Before the HUD 232 LEAN program was implemented, loans were processed under MAP (Multifamily Accelerated Processing) or TAP (Traditional Application Processing) by the local HUD Field Office. Lean is only for FHA 232 applications. Non-232 loans are still processed by MAP or TAP.
HUD's LEAN Process
LEAN (or simply Lean) is not an acronym, but a method of processing HUD 232 applications. According to HUD, the HUD 232 LEAN process, “employs standardized work products and processes to obtain a consistent, timely result.” Some of the main Lean changes over the previous methodology are:
Standardized checklists, certifications, statements of work for third-party work, and lender templates for the application package.
Standardized punch-lists used by HUD staff in underwriting.
The removal of duplicate and unnecessary portions of the application process and requirements. For example, closing-related documents submitted with the Firm Application don’t need to be submitted later in the process as well.
Revised third-party appraisal requirements. Lean appraisals are market appraisals eliminating the need to use HUD forms.
No proprietary earnings carve out.
LEAN Application Processing
Borrowers cannot submit their HUD LEAN 232 applications directly. Only HUD LEAN lenders can submit applications. Using HUD’s Oracle Application Server Portal, lenders submit electronically to the ORCF in Washington, D.C. (the ORCF makes all funding decisions).
This electronic submission process gives the HUD underwriting team greater accessibility. As a result, electronic submission helps to expedite the LEAN 232 application submission process.
To minimize the time between Firm Commitment issuance and closing, HUD begins Legal review once the Firm Application is submitted. Lean applications are then signed off at three levels: the LEAN team, the ORCF, and Legal. Below is a brief outline of the Lean application approval process:
HUD Lean lender submits an application along with two hard copies. At the same time, Legal review begins.
The application is reviewed by a LEAN Team, including Architectural and Engineering, Environmental, Valuation, and Mortgage Credit.
LEAN team members approve and sign off on the application.
ORCF approves and signs off on the application then issues a Firm Commitment.
Legal review is finalized.
LEAN Guidelines and Requirements
The HUD LEAN 232 program has strict guidelines. Below are some of the most important requirements for qualifying properties:
Physical Examination of the Property: A third-party specialist evaluates the facility’s physical plant and systems to highlight capital improvement items and develop a reserve schedule. HUD does not place limits on facilities but does consider factors such as functional obsolescence and estimated useful life. If a property has extensive physical needs, it may qualify for the FHA 232 substantial rehabilitation program.
Compliance and Care Record: Includes state surveys and CMS (Centers for Medicare & Medicaid Services) ratings for skilled nursing facilities and assisted living facilities.
Formal Incident Reporting: HUD requires a formal software-based incident-reporting risk-management system for all facilities insured under the FHA 232 program (in-house or third-party).
Credit-related Factors: HUD examines the potential borrowers’ credit history, financial stability, relevant experience, and previous HUD/FHA participation.
Owner/ Operator History and Experience: HUD also looks at the status of other facilities held or managed by the operator, mortgagor, and other principals. Pertinent details include how long both the owner and operator have been in their roles at the facility. HUD borrowers can be single-facility owners or operators, but they must show a history of successful ownership and operation.
Quality of Candidates: HUD seeks outstanding candidates for the FHA 232 loans program. Applicants must show a combination of experience and financial commitment. For new construction loans, HUD has stricter requirements than loans on existing facilities. HUD especially examines a potential borrower’s previous experience developing similar properties along with owner capitalization and financial strength.
Special Review: For larger portfolios, HUD has special review requirements and requires master leases for three or more properties with the same ownership.
Specific HUD Requirements: Certain conditions and requirements may apply to individual properties which don’t apply to all FHA 232 financing projects. For example, HUD requires ADA compliance and has specific requirements for properties located in floodplains.
Interim Financing: Some borrowers may benefit from bridge loans to stabilize the facilities operations immediately after the purchase transfer of management.
In addition to all the above, FHA 232 senior housing financing projects must submit annual operational audits operations to both HUD and their lender. Also, owner/operators can distribute surplus cash twice annually. For some facilities, full or partial compliance with ADA and UFAS requirements may be required. Additionally, healthcare facilities must maintain adequate liability insurance.