added the suggested
parenthetical phrase with modification:
‘‘(including the refinancing of any
indebtedness incurred in connection
with the early commencement of work
on such improvements or additions,
subject to the requirements of §§ 242.15
and 242.45).’’
8. Section 242.91 Eligibility of
Refinancing Transactions
Comment: The discussion in
§ 242.91(c) is confusing regarding the
term length of a section 223(a)(7) loan.
It appears from the reading that in
particular cases, the term could be 35
years if the current mortgage has 23
years remaining, plus the additional 12
years.
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Response: HUD has determined that
the language should remain unchanged.
HUD may approve a term up to 12 years
beyond the remaining term of the
existing mortgage if it is determined that
the longer term is necessary to ensure
the economic viability of the hospital
and to make an insurance claim less
likely.
Findings and Certifications
Information Collection Requirements
The information collection
requirements contained in §§ 242.16,
242.35, 242.58, 242.61, and 242.68 have
been approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act of
1995 (44 U.S.C. 3501–3520) and
assigned OMB Control Number 2502–
0518. 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 control number.
Environmental Impact
A Finding of No Significant Impact
with respect to the environment for this
final rule 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
Finding of No Significant Impact
remains applicable, and is available for
public inspection between 8 a.m. and 5
p.m. weekdays in the Regulations
Division, Office of General Counsel,
Department of Housing and Urban
Development, 451 Seventh Street, SW.,
Room 10276, Washington, DC 20410–
5000.
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 does not impose a
federal mandate on any state, local, or
tribal government, or on the private
sector, within the meaning of UMRA.
Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA)
(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.
There are no anti-competitive
discriminatory aspects of the rule with
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regard to small entities, and there are
not any unusual procedures that would
need to be complied with by small
entities. The rule revises the regulations
under the mortgage insurance program
for hospitals to update and improve the
efficiency of the program.
Therefore, this final rule will not have
a significant economic impact on a
substantial number of small entities,
and an initial regulatory flexibility
analysis is not required.
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
final 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.
Regulatory Planning and Review
OMB reviewed this rule under
Executive Order 12866, Regulatory
Planning and Review. OMB determined
that this rule is a ‘‘significant regulatory
action,’’ as defined in section 3(f) of the
order (although not an economically
significant regulatory action under the
order). The docket file is available for
public inspection in the Regulations
Division, Office of General Counsel, 451
Seventh Street, SW., Room 10276,
Washington, DC 20410–0500.
Catalog of Federal Domestic Assistance
The Catalog of Federal Domestic
Assistance number is 14.128.
PART 200—INTRODUCTION TO FHA
PROGRAMS
1. The authority citation for part 200
continues to read as follows:
■
Authority: 12 U.S.C. 1702–1715z–21; 42
U.S.C. 3535(d).
2. Section 200.24 is revised to read as
follows:
■
§ 200.24
3. Section 200.25 is revised to read as
follows:
■
§ 200.25
§ 200.40
*
Hospitals, Mortgage insurance,
Reporting and recordkeeping
requirements.
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Supplemental loans.
A loan, advance of credit or purchase
of an obligation representing a loan or
advance of credit made for the purpose
of financing improvements or additions
to a project covered by a mortgage
insured under any section of the Act or
Commissioner-held mortgage, or
equipment for a nursing home,
intermediate care facility, board and
care home, assisted living facility, or
group practices facility, may be insured
pursuant to the provisions of section
241 of the Act and such terms and
conditions established by HUD.
■ 4. 24 CFR 200.40 is amended by
revising paragraphs (c), (d), and (f) as
follows:
24 CFR Part 200
24 CFR Part 242
Existing projects.
A mortgage financing the purchase or
refinance of an existing rental housing
project under section 207 of the Act, or
for refinancing the existing debt of an
existing nursing home, intermediate
care facility, assisted living facility, or
board and care home, or any
combination thereof, under section 232
of the Act, may be insured pursuant to
provisions of section 223(f) of the Act
and such terms and conditions
established by HUD.
List of Subjects
Administrative practice and
procedure, Claims, Equal employment
opportunity, Fair housing, Home
improvement, Housing standards, Lead
poisoning, Loan programs—housing and
community development, Mortgage
insurance, Organization and functions
(Government agencies), Penalties,
Reporting and recordkeeping
requirements, Social Security,
Unemployment compensation, Wages.
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Accordingly, for the reasons described
in the preamble, HUD amends 24 CFR
parts 200 and 242 to read as follows:
■
HUD fees.
*
*
*
*
(c) Application fee—conditional
commitment. For a mortgage being
insured under section 223(f) of the Act
(12 U.S.C. 1715n), an applicationcommitment fee of $3 per thousand
dollars of the requested mortgage
amount shall accompany an application
for conditional commitment.
(d) Application fee—firm
commitment: General. An application
for firm commitment shall be
accompanied by an applicationcommitment fee which, when added to
any prior fees received in connection
with applications for a SAMA letter or
a feasibility letter, will aggregate $5 per
thousand dollars of the requested
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67545
mortgage amount to be insured. The
payment of an application-commitment
fee shall not be required in connection
with an insured mortgage involving the
sale by the government of housing or
property acquired, held, or contracted
pursuant to the Atomic Energy
Community Act of 1955 (42 U.S.C. 2301
et seq.).
*
*
*
*
*
(f) Fees on increases—in general. This
section applies to all applications
except applications involving hospitals,
which are covered in 24 CFR part 242.
(1) Increase in firm commitment
before endorsement. An application,
filed before initial endorsement (or
before endorsement in a case involving
insurance upon completion), for an
increase in the amount of an
outstanding firm commitment, shall be
accompanied by a combined additional
application and commitment fee. This
combined additional fee shall be in an
amount that will aggregate $5 per
thousand dollars of the amount of the
requested increase. If an inspection fee
was required in the original
commitment, an additional inspection
fee shall be paid in an amount
computed at the same dollar rate per
thousand dollars of the amount of
increase in commitment as was used for
the inspection fee required in the
original commitment. When insurance
of advances is involved, the additional
inspection fee shall be paid at the time
of initial endorsement. When insurance
upon completion is involved, the
additional inspection fee shall be paid
before the date construction is begun;
or, if construction has begun, it shall be
paid with the application for increase.
(2) Increase in mortgage between
initial and final endorsement. Upon the
filing of an application between initial
and final endorsement, for an increase
in the amount of the mortgage, either by
amendment or by substitution of a new
mortgage, a combined additional
application and commitment fee shall
accompany the application. This
combined additional fee shall be in an
amount that will aggregate $5 per
thousand dollars of the amount of the
increase requested. If an inspection fee
was required in the original
commitment, an additional inspection
fee shall accompany the application in
an amount not to exceed the $5 per
thousand dollars of the amount of the
increase requested.
(3) Loan to cover operating losses. In
connection with a loan to cover
operating losses (see Sec. 200.22), a
combined application and commitment
fee of $5 per thousand dollars of the
amount of the loan applied for shall be
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submitted with the application for a
firm commitment. No inspection fee
shall be required.
*
*
*
*
*
■ 5. Part 242 is revised to read as
follows:
PART 242—MORTGAGE INSURANCE
FOR HOSPITALS
Subpart A—General Eligibility
Requirements
Sec.
242.1 Definitions.
242.2 Program financial self-sufficiency.
242.3 Encouragement of certain programs.
242.4 Eligible hospitals; transition
provisions.
242.5 Eligible mortgagees/lenders.
242.6 Property requirements.
242.7 Maximum mortgage amounts.
242.8 Standards for licensure and methods
of operation.
242.9 Physician ownership.
242.10 Eligible mortgagors.
242.11 Regulatory compliance required.
242.13 Parents and affiliates.
242.14 Mortgage reserve fund.
242.15 Limitation on refinancing existing
indebtedness.
Subpart B—Application Procedures and
Commitments
242.16 Applications.
242.17 Commitments.
242.18 Inspection fee.
242.19 Fees on increases.
242.20 Reopening of expired commitments.
242.21 Refund of fees.
242.22 Maximum fees and charges by
mortgagee.
242.23 Maximum mortgage amounts and
cash equity requirements.
242.24 Initial operating costs.
Subpart C—Mortgage Requirements
242.25 Mortgage form and disbursement of
mortgage proceeds.
242.26 Agreed interest rate.
242.27 Maturity.
242.28 Allowable costs for consultants.
242.29 Payment requirements.
242.30 Application of payments.
242.31 Accumulation of accruals.
242.32 Covenant against liens.
242.33 Covenant for malpractice, fire, and
other hazard insurance.
242.35 Mortgage lien certifications.
242.37 Mortgage prepayment.
242.38 Late charge.
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Subpart D—Endorsement for Insurance
242.39 Insurance endorsement.
242.40 Mortgagee certificate.
242.41 Certification of cost requirements.
242.42 Certificates of actual cost.
242.43 Application of cost savings.
Subpart E—Construction
242.44 Construction standards.
242.45 Early commencement of work.
242.46 Insured advances—building loan
agreement.
242.47 Insured advances for building
components stored off-site.
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242.48 Insured advances for certain
equipment and long lead items.
242.49 Funds and finances: deposits and
letters of credit.
242.50 Funds and finances: off-site utilities
and streets.
242.51 Funds and finances: insured
advances and assurance of completion.
242.52 Construction contracts.
242.53 Excluded contractors.
Subpart F—Nondiscrimination and Wage
Rates
242.54 Nondiscrimination.
242.55 Labor standards.
Subpart G—Regulatory Agreement,
Accounting and Reporting, and Financial
Requirements
242.56 Form of regulation.
242.57 Maintenance of hospital facility.
242.58 Books, accounts, and financial
statements.
242.59 Inspection of facilities by
Commissioner.
242.61 Management.
242.62 Releases of lien.
242.63 Additional indebtedness and
leasing.
242.64 Current and future property.
242.65 Distribution of assets.
242.66 Affiliate transactions.
242.67 New corporations, subsidiaries,
affiliations, and mergers.
Subpart H—Miscellaneous Requirements
242.68 Disclosure and verification of Social
Security and Employer Identification
Numbers.
242.69 Transfer fee.
242.70 Fees not required.
242.72 Leasing of hospital.
242.73 Waiver of eligibility requirements
for mortgage insurance.
242.74 Smoke detectors.
242.75 Title requirements.
242.76 Title evidence.
242.77 Liens.
242.78 Zoning, deed, and building
restrictions.
242.79 Environmental quality
determinations and standards.
242.81 Lead-based paint poisoning
prevention.
242.82 Energy conservation.
242.83 Debarment and suspension.
242.84 Previous participation and
compliance requirements.
242.86 Property and mortgage assessment.
242.87 Certifications.
242.89 Supplemental loans.
242.90 Eligibility of mortgages covering
hospitals in certain neighborhoods.
242.91 Eligibility of refinancing
transactions.
242.92 Minimum principal loan amount.
242.93 Amendment of regulations.
Authority: 12 U.S.C. 1709, 1710, 1715b,
and 1715u; 42 U.S.C. 3535(d).
