Here’s a fun conversation starter for lenders, borrowers, and attorneys who regularly work with HUD-insured multifamily loans and healthcare facilities: If HUD had a list of ten commandments for getting a HUD-insured loan, what would be the number one commandment?
Most professionals in the HUD-insured lending universe would probably place the requirement for “first lien” at or near the top of the Ten Commandments list. Simply put, you cannot close a HUD-insured loan unless you can demonstrate that the mortgage on that HUD-insured loan takes priority over any other liens on the property. Title insurance companies provide insurance to help us demonstrate first lien status and fulfill this commandment.
HUD requirements, however, aren’t always set in stone. A notable exception to the first lien requirement is the Supplemental Section 241(a) Loan, which stems from Section 241(a) of the National Housing Act. The 241(a) program is the odd one out among HUD loan programs because, unlike almost all other HUD-insured loans commonly offered, 241(a) loans are junior loans. To qualify as 241(a) (that is to sayadditional), there must be a senior loan, and that senior loan must be a loan guaranteed by HUD or held by HUD.
So why would a multifamily or qualified nursing home owner consider a 241(a) loan? Multi-Family Accelerated Processing (MAP) 2021 from HUD To guide states that a Section 241(a) loan is “intended to maintain the competitiveness of the project, extend its economic life, and finance the replacement of obsolete equipment.” A common way for an owner to make a project more competitive with a 241(a) loan is to expand the project’s footprint. For example, a qualified nursing home owner can use a 241(a) loan to add dedicated support units for Alzheimer’s disease or dementia. Similarly, a multifamily property owner can use an additional HUD-insured 241(a) loan to add an apartment building to an undeveloped building.
The underwriting considerations that go into a 241(a) loan are beyond the scope of this article. The discussion below offers an attorney’s perspective on some salient features of the 241(a) program and outlines some of the nuances of documentation, distinguishing between multifamily and healthcare 241(a) loans where applicable.
Initial and final closings
As mentioned above, supplemental Section 241(a) loans are typically used to finance physical improvements to an existing HUD-insured project. As a result, the 241(a) loan closing process is more akin to the 221(d)(4) program (HUD’s program for multifamily new construction and substantial rehabilitation (NC/SR)) than the 223 program. (f) (HUD Refinancing Program Loan Program), with an initial close for the first drawdown of loan proceeds and a final close for the final drawdown. The typical NC/SR suite (construction contract, construction loan contract, etc.) will apply.
Documentation in general
241(a) transactions require documentation that, while largely adhering to standard HUD templates, includes certain adjustments to reflect the loan’s subordinate status.
For multifamily 241(a) loans, HUD has not released a dedicated set of official documents under Section 241(a). However, the HUD closing attorney assigned to a 241(a) loan should be able to provide some sample 241(a) loan documents upon request. Document revisions required for the 241(a) program are not considered “substantial changes” under the MAP Guide and therefore are generally not subject to the multi-level agency review that would otherwise be required. .
Fortunately, HUD’s Office of Residential Care Facilities (ORCF) has released OMB-approved forms that apply specifically to health care facility supplemental loan transactions. These forms are available here.
Whether Davis-Bacon wages apply to physical labor funded by the 241(a) loan depends on the nature of the HUD-insured or HUD-owned senior loan. If the Senior Loan is a New Construction/Substantial Rehabilitation Loan, prevailing wage requirements will apply to the work financed by the Supplemental Loan. In contrast, if the senior loan is insured under 223(f), Davis-Bacon does not apply and salary provisions in effect in the closing documents may be waived in accordance with the MAP guide.
Cross faults – a one-way street
241(a) loan documents must contain cross-default clauses, so that a default on the Senior Loan triggers a default on the Supplemental Loan. Defaults on the Supplemental Loan, however, do not automatically create a Default on the Senior Loan, as the standard HUD loan documents used for first mortgages do not contain cross-default clauses.
With respect to multi-family transactions, the MAP Guide specifies that a Section 241(a) loan must coincide with the Senior Loan if there are 25 or more years remaining in the Senior Loan. If there are less than 25 years remaining in the senior loan, the additional loan can have a maximum duration of 40 years, but not more than 75% of the remaining economic life of the project.
In healthcare, ORCF Handbook 232 has the same general requirement that the junior loan coincides with the senior loan, but it does not offer exceptions to the general requirement based on the number of years remaining on the senior mortgage or the percentage of the remaining economic life of the facility. Instead, the ORCF dictates a minimum 241(a) mortgage term of 10 years (10 years) and allows junior mortgages to have terms longer than the remaining term of the senior loan only when “otherwise approved by HUD.”
Added improvements — Potential complications
When proceeds from the 241(a) loan are used to add improvements to the project, the borrower and lender must consider the impact of the addition on the senior loan. If the addition is within the limits of the legal description of the property contained in the senior loan documents, these documents may not require modification. Improvements should be covered by the broad definition of “mortgaged property” in senior loan documents and therefore form part of the security for that loan.
However, if the addition of the borrower involves the acquisition of property adjoining the parcel currently insured for the senior loan, the parties will need to amend the senior loan documents to include a revised legal description encompassing the original property and the new property. Additionally, when the Section 241(a) transaction proceeds to initial closing, the parties will be required to obtain an updated Senior Loan Title Policy reflecting the expanded legal description and ensuring that the Senior Mortgage remains a first lien on the entire property.
The senior lender may be different from the junior lender
The MAP guide contemplates transactions where the 241(a) lender and primary lender are not the same. To avoid the possibility of default under the first mortgage, the MAP Guide requires the first lender to provide written consent to the 241(a) transaction. It is perhaps unsurprising that this requirement applies even when the first lien lender and the second lien lender are the same.
Refinance a project with a 241(a) mortgage
Refinancing a project subject to a 241(a) mortgage may require special care to maintain the correct lien priority of mortgages. For example, if the owner wanted to pay off his existing senior loan with a 223(a)(7) loan while leaving his subordinated 241(a) loan in place, the parties would need to sign and record a subordination agreement to make the 241(a) lien subordinate to 223(a)(7) lien. HUD does not have a standardized form of subordination agreement for this scenario (multifamily and health care subordination agreement forms require repayment strictly from excess cash, while 241 loans (a ) require regular monthly payments). The parties should therefore work with HUD to create an acceptable alternative subordination document.
Conversely, if the homeowner wished to refinance his 241(a) mortgage with a 223(a)(7) loan without paying off his first mortgage, no changes to the documents for the first loan would be necessary, as these documents normally do not acknowledge the existence of the loan. a subordinated debt. However, if the owner later decides to repay his senior loan with a 223(a)(7) loan, the 241(a) loan documents would have to be amended to change all references to the senior loan, so that the senior loan is identified as the 223(a)(7) loan, not the loan being repaid.
Suffice it to say, it makes the life of the lender’s board much easier when senior and junior loans are repaid with a single 223(a)(7) loan or with two 223(a)(7) loans that close simultaneously.
HUD’s 241(a) program, in departing from the first lien requirement that applies to the rest of HUD’s programs, involves special legal and underwriting considerations that may make the closing of loans under the program more labor intensive than the typical loan insured by HUD. Lenders, borrowers, and the attorneys who represent them are well advised to develop at least a passing familiarity with 241(a), the odd man out among HUD’s lending programs that offers existing HUD projects a unique way to boost marketing.