COMMITMENT TYPES, ESCROW, COST CERTIFICATION, AND COST SAVINGS IN 242/223(F) PROJECTS WITH LIMITED REHABILITATION AND IN 242/223(A)(7) PROJECTS WITH REPAIRS

Section 242.17 states that commitments for insurance upon completion should be issued for Section 242/223(f) projects in lieu of commitments for insurance of advances.  Appendix 6 of this handbook, “Refinancing FHA-Insured Hospital Loans,” states that for refinancing under 242/223(a)(7) or 242/223(f), insurance of advances is expected to be needed only in rare cases, and the alternative, insurance upon completion, will be used.  The use of insurance upon completion is an established process in 223(f) and 223(a)(7) projects in the Multifamily and Residential Care Facilities programs.  This Appendix provides clarifications of language in the regulations related to Commitment Types, Cost Certification, and Cost Savings for hospital loans insured under Sections 223(f) and 223(a)(7) of the Act. 

1. Commitment Type:  Guidance related to §242.17(a)(2) and §242.17(b).  Unless insurance of advances is specifically requested by the Mortgagee and approved by HUD, all 242/223(f) and 242/223(a)(7) insurance commitments shall be issued as Insurance Upon Completion. This clarification brings the Section 242 program in line with other FHA programs.  Further, this should provide indication to Mortgagees and Mortgagors that permanent loan placement is possible and expected with a 242/223(f) or 223(a)(7) commitment, requiring only one initial/final endorsement (a single “Endorsement”) as opposed to an Initial Endorsement and a Final Endorsement when insurance of advances is used.

2. Cost Certification: Inapplicability of §242.41 Certification of cost requirements, §242.42 Certification of actual cost, and Appendix 8, Part 1, Section 13 of this Handbook in relation to 242/223(f) and 223(a)(7).

The above-referenced sections and Appendix govern Cost Certification for two- endorsement (initial and final) Section 242 construction projects. Because a 242/223(f) or a 242/223(a)(7) is a permanent loan with only one Endorsement, the Cost Certification and Cost Savings processes for 242/223(f) projects that include Limited Rehabilitation and for 223(a)(7) projects that include repairs will be different, as described below.

Attestation of costs related to post-Endorsement Limited Rehabilitation or Repairs shall be made by the Mortgagor and Mortgagee as prescribed in HUD-92476A-OHF Escrow Agreement for Limited Rehabilitation for 242/223(f) or HUD-92476-OHF Escrow Agreement for Deferred Work for 223(a)(7), included in the commitment package and/or finalized at Endorsement. Additionally, as in other 223(f) and 223(a)(7) programs, attestation of costs may not require verification of an independent certified public accountant or independent public accountant as prescribed in §242.42(b) for traditional 242 two-Endorsement construction projects. 

More specifically, all 242/223(f) and 242/223(a)(7) projects will require submission of HUD-92205-OHF Borrower’s Certificate of Known Costs at Endorsement. This should attest to all known costs at Endorsement, such as the cost of the refinanced portion, lender fees, Mortgage Insurance Premium, and the amount escrowed to support post-Endorsement Limited Rehabilitation or Repairs.  As with other FHA programs, HUD may allow critical repairs to be executed pre-Endorsement. If approved, these costs shall be included in the certificate as well. An accountant’s opinion is not needed.

Most projects, however, will execute the work after the Endorsement.  As the work proceeds, the borrower requests payments of Escrow funds from the depositary institution, using HUD-92464-OHF Request for Approval of Advance of Escrow Funds.  This request is accompanied by HUD-92117-OHF Borrower’s Certification – Partial Completion of Project.  Following HUD approval, the depositary institution makes a disbursement from the Escrow. When all work is complete, the borrower must submit a HUD-92117-OHF Borrower’s Certification - Full Completion of Project.  If HUD finds the physical improvements to be satisfactory, the borrower must then submit a HUD-92330-OHF Borrower’s Certification of Actual Cost and a HUD-92330A-OHF Contractor’s Certification of Actual Cost.  These certifications require a CPA opinion if: (a) a cost plus construction contract was used, or (b) there is an identity of interest between the borrower and general contractor, or (c) a construction manager or design-build contractor provides a Guaranteed Maximum Price with savings returned to the owner, or (d) the cost of the non-equipment construction and repairs exceeds $5,000,000.

3. Application of cost savings: Inapplicability of §242.43 Application of cost savings. Finally, also in recognition of the single-endorsement 242/223(f) or 223(a)(7) process, the application of cost savings must be clarified for these types of projects. The Department understands that these projects will be placed as permanent loans with no opportunity for prepayment. Accordingly, any cost savings identified throughout the project shall not be used to reduce the principal balance of the loan.  Instead, the excess amount in the Escrow that was funded from Loan proceeds may be used for the following purposes: (a) to pay for additional project expenses approved by the Lender and HUD, the funds for which shall continue to be subject to the Escrow Agreement, in addition to further cost certification if Program Obligations so require, and/or (b) to fund the Mortgage Reserve Fund.   Therefore, HUD shall be extremely vigilant in its review and analysis of project cost documentation during underwriting of applications for insurance upon completion. It is imperative that applicants with these types of projects provide HUD detailed documentation supporting the costs to be incurred, per the Applicants Guide.

4. Figure 1 is a diagram of the process described above showing the documents used at each stage.