Subpart A—General Eligibility
Requirements
§ 242.1
Definitions.
As used in this subpart, the following
terms shall have the meaning indicated:
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Act means the National Housing Act
(12 U.S.C. 1701 et seq.).
Affiliate means a person or entity
which, directly or indirectly, either
controls or has the power to control or
exert significant influence on the other,
or a person and entity both controlled
by a third person or entity, which may
be a parent entity. Indicia of control
include, but are not limited to:
Interlocking management or ownership,
identity of interests among family
members, shared facilities and
equipment, common use of employees,
or a business entity organized following
the suspension or debarment of a person
or entity that has the same or similar
management, ownership, or principal
employees as the suspended, debarred,
ineligible, or voluntarily excluded
person or entity or as defined in the
Medicare reimbursement regulations.
AMPO (Allowance for Making Project
Operational) 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 § 242.43.
Applicant means a HUD multifamilyapproved lender that would be the
mortgagee of record.
Chronic convalescent and rest means
skilled nursing services, intermediate
care services, respite care services,
hospice services, rehabilitation services,
and other services of a similar nature.
Construction means the creation of a
new or replacement hospital facility,
which may include the cost of
acquisition of new or replacement
equipment in the cost of construction.
Days of cash on hand means the
number of days of operating cash
available to the hospital, calculated
pursuant to standards determined by
HUD.
Debt service coverage ratio is a
measure of a hospital’s ability to pay
interest and principal with cash
generated from current operations. Debt
service ratio is calculated as follows:
Debt Service Coverage Ratio (total debt
service coverage on all long-term capital
debt) equals the excess of revenues over
expenses (not-for-profit) or net income
(for-profit) plus interest expense plus
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depreciation expense plus amortization
expense, all divided by current portion
of long-term debt (including capital
leases) from the previous year’s audited
financial statement plus interest
67547
expense. The calculation can be
expressed as:
Hospital means a facility that has
been proposed for approval or has been
approved by HUD under the provisions
of this subpart, and:
(1) That provides community services
for inpatient medical care of the sick or
injured (including obstetrical care);
(2) Where not more than 50 percent of
the total patient days during any year
are customarily assignable to the
categories of chronic convalescent and
rest, drug and alcoholic, epileptic,
mentally deficient, mental, nervous and
mental, and tuberculosis, except that the
50 percent patient day restriction does
not apply to Critical Access Hospitals
(hospitals designated as such under the
Medicare Rural Hospital Flexibility
Program) between January 28, 2008 and
July 31, 2011.
(3) That is a facility licensed or
regulated by the state (or, if there is no
such state law providing for such
licensing or regulation by the state, by
the municipality or other political
subdivision in which the facility is
located) and is:
(i) A public facility owned by a state
or unit of local government or by an
instrumentality thereof, or owned by a
public benefit corporation established
by a state or unit of local government or
by an instrumentality thereof;
(ii) A proprietary facility; or
(iii) A facility of a private nonprofit
corporation or association.
Identity of interest means a
relationship that must be disclosed and
may be prohibited pursuant to the
requirements of the Regulatory
Agreement. Examples of a prohibited
Identity of Interest relationship are, but
are not limited to, a financial or family
relationship between the mortgagor
(which includes but is not limited to an
officer, director, or partner of the
mortgagor) and general contractor,
subcontractor, seller of the land or
property, any consultants, or other
parties to the transaction.
Mortgage means such classes of first
liens as are commonly given to secure
advances on, or the unpaid purchase
price of, real estate under the laws of the
state in which the real estate is located,
together with any mortgage note secured
thereby. The mortgage may be in the
form of one or more trust mortgages or
mortgage indentures or deeds of trust
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securing notes, bonds, or other mortgage
notes; and, by the same instrument or by
a separate instrument, it may create a
security interest in the personalty,
including, but not limited to, the
equipment, whether or not the
equipment is attached to the realty, and
in the revenues and receivables of the
hospital.
Mortgagee or lender means the
original lender under a mortgage, and its
successors and assigns, including the
holders of mortgage notes issued under
a trust mortgage or deed of trust
pursuant to which such holders act by
and through a trustee therein named.
(All official contacts and actions by
HUD shall be with or through a HUDapproved lender.)
Mortgagor means the original
borrower under a mortgage and its
successors and assigns.
Mortgage Reserve Fund means a trust
account, or an account held by the
mortgagee, for and on behalf of the
mortgagor, to which the mortgagor
contributes and from which
withdrawals must be approved by HUD.
The purpose of the fund is to provide
HUD a means to assist the hospital to
avoid mortgage defaults and to preserve
the value of the mortgaged property and
the hospital’s business.
Most recent audited financial
statement means the audited financial
statement required under the regulatory
agreement for the prior fiscal year.
Net income means the net income of
a for-profit entity, or, in the case of a
nonprofit entity, the excess of revenues
less expenses.
Non-operating revenues and expenses
are those revenues and expenses not
directly related to patient care, hospitalrelated patient services, or the sale of
hospital-related goods. Examples of
items classified as non-operating are
state and federal income tax, general
contributions, gains and losses from
investments, unrestricted income from
endowment funds, and income from
related entities.
Classification of items as operating or
non-operating shall follow written
guidance by HUD.
Operating margin is operating income
divided by operating revenue, where:
(1) Operating revenue is the revenue
from the core patient care operations of
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the hospital. It includes revenues from
the provision of such items as patient
care (including, but not limited to,
hospital-based nursing home and
physicians’ clinics); transfers from
temporarily restricted accounts that are
used for current operating expenses; and
patient-related activities such as the
operation of the cafeteria, parking
facilities, television services to patients,
sale of medical scrap or waste, etc.
(Additional sources of revenue, which
are classified as non-operating, are
excluded from this measure, provided,
however, at HUD’s discretion, that
revenue that has historically been
received reliably and is expected to
continue to be received may be
considered operating revenue for
underwriting purposes); and
(2) Operating income is operating
revenue minus operating expenses,
where operating expenses are the
expenses incurred in providing patient
care, including such items as salaries,
supplies, and the cost of capital.
Parent means an organization or
entity that controls or has a controlling
interest in another organization or
entity.
Personalty means all furniture,
furnishings, equipment, machinery,
building materials, appliances, goods,
supplies, tools, books, records (whether
in written or electronic form), computer
equipment (hardware and software) and
other tangible or electronically stored
personal property (other than fixtures)
that are owned or leased by the
borrower or the lessee now or in the
future in connection with the
ownership, management, or operation of
the land or the improvements or are
located on the land or in the
improvements, and any operating
agreements relating to the land or the
improvements, and any surveys, plans,
specifications, and contracts for
architectural, engineering, and
construction services relating to the
land or the improvements, chooses in
action and all other intangible property
and rights relating to the operation of,
or used in connection with, the land or
the improvements, including all
governmental permits relating to any
activities on the land. Personalty also
includes all tangible and intangible
personal property used for health care
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( Excess of revenues over expenses OR net income ) + interest expense + depreciation expense + amortization expense
Current portion of long-term debt [ prior year, including capital leeases ] + interest expense
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(such as major movable equipment and
systems), accounts, licenses, bed
authorities, certificates of need required
to operate the hospital and to receive
benefits and reimbursements under
provider agreements with Medicaid,
Medicare, state and local programs,
payments from health care insurers and
any other assistance providers
(‘‘Receivables’’); all permits,
instruments, rents, lease and contract
rights, and equipment leases relating to
the use, operation, maintenance, repair,
and improvement of the hospital.
Generally, intangibles shall also include
all cash and cash escrow funds, such as
but not limited to: Depreciation reserve
fund or mortgage reserve fund accounts,
bank accounts, residual receipt
accounts, all contributions, donations,
gifts, grants, bequests, and endowment
funds by donors, and all other revenues
and accounts receivable from whatever
source paid or payable. All personalty
shall be securitized with appropriate
UCC filings and any excluded
personalty shall be indicated in the
Regulatory Agreement.
Preapplication meeting means a
meeting among HUD, a potential
mortgagee (applicant), and a potential
mortgagor for mortgage insurance where
there has been a positive Preliminary
Review of the proposed project. The
preapplication meeting is an
opportunity for the potential mortgagee
and mortgagor to summarize the
proposed project, for HUD to summarize
the application process, and for issues
that could affect the eligibility or
underwriting of the proposed loan to be
identified and discussed.
Preliminary Review Letter means a
letter from HUD to a potential applicant
communicating the result of the
Preliminary Review. The letter may
state that an application for mortgage
insurance would probably not be
successful and provide the reasons for
this determination, or state that no
factors that would cause an application
to be rejected have been identified, and
therefore there appears to be no bar to
the applicant proceeding to a
preapplication meeting.
Project means the construction (which
may include replacement of an existing
hospital facility) or substantial
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
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mortgagor, the facility, or all of the
mortgaged property, depending on the
context in which it is used.
Regulatory Agreement means the
agreement under which all mortgagors
shall be regulated by HUD, as long as
HUD is the insurer or holder of the
mortgage, in a published format
determined by HUD, and such
additional covenants and restrictions as
may be determined necessary by HUD
on a case-by-case basis.
Secretary means the Secretary of
Housing and Urban Development or his
or her authorized representatives.
Security instrument means a
mortgage, deed of trust, and any other
security for the indebtedness, and shall
be deemed to be the mortgage as defined
by the National Housing Act, as
amended, implementing regulations,
and HUD directives.
Service area means that geographical
area, identified by zip codes, from
which a substantial majority of a
hospital’s patients derive.
State includes the several states,
Puerto Rico, the District of Columbia,
Guam, the Trust Territory of the Pacific
Islands, American Samoa, and the
United States Virgin Islands.
Substantial rehabilitation means
additions, expansion, remodeling,
renovation, modernization, repair, and
alteration of existing buildings,
including acquisition of new or
replacement equipment.
Surplus Cash means any cash earned
in the applicable fiscal period,
including accounts receivable and
equity balance, remaining after all of the
following conditions have been met:
(1) Final endorsement of the HUDinsured note has occurred;
(2) Mortgage payments for the
preceding 12 months have been made
when due, including any grace period;
(3) The Debt Service Coverage Ratio is
greater than or equal to 1.50 in the most
recent audited financial statements and
as of the date of distribution;
(4) Days in Accounts Receivable are
less than or equal to 80 in the most
recent audited financial statements and
as of the date of distribution;
(5) The average payment period is less
than or equal to 80 in the most recent
audited financial statements and as of
the date of distribution;
(6) The Mortgage Reserve Fund (MRF)
is fully funded as of the date of the
distribution in conformity with the MRF
schedule;
(7) All income, property, and
statutory employer payroll taxes and
employee payroll withholding
contributions (including penalties and
interest, if applicable) have been
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deposited as of the date of the
distribution, as required;
(8) The Current Ratio is greater than
or equal to 1.50 in the most recent
audited financial statements and
immediately after the distribution;
(9) Days of cash on hand are greater
than or equal to 21 days in the most
recent audited financial statements and
immediately after the distribution;
(10) The distribution may not be more
than 50 percent of Net Income as
reflected in the most recent audited
financial statements, unless the
Mortgagor has an equity financing ratio
equal to or greater than 20 percent in the
most recent audited financial statements
and immediately after the distribution;
and
(11) The Equity less any assets
excluded from the mortgaged property
is greater than 0.00 in the most recent
audited financial statements and
immediately after the distribution is
made. As used in this definition:
‘‘Most recent audited financial
statements’’ refers to the audited
financial statement required under
section 242.58 for the prior fiscal year;
‘‘Net Income’’ means Net Income for
for-profit entities; Excess of Revenues
over Expenses for not-for-profit entities;
and Excess of Revenues over Expenses
before Capital Grants, Contributions,
and Additions to Permanent
Endowment for governmental entities;
and
‘‘Equity financing ratio’’ means
(Equity less any assets excluded from
the mortgaged property)/(total assets
less any assets excluded from the
mortgaged property). Equity is defined
as Equity for a for-profit entity, Total
Net Assets for not-for-profit entities, and
Total Net Assets for governmental
entities.
§ 242.2
Program financial self-sufficiency.
The Commissioner shall administer
the Section 242 program in such a way
as to encourage financial self-sufficiency
and actuarial soundness; i.e., to avoid
mortgage defaults and claims for
insurance benefits in order to protect
the mortgage insurance fund.
§ 242.3 Encouragement of certain
programs.
The activities and functions provided
for in this part shall be carried out so
as to encourage provision of
comprehensive health care, including
outpatient and preventive care as well
as hospitalization, to a defined
population, and in the case of public
and certain not-for-profit hospitals, to
encourage programs that are undertaken
to provide essential health care services
to all residents of a community
regardless of ability to pay.
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§ 242.4 Eligibility for insurance and
transition provision.
(a) The hospital to be financed with
a mortgage insured under this part shall
involve the construction of a new
hospital or the substantial rehabilitation
(or replacement) of an existing hospital.
(b) This part applies only to
applications for FHA mortgage
insurance submitted after a preapplication meeting (as defined in
§ 242.1) with HUD that occurred on and
after January 28, 2008. HUD’s
regulations and practices prior to
January 28, 2008 apply to applications
for FHA mortgage insurance submitted
after a pre-application meeting that
occurred before January 28, 2008.
§ 242.10
Eligible mortgagors.
The mortgage, to be eligible for
insurance, shall be on property located
in a state, as defined in § 242.1. The
mortgage shall cover real estate in
which the mortgagor has one of the
following interests:
(a) A fee simple title;
(b) A lease for not less than 99 years
that is renewable; or
(c) A lease having a term of not less
than 50 years to run from the date the
mortgage is executed.
The mortgagor shall be a public
mortgagor (i.e., an owner of a public
facility), a private nonprofit corporation
or association, or a profit-motivated
mortgagor meeting the definition of
‘‘hospital’’ in § 242.1. The mortgagor
shall be approved by HUD and shall
possess the powers necessary and
incidental to operating a hospital.
Eligible proprietary or profit-motivated
mortgagors may include for-profit
corporations, limited partnerships, and
limited liability corporations and
companies, but may not include natural
persons, joint ventures, and general
partnerships. Any proposed mortgagor
must demonstrate that it has a
continuity of organization
commensurate with the term of the
mortgage loan being insured. For new
organizations, or those whose continuity
is necessarily dependent upon an
individual or individuals, broad
community participation is required.
§ 242.7
§ 242.11
§ 242.5
Eligible mortgagees/lenders.
The lender requirements set forth in
24 CFR part 202 regarding approval,
recertification, withdrawal of approval,
approval for servicing, report
requirements, and conditions for
supervised mortgagees, nonsupervised
mortgagees, investing mortgagees, and
governmental and similar institutions,
apply to these programs.
§ 242.6
Property requirements.
Maximum mortgage amounts.
The mortgage shall involve a
principal obligation not in excess of 90
percent of HUD’s estimate of the
replacement cost of the hospital,
including the equipment to be used in
its operation when the proposed
improvements are completed and the
equipment is installed.
§ 242.8 Standards for licensure and
methods of operation.
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is permitted within limits determined
by HUD to avoid insurance risks that
may be associated with such ownership.
The Commissioner shall determine if
the proposed mortgagor will be at low
risk for violation of regulations of the
U.S. Department of Health and Human
Services, other federal regulations, and
state regulations governing kickbacks,
self-referrals, and other issues that could
increase the risk of eventual default.
The Commissioner’s determination shall
be based on an unqualified legal
opinion as to compliance with
applicable federal law, among other
considerations.
The Secretary shall require
satisfactory evidence that the hospital
will be located in a state or political
subdivision of a state with reasonable
minimum standards of licensure and
methods of operation for hospitals, and
satisfactory assurance that such
standards will be applied and enforced
with respect to the hospital.
§ 242.9
Physician ownership.
Ownership of an interest in the
mortgagor by physicians or other
professionals practicing in the hospital
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Regulatory compliance required.
An application for insurance of a
mortgage under this part shall be
considered only in connection with a
hospital that is in substantial
compliance with regulations of the
Department of Health and Human
Services and the regulations of the
applicable state governing the operation
and reimbursement of hospitals. A
hospital that is under investigation by
any state or federal agency for statutory
or regulatory violations is not eligible so
long as the investigation is unresolved,
unless HUD determines that the
investigation is minor in nature; that is,
the investigation is unlikely to result in
substantial liabilities or to otherwise
substantially harm the creditworthiness
of the hospital.
§ 242.13
Parents and affiliates.
As a condition of issuing a
commitment, HUD may require
corporate parents, affiliates, or
principals of the proposed mortgagor to
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provide assurances, guarantees, or
collateral to protect HUD’s interests.
The Commissioner may also require
financial and operational information
on the parent, other businesses owned
by the parent, or affiliates of the
proposed mortgagor and may also
require a parent or affiliate to be
regulated by HUD as to certain actions
that could impact on the insurance of a
mortgage loan for the benefit of the
hospital.
§ 242.14
Mortgage reserve fund.
As a condition of issuing a
commitment, HUD shall require
establishment of a Mortgage Reserve
Fund (MRF). The mortgagor shall be
required to make contributions to the
MRF such that, with fund earnings, the
MRF will build to one year of debt
service at 5 years following
commencement of amortization,
increasing thereafter to 2 years of debt
service on and after 10 years following
commencement of amortization
according to a schedule established by
HUD, unless HUD determines that a
different schedule of contributions is
appropriate based on the mortgagor’s
risk profile, reimbursement structure, or
other characteristics. In particular,
hospitals that receive cost-based
reimbursement may be required to have
MRFs that build to more than 2 years of
debt service. Expenditures from the
fund are made at HUD’s sole discretion
or in accordance with the mortgagor’s
MRF Schedule. Upon termination of
insurance, the balance of the MRF shall
be returned to the mortgagor, provided
that all obligations to HUD have been
met.
§ 242.15 Limitation on refinancing existing
indebtedness.
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.
Subpart B—Application Procedures
and Commitments
§ 242.16
Applications.
(a) Application process—(1) Market
Need. The approval process entails a
determination of the market need of the
proposal and stresses, on a market-wide
basis, the impact of the proposed facility
on, and its relationship to, other health
care facilities and services (particularly
other hospitals with mortgages insured
under this part and hospitals that have
a disproportionate share of Medicaid
and uninsured patients or provide a
substantial amount of charity care); the
number and percentage of any excess
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beds; and demographic projections.
Generally, Section 242 insurance may
support start-up hospitals or major
expansions of existing hospitals only if
existing hospital capacity or services are
clearly not adequate to meet the needs
of the population in the service area.
(i) If the state has an official
procedure for determining need for
hospitals, HUD shall require that such
procedure be followed before the
application for insurance is submitted,
and that the application document that
need has also been established under
that procedure.
(ii) The following factors are relevant
in evaluating market need for the project
and should be addressed, as applicable,
in the study of market need and
feasibility submitted with the
application. Because each hospital
presents a unique situation, there is no
formula or cutoff level that applies to all
applications:
(A) Service area definition;
(B) Existing or proposed hospital;
(C) Designation as sole community
provider, Critical Access Hospital, or
rural referral center;
(D) Community-wide use rates
(discharges and days/1000);
(E) Statewide use rates (for
benchmarking purposes);
(F) Current population and 5-year
projection by age cohort;
(G) Staffed versus licensed beds;
(H) Applicant hospital’s occupancy
rate;
(I) Competitors’ occupancy rates;
(J) Outpatient volume;
(K) Availability of emergency
services;
(L) Teaching hospital status;
(M) Services offered by hospitals in
the service area;
(N) Migration of patients out of the
service area;
(O) Planned construction at other
facilities in the region;
(P) Historical market share by major
service category;
(Q) Disproportionate Share Hospital
designation; and
(R) Distance to other hospitals.
(2) Operating margin and debt service
coverage ratio. (i) Hospitals with an
aggregate operating margin of less than
0.00 when calculated from the three
most recent annual audited financial
statements are not eligible for Section
242 insurance, unless HUD determines,
based on the financial data in those
statements, that the hospital has
achieved a financial turnaround
resulting in a positive operating margin
in the most recent year, calculated using
classifications of items as operating or
non-operating in accordance with
guidance that shall be provided in
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written directives by HUD. In any event,
HUD shall not issue an insurance
commitment for any hospital in a
turnaround situation that has not
achieved 2 consecutive years of positive
operating margin immediately prior to
issuance of the commitment.
(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 1.40 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
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 to
determine the debt service coverage
ratio, hospitals must have an average
debt service coverage ratio of 1.40 or
greater.
(3) Financial Feasibility. The approval
process entails a determination of the
financial feasibility of the proposal, i.e.,
a determination that it is probable that
the proposed mortgagor will be able to
meet its debt service requirements
during the period projected. It includes
analysis of the reimbursement structure
of the proposed hospital (including
patient/payer mix); actions of
competitors; and the probable projected
impact on the proposed hospital of
general health care system trends, such
as the development of alternative health
care delivery systems and new
reimbursement methods. In addition to
historical operating margin,
determination of financial feasibility
includes, but is not limited to,
evaluation of the following factors,
which the application must address and
which HUD will review:
(i) Current and projected gains from
operations and a manageable debt load
using reasonable assumptions;
(ii) Current debt service coverage ratio
of 1.25 or higher and projected debt
service coverage ratio of 1.40 or higher;
(iii) Cushion in the balance sheet
sufficient to demonstrate the ability to
withstand short periods of net operating
losses without jeopardizing financial
viability;
(iv) Patient utilization forecasts
(including average length of stay, case
intensity, discharges, area-wide use
rates) that are consistent with the
hospital’s historical trends, future
service mix, market trends, population
forecasts, and business climate;
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(v) The hospital’s demonstrated
ability to position itself to compete in its
marketplace;
(vi) Organizational affiliations or
relationships that help optimize
financial, clinical, and operational
performance;
(vii) Management’s demonstrated
ability to operate effectively and
efficiently, and to develop effective
strategies for addressing problem areas;
(viii) Systems in place to monitor
hospital operations, revenues, and costs
accurately and in a timely manner;
(ix) A Board that is appropriately
constituted and provides effective
oversight;
(x) Required licensures and approvals;
and
(xi) Favorable ratings from the Joint
Commission on Accreditation of
Healthcare Organizations or other
organizations acceptable to HUD.
(4) Preliminary Review. A Preliminary
Review is a general overview of the
acceptability of a potential mortgagor
performed at the request of a hospital,
a financial consultant representing a
hospital, or a lender, to identify any
factors that would likely cause an
application to be rejected, should an
application be submitted.
(i) The purpose of the preliminary
review is for HUD to identify any
obvious factors that would cause an
application to be rejected, before the
potential mortgagor or mortgagee
expends resources to prepare one. The
hospital, financial consultant, or lender
shall submit a preliminary information
package to HUD that provides evidence
of statutory eligibility, market need,
financial strength, and such other
documentation as HUD may require.
The scope of the preliminary review
does not include approval of any
specific site in the community.
(ii) If HUD identifies factors that
would cause an application to be
rejected, HUD shall issue a Preliminary
Review Letter notifying the potential
applicant that an application for
mortgage insurance would probably not
be successful and providing the reasons
for this decision. Also, no further
request from the proposed applicant for
a Preliminary Review shall be
entertained for a period of one year from
the date of HUD’s notification. HUD
may grant an exception to this one-year
limitation if, during the year, there is a
major change in the circumstances that
caused HUD to determine that the
project would be rejected. For example,
if the sole reason for HUD’s
determination was the hospital’s failure
to meet the historical operating margin
test, and a new audited annual financial
statement contains results that would
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cause the hospital to meet the test, then
the lender may request a new
Preliminary Review within one year of
HUD’s notification.
(iii) If HUD does not identify any
factors that would cause an application
to be rejected, HUD shall issue a
Preliminary Review Letter advising the
potential applicant that there appears to
be no bar to the applicant’s proceeding
to the next step in the application
process, provided that if a complete
application is not received by HUD
within one year following the date of
HUD’s letter, another Preliminary
Review may be required, at HUD’s
discretion, before the application
process may proceed.
(iv) The Commissioner’s
determination in the preliminary review
phase that no factors have been
identified that would cause an
application to be rejected shall in no
way be construed as an indication that
a subsequent application will be
approved.
(5) Preapplication meeting. The next
step in the application process is the
preapplication meeting. 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 meeting is an
opportunity for the potential mortgagor
to summarize the proposed project, 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:
(i) Advise the potential applicant that
there appears to be no bar to submitting
an application for mortgage insurance;
or
(ii) Identify issues that must be
resolved before a full application should
be submitted for processing.
(b) Application contents. The
application for mortgage insurance shall
include exhibits that follow such
guidance as to content and format that
HUD shall provide from time to time.
The application shall include:
(1) A description of the proposed
sources and uses of funds;
(2) A description of the mortgagor
entity, its ownership structure, and its
directors and managers;
(3) A description of the project, the
business plan of the hospital, and how
the project will further that plan;
(4) Historical audited financial
statements and interim year-to-date
financial results (for existing hospitals);
(5) A study of market need and
financial feasibility, addressing the
factors listed in paragraphs (a)(1)(ii),
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(a)(2), and (a)(3) of this section, with
assumptions and financial forecast
clearly presented, and prepared by a
certified accounting firm acceptable to
HUD;
(6) Architectural plans and
specifications in sufficient detail to
enable a reasonable estimate of cost;
(7) Evidence that the hospital will be
located in a state or political
subdivision of a state with reasonable
minimum standards of licensure and
methods of operation for hospitals and
satisfactory assurance that such
standards will be applied and enforced
with respect to the hospital;
(8) If the state has an official
procedure for determining need for
hospitals, evidence that such procedure
has been followed and that need has
been established under that procedure;
(9) A Phase I environmental report;
and
(10) Such other exhibits as HUD shall
require based upon the facts pertaining
to the particular case.
(c) Fee. An application fee of $1.50
per thousand dollars of the amount of
the loan to be insured shall be paid to
HUD at the time the application is
submitted to HUD for approval.
(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 the FHA Office of Insured
Health Care Facilities.
(e) Complete application. Only
technically complete applications will
be processed. Partial applications
cannot be processed. Upon
determination that an application is
complete, HUD shall issue a
Completeness Letter to the applicant
stating that the application is complete.
(f) Application Review. Upon receipt
of a complete application, HUD shall
evaluate the application to determine if
eligibility, market need, financial
feasibility, and compliance with
applicable regulations (including but
not limited to federal environmental
regulations, wage rate regulations, and
health care regulations) have been
demonstrated, and to evaluate any other
factors, including but not limited to risk
to the Insurance Fund, that should be
considered in determining if the
application for mortgage insurance
should be approved. As a part of this
review, HUD may solicit the advice of
private consultants and expert staff in
the Department of Health and Human
Services and other federal agencies.
Based on review of the complete
application, HUD may request
additional information from the
applicant. The timeliness of the
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applicant’s submission of the additional
information may affect the approval or
disapproval of the application. The
Commissioner’s decision shall be
communicated in the form of a
Commitment Letter or a Rejection
Letter. HUD will not issue a
Commitment Letter until HUD
completes the environmental review
under 24 CFR 242.79.
§ 242.17
Commitments.
(a) Issuance of commitment. Upon
approval of an application for
insurance, a commitment shall be
issued by HUD setting forth the terms
and conditions under which an
insurance endorsement shall be issued
for the hospital. The commitment shall
include the following:
(1) A commitment for insurance of
advances reflecting the mortgage
amount, interest rate, mortgage term,
date of commencement of amortization,
and other requirements pertaining to the
mortgage and construction project;
(2) HUD’s computation of the
replacement cost and maximum
insurable mortgage amount;
(3) Financial requirements for closing;
(4) Approval covenants, including any
special conditions that must be satisfied
prior to initial endorsement;
(5) Mortgage Reserve Fund
Agreement.
(b) Type of commitment. The
commitment will provide for the
insurance of advances of mortgage funds
during construction.
(c) Term of commitment. (1) The
initial commitment shall be issued for a
period of 90 days.
(2) The term of a commitment may be
extended in such manner as HUD may
prescribe, provided, however, that the
combined term of the original
commitment and any extensions do not
exceed 180 days.
(d) Commitment fee. A commitment
fee that, when added to the application
fee, will aggregate $3 per thousand
dollars of the amount of the loan set
forth in the commitment, shall be paid
within 30 days of the date of issuance
of the commitment. If such fee is not
paid within this 30-day period, the
commitment shall automatically
terminate.
§ 242.18
Inspection fee.
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 at the time
of initial endorsement.
§ 242.19
Fees on increases.
(a) Increase in commitment prior to
endorsement. An application, filed prior
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to initial endorsement, for an increase in
the amount of an outstanding
commitment, shall be accompanied by
an additional application fee of $1.50
per thousand dollars computed on the
amount of the increase requested. Any
increase in the amount of a commitment
shall be subject to the payment of an
additional commitment fee which,
when added to the additional
application fee, will aggregate $3 per
thousand dollars of the amount of the
increase. The additional commitment
fee shall be paid within 30 days after the
date of the amended commitment. If the
additional commitment fee is not paid
within 30 days, the commitment
novation providing for the increased
amount will automatically terminate
and the previous commitment will be
reinstated. If an inspection fee was
required in the original commitment, an
additional inspection fee shall be paid
in an amount not to exceed $5 per
thousand dollars of the amount of
increase in commitment. The additional
inspection fee shall be paid at the time
of initial endorsement.
(b) Increase in mortgage between
initial and final endorsement. Upon an
application, filed between initial and
final endorsement, for an increase in the
amount of the mortgage, either by
amendment, consolidation agreement,
or by substitution of a new mortgage, an
additional application fee of $1.50 per
thousand dollars computed on the
amount of the increase requested shall
accompany the application. The
approval of any increase in the amount
of the mortgage shall be subject to the
payment of an additional commitment
fee which, when added to the additional
application fee, will aggregate $3 per
thousand dollars of the amount of the
increase granted. If an inspection fee
was required in the original
commitment, an additional inspection
fee shall be paid in an amount not to
exceed $5 per thousand dollars of the
amount of the increase granted. The
additional commitment and inspection
fees shall be paid within 30 days after
the date that the increase is granted.
jlentini on PROD1PC65 with RULES2
§ 242.20 Reopening of expired
commitments.
An expired commitment may be
reopened if a request for reopening is
received by HUD no later than 90 days
after the date of expiration of the
commitment. The reopening request
shall be accompanied by a fee of 50
cents per thousand dollars of the
amount of the expired commitment. A
commitment that has expired because of
failure to pay the commitment fee may
be reopened only upon payment of the
commitment fee and the reopening fee.
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If the reopening request is not received
by HUD within the required 90-day
period, a new application accompanied
by an application fee must be submitted.
If a commitment for an increased
amount has expired because of failure to
pay an additional commitment fee based
on the amount of the increase, the
reopening fee shall be computed on the
basis of the amount of the commitment
increase rather than on the amount of
the original commitment.
§ 242.21
Refund of fees.
Commitment, inspection, and
reopening fees (but not application fees)
may be refunded, in whole or in part, if
HUD determines that the construction
or financing of the project has been
prevented because of condemnation
proceedings or other legal action taken
by a government body or public agency,
or in such other instances as HUD may
determine as being beyond the control
of the applicant and resulting from no
fault of the applicant. A transfer fee may
be refunded only in such instances as
HUD may determine. However, the
portion of the inspection fee paid in
connection with early commencement
of work is not refundable.
§ 242.22 Maximum fees and charges by
mortgagee.
The mortgagee may collect from the
mortgagor the amount of the fees
provided for in this subpart. The
mortgagee may also collect from the
mortgagor an initial service charge not
to exceed 2 percent of the original
principal amount of the mortgage to
reimburse the mortgagee for the cost of
closing the transaction. A permanent
financing fee not to exceed 3.5 percent
may be collected from the mortgagor;
however, the combined initial service
charge and permanent financing fee may
not exceed 5.5 percent in bond
transactions and 3.5 percent in all other
transactions. Any additional charges or
fees collected from the mortgagor shall
be subject to prior approval of HUD and
shall be clearly disclosed in the
Mortgagee’s Certificate.
§ 242.23 Maximum mortgage amounts and
cash equity requirements.
(a) Adjusted mortgage amount—
rehabilitation projects. A mortgage
financing the rehabilitation of an
existing hospital shall be subject to the
following limitations, in addition to
those set forth in § 242.7:
(1) Property held unencumbered. If
the mortgagor is the fee simple owner of
the property and the ownership is not
encumbered by an outstanding
indebtedness, the mortgage shall not
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exceed 100 percent of HUD’s estimate of
the cost of the proposed rehabilitation.
(2) Property subject to existing
mortgage. If the mortgagor owns the
property subject to an outstanding
indebtedness, which is to be refinanced
with part of the insured mortgage, the
mortgage shall not exceed the total of
the following:
(i) The Commissioner’s estimate of the
cost of rehabilitation, plus
(ii) Such portion of the outstanding
indebtedness as does not exceed 90
percent of HUD’s estimate of the fair
market value of such land and
improvements prior to rehabilitation.
(3) Property to be acquired. If the
property is to be acquired by the
mortgagor and the purchase price is to
be financed with a part of the insured
mortgage, the mortgage shall not exceed
90 percent of the total of the following:
(i) The Commissioner’s estimate of the
cost of rehabilitation, plus
(ii) The actual purchase price of the
land and improvements or HUD’s
estimate (prior to rehabilitation) of the
fair market value of such land and
improvements, whichever is the lesser.
(b) Reduced mortgage amount—
leaseholds. In the event the mortgage is
secured by a leasehold estate rather than
a fee simple estate, the value or
replacement cost of the property
described in the mortgage shall be the
value or replacement cost of the
leasehold estate (as determined by
HUD), which shall in all cases be less
than the value or replacement cost of
the property in fee simple.
(c) Cash equity. Depending on the
financial circumstances of each hospital
facility, HUD shall have the discretion
to evaluate, on a case-by-case basis, the
amount of equity that a mortgagor must
supply in addition to the value of plant,
property, and equipment and other
values recognized as loan security in the
commitment process. Exercise of this
discretion shall never cause a loan to
exceed 90 percent of estimated
replacement cost, although it may cause
it to be less than 90 percent. The equity
contribution may not be made from
borrowed funds. A private nonprofit or
public mortgagor, but not a proprietary
mortgagor, in HUD’s discretion and
subject to 24 CFR 242.49, may provide
any such required equity in the form of
a letter of credit.
§ 242.24
Initial operating costs.
In the case of a new hospital or a
hospital expansion, HUD shall establish,
on a case-by-case basis, the amount of
initial operating capital, if any, that
must be deposited in cash or a letter of
credit (or combination) to be available to
the new hospital upon commencement
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of operations. Generally, the initial
operating capital other than AMPO shall
not be borrowed funds unless HUD
determines that there are offsetting
financial strengths to compensate for the
risk associated with borrowing.
Subpart C—Mortgage Requirements
§ 242.25 Mortgage form and disbursement
of mortgage proceeds.
(a) Mortgage form. The mortgage shall
be:
(1) Executed on a form approved by
HUD for use in the jurisdiction in which
the property covered by the mortgage is
situated; the form shall not be changed
without the prior written approval of
HUD.
(2) Executed by an eligible mortgagor.
(b) Disbursement of mortgage
proceeds. The mortgagee shall be
obligated, as a part of the mortgage
transaction, to disburse the principal
amount of the mortgage to (or for the
account of) the mortgagor or to his or
her creditors for his or her account and
with his or her consent.
Application of payments.
All payments to be made by the
mortgagor to the mortgagee shall be
added together and the aggregate
amount thereof shall be paid by the
mortgagor each month in a single
payment. The mortgagee shall apply
each payment received to the following
items in the following order:
(a) Premium charges under the
contract of mortgage insurance;
(b) Ground rents, taxes, special
assessments, and fire and other hazard
insurance premiums;
(c) Interest on the mortgage; and
(d) Amortization of the principal of
the mortgage.
§ 242.31
Accumulation of accruals.
Consulting fees for work essential to
the development of the project may be
included in the insured mortgage.
Allowable consulting fees include those
for analysis of market demand, expected
revenues, and costs; site analysis;
architectural and engineering design;
and such other fees as HUD may
determine to be essential to project
development. Fees for work performed
more than 2 years prior to application
are not allowable. Fees for work
performed by any party with an identity
of interest with the proposed mortgagor
or mortgagee are not allowable.
(a) The mortgage shall provide for
payments by the mortgagor to the
mortgagee on each interest payment
date of an amount sufficient to
accumulate, in the hands of the
mortgagee one payment period prior to
its due date, the next annual MIP
payable by the mortgagee to HUD. Such
payments shall continue only so long as
the contract of insurance shall remain in
effect.
(b) The mortgage shall provide for
such equal monthly payments by the
mortgagor to the mortgagee as will
amortize the ground rents, if any, and
the estimated amount of all taxes, water
charges, special assessments, and fire
and other hazard insurance premiums,
within a period ending one month prior
to the dates on which the same become
delinquent. The mortgage shall further
provide that such payments shall be
held by the mortgagee, for the purpose
of paying such items before they become
delinquent. The mortgage shall also
make provision for adjustments in case
such estimated amounts shall prove to
be more, or less, than the actual
amounts so paid therefore by the
mortgagor. Notwithstanding the
foregoing, in particular circumstances, a
mortgagor may purchase required fire
and hazard insurance through a
consortium of affiliated institutions or
related organizations or, in the case of
public institutions, through required
state purchasing arrangements. In such
circumstances, the mortgage accrual
requirement may be modified to reflect
circumstances in which it is
inappropriate for the mortgagee to
collect monthly payments and to make
payments on behalf of the mortgagor.
§ 242.29
§ 242.32
§ 242.26
Agreed interest rate.
(a) The mortgage shall bear interest at
the rate or rates agreed upon by the
mortgagee and the mortgagor.
(b) The amount of any increase
approved by HUD in the mortgage
amount between initial and final
endorsement in excess of the amount
that HUD had committed to insure at
initial endorsement shall bear interest at
the rate agreed upon by the mortgagee
and the mortgagor.
§ 242.27
Maturity.
The mortgage shall have a maturity
not to exceed 25 years from the date
amortization begins.
§ 242.28
jlentini on PROD1PC65 with RULES2
§ 242.30
Allowable costs for consultants.
Payment requirements.
The mortgage shall provide for
payments on the first day of each month
in accordance with an amortization plan
agreed upon by the mortgagor, the
mortgagee, and HUD.
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Covenant against liens.
The mortgage shall contain a covenant
against the creation by the mortgagor of
any liens against the property, except
for such liens as may be approved by
HUD.
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67553
§ 242.33 Covenant for malpractice, fire,
and other hazard insurance.
The mortgage shall contain a covenant
binding the mortgagor to maintain
adequate liability, fire, and extended
coverage insurance on the property. The
mortgage shall also contain a covenant
binding the mortgagor to maintain
adequate malpractice coverage. All
coverage shall be acceptable to the
mortgagee and HUD.
§ 242.35
Mortgage lien certifications.
At initial and/or final endorsement of
the mortgage note, each of the following
requirements must be met:
(a) The mortgage is the first lien upon
and covers all of the property used in
the operation of the entire hospital;
(b) The property upon which the
improvements have been made or
constructed and the equipment financed
with mortgage proceeds are free and
clear of all liens other than the insured
mortgage and such other secondary
liens as may be approved by HUD;
(c) The Security Agreement and
Uniform Commercial Code filings
establish a first lien on the personalty of
the mortgagor, including but not limited
to equipment acquired with mortgage
proceeds or otherwise not subject to a
prior lien;
(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 or
rehabilitation of the project, or the
purchase of the equipment financed
with mortgage proceeds.
§ 242.37
Mortgage prepayment.
(a) Prepayment privilege. Except as
provided in paragraph (c) of this section
or otherwise established by HUD, the
mortgage shall contain a provision
permitting the mortgagor to prepay the
mortgage in whole or in part upon any
interest payment date, after giving the
mortgagee a 30-day notice in writing in
advance of its intention to so prepay.
The 30-day notice may be extended
with the prior written approval of HUD.
(b) Prepayment charge. The mortgage
may contain a provision for such charge,
in the event of prepayment of principal,
as may be agreed upon between the
mortgagor and the mortgagee, subject to
the following:
(1) The mortgagor shall be permitted
to prepay up to 15 percent of the
original principal amount of the
mortgage in any one calendar year
without any such charge.
(2) Any reduction in the original
principal amount of the mortgage
resulting from the certification of cost,
which HUD may require, shall not be
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construed as a prepayment of the
mortgage.
(c) Prepayment of bond-financed or
GNMA-securitized mortgages. Where
the mortgage is given to secure GNMA
mortgage-backed securities or a loan
made by a lender that has obtained the
funds for the loan by the issuance and
sale of bonds or bond anticipation notes,
or both, the mortgage may contain a
prepayment restriction and prepayment
penalty charge acceptable to HUD as to
term, amount, and conditions.
(d) HUD override of prepayment
restrictions. In the event of a default,
HUD may override any lockout,
prepayment penalty, or combination of
penalties in order to facilitate a partial
or full refinancing of the mortgaged
property and avoid a claim.
§ 242.38
Late charge.
The mortgage may provide for the
collection by the mortgagee of a late
charge in accordance with terms,
conditions, and standards of HUD for
each dollar of each payment to interest
or principal more than 15 days in
arrears, to cover the expense involved in
handling delinquent payments. Late
charges shall be separately charged to
and collected from the mortgagor and
shall not be deducted from any
aggregate monthly payment.
Subpart D—Endorsement for
Insurance
jlentini on PROD1PC65 with RULES2
§ 242.39
Insurance endorsement.
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 (b) of this section.
(a) 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
mortgage is insured and the date of
insurance.
(b) 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.
(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.
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§ 242.40
Mortgagee certificate.
At initial endorsement, the mortgagee
shall execute a Mortgagee Certificate in
a form prescribed by HUD.
§ 242.41 Certification of cost
requirements.
Certificates of actual cost.
(a) The mortgagor’s certificate of
actual cost, in a form prescribed by
HUD, shall be submitted upon
completion of the physical
improvements to the satisfaction of
HUD and before final endorsement,
except that in the case of an existing
hospital that does not require
substantial rehabilitation and where the
commitment provides for completion of
specified repairs after endorsement, a
supplemental certificate of actual cost
will be submitted covering the
completed costs of any such repairs.
The certificate shall show the actual
cost to the mortgagor, after deduction of
any kickbacks, rebates, trade discounts,
or other similar payments to the
mortgagor, any of its officers, directors,
stockholders, partners, or other entity
member ownership, of construction and
other costs, as prescribed by HUD.
(b) The Certificate of Actual Cost shall
be verified by an independent certified
public accountant or independent
public accountant in a manner
acceptable to HUD.
(c) Upon HUD’s approval of the
mortgagor’s certification of actual cost,
such certification shall be final and
incontestable except for fraud or
material misrepresentation on the part
of the mortgagor.
§ 242.43
Application of cost savings.
At the sole discretion of HUD, any
cost savings shall be used to:
(a) Reduce the principal amount of
the mortgage and the mortgagor’s cash
equity contribution proportionally,
unless the mortgagor elects to have a
greater portion of the savings used to
reduce the mortgage; and/or
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Subpart E—Construction
§ 242.44
Before initial endorsement of the
mortgage for insurance, the mortgagor,
the mortgagee, and HUD shall enter into
an agreement in form and content
satisfactory to HUD for the purpose of
precluding any excess of mortgage
proceeds over statutory limitations.
Under this agreement, the mortgagor
shall disclose its relationship with the
builder, including any collateral
agreement, and shall agree:
(a) To execute a Certificate of Actual
Costs, upon completion of all physical
improvements on the mortgaged
property.
(b) To apply any cost savings in
accordance with the provisions below.
§ 242.42
(b) Fund any additional construction
or substantial rehabilitation approved
by HUD.
Construction standards.
Work designed and performed under
this section shall conform to the
standards adopted by HUD, which, at a
minimum, shall include the ‘‘Guidelines
for Construction and Equipment of
Hospital and Medical Facilities,’’ which
is regularly updated and published by
the American Institute of Architects.
§ 242.45
Early commencement of work.
(a) Site preparation. Prior to or
following the submission of an
application, the mortgagor may request
for good cause the commencement of
certain limited site preparation for the
project within legal guidelines and state
law. Such work can commence only
after the review of the work and
concurrence by HUD, including the
environmental review under 24 CFR
242.79, previous participation review,
and the agreement to certain conditions
by the applicant. HUD will not approve
such request until it has completed the
environmental review under 24 CFR
242.79. The work must meet all
requirements and guidelines as if it
were approved for mortgage insurance
and is to be accomplished at the sole
risk of the mortgagor.
(b) Construction completed prior to
application. Structures completed more
than 2 years prior to application are
eligible to be refinanced with insured
mortgage proceeds.
(c) Pre-commitment work. Subsequent
to submission of an application but
prior to the issuance of a commitment
or denial by HUD, the hospital and
lender may request for good cause the
commencement of certain necessary
early site work and limited construction
activity in connection with the
improvements, within legal guidelines
and state law. This work must be
requested by both the hospital and the
lender to be approved. Such work may
be eligible to be financed with insured
mortgage proceeds if the application is
approved and the work complies with
all specified conditions of HUD as set
forth in a written agreement between the
hospital and HUD. It is understood that
in some cases the application submitted
in order for pre-commitment work to
begin may not be complete in all
respects. However, at a minimum, the
application shall include the approved
FHA application form, the application
fee (based on the amount of the total
proposed insured loan), the inspection
fee (based on the cost of the pre-
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commitment work), a project
description of the pre-commitment work
and its relation to the total project, and
plans and specifications for the
proposed pre-commitment work in
sufficient detail to allow HUD to
conduct its architectural and
engineering review and obtain the
necessary previous participation
information and evidence of compliance
with federal and state environmental
regulations. Such work can commence
only after the review of the work and
concurrence by the lender and HUD,
including previous participation review.
HUD will not approve such request
until it has completed the
environmental review under 24 CFR
242.79. The work must meet all
requirements and guidelines as if it
were approved for mortgage insurance
and is to be accomplished at the sole
risk of the hospital. A request shall be
accompanied by documentation
required by HUD. That documentation
shall include:
(1) A justification explaining the
urgent and compelling circumstances
that make it necessary to begin
construction without waiting for the
application process to run its course.
The justification must specify the harm
the hospital would suffer from waiting.
(2) A plan detailing how the hospital
will finance the limited construction if
the application for mortgage insurance
is denied.
(3) A statement that financing the
limited construction by means other
than a HUD-insured mortgage in the
event the application is denied will
impose no significant financial hardship
on the hospital. The statement shall be
accompanied by supporting historical
and projected financial data.
(4) A statement that the hospital
recognizes that HUD’s agreement to
include the cost of the limited
construction in a subsequently
approved application does not in any
way indicate that the application will be
approved.
(5) A resolution of the governing body
(or, at HUD’s discretion, the executive
committee of the governing body) of the
mortgagor attesting to paragraphs (c)(1)
through (4).
(d) Early Start. Subsequent to the
issuance of a commitment, if the
hospital and lender request the
commencement of the project, the work
may commence after the review and
approval of the request by HUD,
including the agreement by the hospital
and the lender to any conditions that
HUD may require. Any work undertaken
prior to the initial endorsement shall be
at the sole risk of the hospital.
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(e) Prepayment of inspection fee. The
hospital shall pay a non-refundable
inspection fee to HUD before the work
described in paragraph (c) or (d) of this
section commences. The fee shall be
based on the amount of the precommitment and/or early start work
requested to be included in the insured
mortgage loan.
(f) No expressed or implied intent.
Approval to proceed under paragraphs
(c) or (d) of this section shall in no way
be construed as indicating any intent,
expressed or implied, on the part of
HUD to approve, disapprove, or make
any undertaking or promise whatsoever
with respect to the application or with
respect to any commitment for mortgage
insurance. Any work under paragraphs
(c) or (d) of this section shall be
undertaken at the sole risk and
responsibility of the hospital.
§ 242.46 Insured advances—building loan
agreement.
Prior to the initial endorsement of the
mortgage for insurance, the mortgagor
and mortgagee shall execute a building
loan agreement, approved by HUD,
setting forth the terms and conditions
under which progress payments may be
advanced during construction. To be
covered by mortgage insurance, or to be
included as an eligible cost, each
progress payment involving mortgage
proceeds and the owner’s equity
requirement shall be approved by HUD.
§ 242.47 Insured advances for building
components stored off-site.
(a) Building components. In insured
advances for building components
stored off-site, the term building
component shall mean any
manufactured or pre-assembled part of a
structure that HUD has specifically
identified for incorporation into the
property and has designated for off-site
storage because it is of such size or
weight that:
(1) Storage of the number of
components required for timely
construction progress at the
construction site is impractical, or
(2) Weather damage or other adverse
conditions prevailing at the
construction site would make storage at
the site impractical or unduly costly.
(b) Storage. (1) An insured advance
may be made for up to 90 percent of the
invoice value (to exclude costs of
transportation and storage) of the
building components stored off-site, if
the components are stored at a location
approved by the mortgagee and HUD.
(2) Each building component shall be
adequately marked so as to be readily
identifiable in the inventory of the offsite location. Each component shall be
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67555
kept together with all other building
components of the same manufacturer
intended for use in the same project for
which insured advances have been
made and separate and apart from
similar units not for use in the project.
(3) Storage costs, if any, shall be borne
by the contractor.
(c) Responsibility for transportation,
storage, and insurance of off-site
building components. The general
contractor of the insured mortgaged
property shall have the responsibility
for:
(1) Insuring the components in the
name of the mortgagor while in transit
and storage; and
(2) Delivering or contracting for the
delivery of the components to the
storage area and to the construction site,
including payment of freight.
(d) Advances. (1) Before an advance
for a building component stored off-site
is insured: (i) The mortgagor shall:
(A) Obtain a bill of sale for the
component;
(B) Give the mortgagee a security
agreement; and
(C) File a financing statement in
accordance with the Uniform
Commercial Code; and
(ii) The mortgagee shall warrant to
HUD that the security instruments are a
first lien on the building components
covered by the instruments except for
such other liens or encumbrances as
may be approved by HUD.
(2) Before each advance for building
components stored off-site is insured,
the mortgagor’s architect shall certify to
HUD that the components, in their
intended use, comply with HUDapproved contract plans and
specifications. Under those
circumstances permitted by HUD in
which there is no architect, compliance
with the HUD-approved contract plans
and specifications shall be determined
by HUD.
(3) Advances may be made only for
components stored off-site in a quantity
required to permit uninterrupted
installation at the site.
(4) At no time shall the invoice value
of building components being stored offsite, for which advances have been HUD
insured, represent more than 50 percent
of the total estimated construction costs
for the insured mortgaged project as
specified in the construction contract.
Notwithstanding the preceding sentence
and other regulatory requirements that
set bonding requirements, the
percentage of total estimated
construction costs insured by advances
under this section may exceed 25
percent but not 50 percent if the
mortgagor furnishes assurance of
completion in the form of a corporate
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surety bond for the payment and
performance each in the amount of 100
percent of the amount of the
construction contract. In no event will
insurance of advances for components
stored off-site be made in the absence of
a payment and a performance bond.
(5) No single advance that is to be
insured shall be in an amount less than
$10,000.
§ 242.48 Insured advances for certain
equipment and long lead items.
The Commissioner may allow
advances for certain pieces of
equipment or other construction
materials for which a manufacturer,
fabricator, or other source requires an
interim payment(s) in order to assure
the timely manufacture or fabrication
and delivery to the project site. Such
advances can be made only if a bill of
sale or an invoice describes the material
or equipment and its completion and
delivery dates in no uncertain terms,
and that such displayed timetable is
necessary to meet the requirements of
the overall construction schedule cited
in the construction contract.
§ 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
the mortgagee or a depository acceptable
to the mortgagee. Any such deposit shall
be held in a separate account for and on
behalf of the mortgagor, and shall be the
responsibility of the mortgagee.
(b) Letter of credit. Where the use of
a letter of credit is acceptable to HUD
in lieu of a deposit of cash or securities,
the letter of credit shall be issued to the
mortgagee by a banking institution
acceptable to the lender. The mortgagee
shall be responsible to HUD for
collection under the letter of credit. In
the event a demand for payment
thereunder is not immediately met, the
mortgagee shall forthwith provide a
cash deposit equivalent to the undrawn
balance of the letter of credit.
(c) Mortgagee not issuer. The
mortgagee of record may not be the
issuer of the letter of credit without the
prior written consent of HUD.
jlentini on PROD1PC65 with RULES2
§ 242.50 Funds and finances: off-site
utilities and streets.
The Commissioner shall require
assurance of completion of off-site
public utilities and streets in all cases,
except where a municipality or other
public body has by agreement
acceptable to HUD agreed to install such
utilities and streets without cost to the
mortgagor. Where such assurance is
required, it shall be either in the form
of a cash escrow deposit or the retention
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of a specified amount of mortgage
proceeds by the mortgagee, or both. In
any case, the amount of deposit or
retained cash (or both) must be
sufficient to cover the cost of off-site
utilities and streets. If a cash escrow is
used, it shall be deposited with the
mortgagee or with an acceptable trustee
or escrow agent designated by the
mortgagee. If mortgage proceeds are
used, the mortgagee shall retain under
terms approved by HUD, rather than
disburse at the initial closing of the
mortgage, a sufficient portion of the
mortgage proceeds allocated to land in
the project analysis. As additional
assurance, HUD may also require a
surety company bond or bonds.
§ 242.51 Funds and finances: Insured
advances and assurance of completion.
(a) Where the estimated cost of
construction or substantial
rehabilitation is more than $500,000, the
mortgagor shall furnish assurance of
completion in the form of corporate
surety bonds for payment and
performance, each in the minimum
amount of 100 percent of the
construction contract (or Guaranteed
Maximum Price, in the case of
construction management) and each
satisfactory to HUD.
(b) All types of assurance of
completion shall be on forms approved
by HUD. All surety companies
executing a bond and all parties
executing a personal indemnity
agreement must be satisfactory to HUD.
(c) A mortgagee may prescribe more
stringent requirements for assurance of
completion than the minimum
requirements provided for in this
section.
§ 242.52
Construction contracts.
(a) Awarding of contract. A contract
for the construction or rehabilitation of
a hospital shall be entered into by a
mortgagor, with a builder selected by a
competitive bidding procedure
acceptable to HUD.
(b) Form of contract. The construction
contract shall be: A lump sum form
providing for payment of a specified
amount; a construction management
contract with a guaranteed maximum
price, the final costs of which are
subject to a certification acceptable to
HUD; a design-build contract with terms
and certification requirements
acceptable to HUD; or such other form
of contract as may be acceptable to
HUD.
(c) Competitive bidding. A
competitive bidding procedure
acceptable to HUD must be used in the
selection of bidders to perform work or
otherwise provide service to the project,
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the costs of which are included in any
form of construction contract cited in
paragraph (b) of this section. Fixed
equipment not included in the
construction contract, and movable
equipment, may be purchased by
securing quotations or by using
competitive bidding procedures.
§ 242.53
Excluded contractors.
(a) Contracts relating to the
construction of the project shall not be
made with any person or entity that has
been excluded from participation in
federal programs, including but not
limited to: A general contractor, a
subcontractor, or construction manager
(or any firm, corporation, partnership,
or association in which such contractor,
subcontractor, or construction manager
has a substantial interest). Before
entering into contracts with any such
person or entity, owners must consult
the government-wide list of excluded
parties, and any list of excluded parties
maintained by HUD.
(b) Contracts relating to the
construction of the project shall not be
made with a general contractor that has
an identity of interest, as defined by
HUD, with the mortgagor or mortgagee.
(c) If HUD determines that a contract
has been made contrary to the
requirements of paragraphs (a) or (b) of
this section and so notifies the
mortgagee, HUD will require the
contractor or construction manager to
cost-certify and may require other
remedial action in addition to taking
enforcement action, as HUD deems
appropriate.
Subpart F—Nondiscrimination and
Wage Rates
§ 242.54
Nondiscrimination.
Hospital facilities financed with
mortgages insured under this part must
be made available without
discrimination as to race, color, religion,
sex, age, disability, or national origin.
Hospitals must be operated in
compliance with all applicable civil
rights laws and regulations, including
24 CFR part 200, subpart J (Equal
Employment Opportunity), and the
Americans with Disabilities Act (42
U.S.C. 12101 et seq.). Racially restrictive
covenants are per se illegal and their use
is prohibited. The aforesaid provisions
regarding age and sex discrimination do
not affect the eligibility of hospitals for
women and children.
§ 242.55
Labor standards.
(a) Projects financed under this part
(except under 24 CFR 242.91) must
comply with the prevailing wage rates
determined under the Davis-Bacon Act
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(40 U.S.C. 3141 et seq.), and U.S.
Department of Labor regulations in 29
CFR parts 1, 3, and 5 for compliance
with labor standards laws, in
accordance with section 212 of the Act,
provided that supplemental loans under
section 241 of the Act made in
connection with loans insured under
this part are subject to labor standards
requirements in the same manner and to
the same extent as mortgages insured
under section 242 of the National
Housing Act.
(b) The requirements stated in 24 CFR
part 70 governing HUD waiver of DavisBacon prevailing wage rates for
volunteers apply to hospitals with
mortgages insured under this part.
(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 National Housing Act made in
connection with a loan insured under
this part) shall receive compensation at
a rate not less than 1.5 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.
(d) Project commitments, contracts,
and agreements, as determined by HUD,
and construction contracts and
subcontracts, shall include terms,
conditions, and standards for
compliance with applicable
requirements set forth in 29 CFR parts
1, 3, and 5 and section 212 of the Act.
(e) No advance under a loan or
mortgage that is subject to the
requirements of section 212 shall be
eligible for insurance unless there is
filed with the application for the
advance a certificate as required by
HUD certifying that the laborers and
mechanics employed in construction of
the project have been paid not less than
the wage rates required under section
212.
Subpart G—Regulatory Agreement,
Accounting and Reporting, and
Financial Requirements
jlentini on PROD1PC65 with RULES2
§ 242.56
Form of regulation.
As long as HUD is the insurer or
holder of the mortgage, all mortgagors
shall be regulated by HUD through the
use of a regulatory agreement in a
published format determined by HUD
and such additional covenants and
restrictions as may be determined
necessary by HUD on a case-by-case
basis. In addition, all mortgagors shall
be subject to the provisions of 24 CFR
part 24 and such other enforcement
provisions as may be applicable. The
mortgagor shall be subject to monitoring
by HUD and its agents and contractors,
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on an ongoing basis for the life of the
insured mortgage to ensure against the
risk of default, and the mortgagor must
make its financial records available to
HUD and its agents and contractors
upon request.
§ 242.57
Maintenance of hospital facility.
The mortgagor shall maintain the
hospital’s grounds, buildings, and the
equipment financed with mortgage
proceeds in good repair, and shall
promptly complete such repairs and
maintenance as HUD considers
necessary.
§ 242.58 Books, accounts, and financial
statements.
(a) Books and accounts. The
mortgagor’s books and accounts relating
to the operation of the physical facilities
of the hospital shall be established in a
manner satisfactory to HUD, and shall
be kept in accordance with the
requirements of HUD as long as the
mortgage is insured or held by HUD.
(b) Financial reports. The mortgagor
shall file with HUD:
(i) Annual audited financial
statements in accordance with the
guidance below;
(ii) Quarterly unaudited financial
reports, within 40 days following the
end of each quarter of the mortgagor’s
fiscal year;
(iii) If requested by HUD, monthly
financial reports within 40 days
following the end of each month;
(iv) Board-certified annual financial
results within 120 days following the
close of the fiscal year (if the annual
audited financial statement has not yet
been filed with HUD) and at such other
times as HUD may designate on a caseby-case basis; and
(v) Such other financial and
utilization reports as HUD may require.
(c) Audits. (1) Not-for-profit
organizations shall conduct audits in
accordance with the Consolidated Audit
Guide for Audits of HUD Programs
(Handbook 2000.04) and OMB Circular
A–133 (Audits of states, local
governments, and nonprofit
organizations).
(2) For-profit organizations shall
conduct audits in accordance with the
Consolidated Audit Guide for Audits of
HUD Programs (Handbook 2000.04).
(d) Changes in accounting policies.
The annual audited financial statements
shall identify any changes in accounting
policies and their financial effect on the
balance sheet and on the income
statement.
(e) Compliance reporting. The
mortgagor shall instruct the auditor of
the annual financial statement to
include in its report an evaluation of the
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67557
mortgagor’s compliance with the
Regulatory Agreement.
(f) Books of management agents. The
books and records of management
agents, lessees, operators, managers, and
affiliates, as they pertain to the
operations of the hospital, shall be
maintained in accordance with
Generally Accepted Accounting
Principles (GAAP) or Governmental
Accounting Standards and shall be open
and available to inspection by HUD,
after reasonable prior notice, during
normal office hours, at the hospital or
other mutually agreeable location. Every
contract executed on behalf of the
hospital with any of the aforesaid
parties shall include the provision that
the books and records of such entities
shall be properly maintained and open
to inspection during normal business
hours by HUD at the hospital or other
mutually agreeable location.
(g) Medicare cost reports. Upon
request, the mortgagor shall provide to
HUD a copy of the Medicare Cost Report
most recently submitted to the Centers
for Medicare and Medicaid Services (an
agency of the Department of Health and
Human Services), along with related
financial documents.
§ 242.59 Inspection of facilities by
Commissioner.
The mortgaged property (including
buildings and equipment) and the
books, records, and documents relating
to the operation of the physical facilities
of the hospital shall be subject to
inspection and examination by HUD or
its authorized representative at all
reasonable times.
§ 242.61
Management.
The mortgagor shall provide for
management of the hospital in a manner
satisfactory to HUD.
(a) Contract Management. The
mortgagor shall not execute a
management agreement or any other
contract for management of the hospital
without HUD’s prior written approval.
Any management agreement or contract
shall contain a provision that it shall be
subject to termination without penalty
and with or without cause, upon written
request by HUD addressed to the
mortgagor and management agent.
(b) Principals. HUD shall have the
authority to require that any principals
of the mortgagor, including but not
limited to board members of a corporate
entity, be removed, substituted, or
terminated for cause upon written
request by HUD addressed to the
mortgagor.
(c) Employees. HUD shall have the
authority to require that any key
management employees of the
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mortgagor (as defined and determined
solely by HUD) be terminated for cause
upon written request by HUD addressed
to the mortgagor.
(d) Procedures upon receipt of request
under paragraphs (a) through (c) of this
section. Upon receipt of such requests
under paragraphs (a) through (c) of this
section, the mortgagor shall
immediately terminate said
management agreement, principals, or
employees within the shortest
applicable period HUD determines
appropriate and shall make
arrangements satisfactory to HUD for
ongoing proper management of the
hospital.
§ 242.62
Releases of lien.
The mortgagor shall not sell, dispose
of, transfer, or permit to be encumbered
any security property without the prior
approval of the lender and
Commissioner, subject to thresholds or
such other standards as HUD may
establish for the approval requirement.
Where there is a partial release of lien,
the lender must make a determination,
subject to prior review and approval by
HUD, that the remaining or replacement
property subject to the first lien
provides adequate security for the
remaining principal indebtedness.
§ 242.63
leasing.
Additional indebtedness and
The mortgagor shall not enter into any
long-term debt, short-term debt
(including receivables or line of credit
financing), equipment leases, or
derivative-type transactions, except in
conformance with policies and
procedures established by HUD.
jlentini on PROD1PC65 with RULES2
§ 242.64
Current and future property.
All current or future property
(including personalty) of the mortgagor
on or off mortgaged real estate (except
that specifically restricted by donors or
specifically excluded by HUD) will be
considered as part of the HUD-insured
hospital and subject to all provisions of
the HUD regulatory agreement. All
equipment acquired by the hospital
following initial endorsement and at
any time during the term of the loan
shall become subject to the lien of the
security agreement and any Uniform
Commercial Code Financing Statements
filed pursuant to the security agreement,
unless the mortgagor specifically
requests and HUD, for good cause,
approves subordination of the lien of
the insured mortgagee on specific
personalty for specific periods of time.
The first lien on the realty (as defined
in the regulatory agreement and as
identified in the security instrument)
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cannot be subordinated in whole or in
part.
§ 242.65
Distribution of assets.
The Commissioner shall establish
financial thresholds and procedures for
the distribution of surplus cash and
other assets. Surplus cash that meets the
definition in 24 CFR 242.1, or cash that
has been expressly approved for
distribution by HUD, may be distributed
to other organizations formally affiliated
with the mortgagor, a parent
organization with which the mortgagor
is also affiliated, partners, or
stockholders, in accordance with those
financial thresholds and procedures set
forth in the regulatory agreement. Other
assets may be distributed to other
organizations formally affiliated with
the mortgagor, a parent organization
with which the mortgagor is also
affiliated, partners, or stockholders, in
accordance with those financial
thresholds and procedures set forth in
the regulatory agreement, and in
accordance with the release of lien
conditions in 24 CFR 242.62, if
applicable.
§ 242.66
Affiliate transactions.
Transactions with affiliates that are
arms-length are permitted as specified
in the Regulatory Agreement.
Transactions with affiliates that are not
arms-length are not permitted except
with the prior written approval of HUD.
§ 242.67 New corporations, subsidiaries,
affiliations, and mergers.
The mortgagor shall not establish,
develop, organize, acquire, become the
sole member of, or acquire an interest
sufficient to require disclosure on the
audited financial statements of the
mortgagor, in any corporation,
subsidiary, or affiliate organization
other than those with which the
mortgagor was affiliated as of date of
application, without the prior approval
of HUD. The mortgagor shall obtain
HUD’s written approval for all future
mergers.
Subpart H—Miscellaneous
Requirements
§ 242.68 Disclosure and verification of
Social Security and Employer Identification
Numbers.
The requirements set forth in 24 CFR
part 5, regarding the disclosure and
verification of Social Security Numbers
and Employer Identification Numbers,
and Employer Identification Numbers
by ‘‘applicants for and participants in’’
assisted mortgage and loan insurance
and related programs, apply to this
program.
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§ 242.69
Transfer fee.
Upon application for review of a
transfer of physical assets or the
substitution of mortgagors, a transfer fee
of 50 cents per thousand dollars of the
outstanding principal balance of the
mortgage shall be paid to HUD. A
transfer fee is not required if both
parties to the transfer transaction are
not-for-profit or public organizations.
§ 242.70
Fees not required.
The payment of an application,
commitment, inspection, or reopening
fee shall not be required in connection
with the insurance of a mortgage
involving the sale by the Secretary of
any property acquired under any section
or title of the Act.
§ 242.72
Leasing of hospital.
Leasing of a hospital in its entirety is
prohibited. Notwithstanding this
prohibition, any proposal in which
leasing of the entire facility is a factor
due to state law prohibitions against the
mortgaging of health care facilities by
state entities shall be considered on a
case-by-case basis. Also, leasing of a
hospital that has an existing Section
242-insured loan is permitted if HUD
determines that leasing is necessary to
reduce the risk of default by a
financially troubled hospital.
§ 242.73 Waiver of eligibility requirements
for mortgage insurance.
The Secretary may insure under this
part, without regard to any limitation
upon eligibility contained in this
subpart, any mortgage assigned to him
or her in connection with payment
under a contract of mortgage insurance,
or executed in connection with a sale by
him or her of any property previously
insured under this part and acquired
subsequent to a claim.
§ 242.74
Smoke detectors.
Each occupied room must include
such smoke detectors as are required by
law.
§ 242.75
Title requirements.
In order for the mortgaged property to
be eligible for insurance, HUD shall
determine that marketable title thereto
is vested in the mortgagor as of the date
the mortgage is filed for record. The title
evidence shall be examined by HUD and
the endorsement of the mortgage note
for insurance shall be evidence of its
acceptability.
§ 242.76
Title evidence.
Upon insurance of the mortgage, the
mortgagee shall furnish to HUD a survey
of the mortgage property, satisfactory to
HUD, and a policy of title insurance
covering the property, as provided in
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paragraph (a) of this section. If, for
reasons HUD considers to be
satisfactory, title insurance cannot be
furnished, the mortgagee shall furnish
such evidence of title in accordance
with paragraph (b) or (c) of this section
as HUD may require. Any survey, policy
of title insurance, or evidence of title
required under this section shall be
furnished without expense to HUD. The
types of title evidence are:
(a) A policy of title insurance issued
by a company and in a form satisfactory
to HUD. The policy shall name as the
insureds the mortgagee and the
Secretary of Housing and Urban
Development, and their successors and
assigns, as their respective interests may
appear. The policy shall provide that
upon acquisition of title by the
mortgagee or the Secretary, it will
continue to provide the same coverage
as the original policy, and will run to
the mortgagee or the Secretary, as the
case may be.
(b) An abstract of title satisfactory to
HUD, prepared by an abstract company
or individual engaged in the business of
preparing abstracts of title, accompanied
by a legal opinion satisfactory to HUD
as to the quality of such title, signed by
an attorney-at-law experienced in the
examination of titles.
(c) A Torrens or similar title
certificate.
§ 242.77
Liens.
jlentini on PROD1PC65 with RULES2
The hospital must be free and clear of
all liens other than the insured
mortgage, except that the property may
be subject to a lien as provided by terms
and conditions established by HUD, as
follows:
(a) An inferior lien made or held by
a federal, state, or local government
instrumentality;
(b) An inferior lien required in
connection with a supplemental loan
insured pursuant to section 241 of the
Act;
(c) An inferior or superior lien on
equipment as may be approved in
connection with an equipment leasing
program approved by HUD;
(d) An inferior or superior lien on
accounts receivable as approved by
HUD as collateral for a line of credit or
other borrowing by a hospital insured
under this part that has extraordinary
needs such as cash flow difficulties; or
(e) Similar liens otherwise approved
by HUD.
§ 242.78 Zoning, deed, and building
restrictions.
The project when completed shall not
violate any material zoning or deed
restrictions applicable to the project
site, and shall comply with all
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applicable building and other
governmental codes, ordinances,
regulations, and requirements.
§ 242.79 Environmental quality
determinations and standards.
Requirements set forth in 24 CFR part
50, ‘‘Protection and Enhancement of
Environmental Quality,’’ 24 CFR part
51, ‘‘Environmental Criteria and
Standards,’’ and 24 CFR part 55,
‘‘Floodplain Management,’’ governing
environmental review responsibilities
(as applicable) and any additional
environmental standards, reviews, or
determinations required by HUD apply
to this program.
§ 242.81 Lead-based paint poisoning
prevention.
Requirements set forth in 24 CFR part
35 apply to this program.
§ 242.82
Energy conservation.
Construction, mechanical equipment,
and energy and metering selections
shall provide cost-effective energy
conservation in accordance with
standards established by HUD.
§ 242.83
Debarment and suspension.
The requirements set forth in 24 CFR
part 24 apply to this program.
§ 242.84 Previous participation and
compliance requirements.
The requirements set forth in 24 CFR
part 200, subpart H, apply to this
program.
§ 242.86 Property and mortgage
assessment.
The requirements set forth in 24 CFR
part 200, subpart E, regarding the
mortgagor’s responsibility for making
those investigations, analysis, and
inspections it deems necessary for
protecting its interests in the property
apply to these programs.
§ 242.87
Certifications.
Any agreement, undertaking,
statement, or certification required by
HUD shall specifically state that it has
been made, presented, and delivered for
the purpose of influencing an official
action of the FHA, and of HUD, and may
be relied upon by HUD as a true
statement of the facts contained therein.
§ 242.89
Supplemental loans.
A loan, advance of credit, or purchase
of an obligation representing a loan or
advance of credit made for the purpose
of financing improvements or additions
(including the refinancing of any
indebtedness incurred in connection
with the early commencement of work
on such improvements or additions,
subject to the requirements of §§ 242.15
and 242.45) to a hospital covered by a
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67559
mortgage insured under this section of
the Act or for a Commissioner-held
mortgage, or equipment for a hospital,
may be insured pursuant to the
provisions of section 241 of the Act and
under the provisions of this part as
applicable and such additional terms
and conditions as established by HUD.
See subpart B of 24 CFR part 241 with
respect to the contract of mortgage
insurance for all loans insured under
section 241 of the Act. See 24 CFR part
241, subpart C, for energy
improvements.
§ 242.90 Eligibility of mortgages covering
hospitals in certain neighborhoods.
(a) A mortgage financing the repair,
rehabilitation, or construction of a
hospital located in an older declining
urban area shall be eligible for insurance
under this subpart, subject to
compliance with the additional
requirements of this section.
(b) The mortgage shall meet all of the
requirements of this subpart, except
such requirements (other than those
relating to labor standards and
prevailing wages or environmental
review) as are judged to be not
applicable on the basis of the following
determinations to be made by HUD.
(1) That the conditions of the area in
which the property is located prevent
the application of certain eligibility
requirements of this subpart.
(2) That the area is reasonably viable,
and there is a need in the area for an
adequate hospital to serve low and
moderate income families.
(3) That the mortgage to be insured is
an acceptable risk.
(c) Mortgages complying with the
requirements of this section shall be
insured under this subpart pursuant to
section 223(e) of the National Housing
Act. Such mortgages shall be insured
under and be the obligation of the
Special Risk Insurance Fund.
§ 242.91 Eligibility of refinancing
transactions.
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:
(a) Principal amount. The principal
amount of the refinancing mortgage
shall not exceed the lesser of:
(1) The original principal amount of
the existing insured mortgage, or
(2) The unpaid principal amount of
the existing insured mortgage, to which
may be added loan closing charges
associated with the refinancing
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jlentini on PROD1PC65 with RULES2
mortgage, and costs, as determined by
HUD, of improvements, upgrading, or
additions required to be made to the
property.
(b) Debt service rate. The monthly
debt service payment for the refinancing
mortgage may not exceed the debt
service payment charged for the existing
mortgage.
(c) 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
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Insurance Fund, taking into
consideration the outstanding insurance
liability under the existing insured
mortgage, and the remaining economic
life of the property.
(d) Minimum loan amount. The
mortgagee may not require a minimum
principal amount to be outstanding on
the loan secured by the existing
mortgage.
§ 242.92
Minimum principal loan amount.
A mortgagee may not require, as a
condition of providing a loan secured by
a mortgage insured under this part, that
the principal amount of the mortgage
exceed a minimum amount established
by the mortgagee.
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§ 242.93
Amendment of regulations.
The regulations in this subpart may be
amended by HUD at any time and from
time to time, in whole or in part, but
such amendment shall not adversely
affect the interests of a mortgagee or
lender under the insurance on any
mortgage or loan already insured, and
shall not adversely affect the interests of
a mortgagee or lender on any mortgage
or loan to be insured on which HUD has
issued a commitment to insure.
Dated: October 24, 2007.
Brian D. Montgomery,
Assistant Secretary for Housing—Federal
Housing Commissioner.
[FR Doc. E7–22406 Filed 11–27–07; 8:45 am]
BILLING CODE 4210–67–P
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| File Type | application/pdf |
| File Title | Document |
| Subject | Extracted Pages |
| Author | U.S. Government Printing Office |
| File Modified | 2007-11-28 |
| File Created | 2007-11-28 |