December 22, 2008

**MORTGAGEE LETTER 08-42**

**TO: ALL MULTIFAMILY MORTGAGEES**

**SUBJECT:** Implementation of 24 CFR Parts 200 and 242, Revisions to
the Hospital Mortgage

Insurance Program: Final Rule \[Docket No. FR-4927-C-03\] RIN 2502-AI22

The purpose of this Mortgagee Letter is to provide clarification and
amplification of language in certain sections of the Final Rule where
HUD believes it would benefit program participants to have additional
guidance pending publication of a program Handbook.

[242.16 Applications, (a)(2) Operating margin and debt service coverage
ratio]{.underline}

For critical access hospitals that do not have three full years of
cost-based reimbursement, HUD's policy continues to be that they may
restate results as if they had been receiving cost-based reimbursement
for the full three years.

[242.28 Allowable costs for consultants]{.underline}

In cases where HUD has determined that the planning process was
unusually protracted, HUD will consider requests for waivers of the
two-year limitation, on a case-by-case basis. Requests must be
accompanied by documentation establishing a clear nexus between the
consulting cost and the project at hand.

242.33 Covenant for malpractice, fire, and other hazard insurance

In the final rule as amended, the final sentence of this section states:
"All coverage shall be acceptable to the mortgagee *or* HUD" (emphasis
added). The following provides more specificity concerning requirements
for maintaining, certifying, and determining acceptability of insurance:

The hospital shall maintain at all times liability, fire, hazard,
boiler, and vehicle insurance of a type and amount customary in the
health care industry and determined by an independent insurance
consultant(s) to be adequate to protect the interests of the hospital,
the mortgagee, and HUD. The fire and hazard insurance shall be for an
amount that is no less than the amount of the outstanding loan and shall
be acceptable to the mortgagee.

The hospital shall maintain at all times medical malpractice insurance
of a type and amount that is: (1) customary in the health care industry;
(2) determined by an independent insurance consultant to be adequate to
protect the interests of the Hospital, the mortgagee, and HUD; and (3)
acceptable to HUD.

The Hospital shall annually report and certify all of its insurance
coverages, including but not limited to: liability, fire, hazard,
boiler, vehicle, medical malpractice and D&O insurance. This report and
certification shall be submitted to HUD in conjunction with the filing
of the Hospital\'s annual audited financial statements. The mortgagee is
responsible for monitoring the Hospital\'s insurance policies to ensure
that coverage remains in force at all times.

[242.45 Early commencement of work, (b) Construction completed prior to
application]{.underline}

Subsection (b) of the Final Rule discusses the refinancing of debt for
structures that were constructed more than two years before application.
HUD believes that refinancing of structures completed less than two
years before application would be tantamount to "Insurance Upon
Completion", which HUD has not implemented in the Section 242 program.
"Structures" as referred to in Subsection (b) would include major
components such as buildings, new wings, additional floors, parking
garages, and power plants, that are typically major parts of a project
and are constructed with insured mortgage proceeds following application
review and commitment issuance.

Should a case arise in which exceptional circumstances create a need for
an application to be submitted within two years following the completion
of such structures, the potential applicant may request a waiver of the
two-year requirement in Subsection (b) in conjunction with the request
for a preliminary review under the provisions of Section 242.16(a)(4),
and HUD will review the merits of the waiver request.

Subsection (b) refers to "structures" and not to the various renovations
and repairs that occur from time to time at hospitals. Such renovations
and repairs do not make hospital financing ineligible for Section 242
insurance, and if the hospital completed them using borrowed funds prior
to filing a Section 242 application, that loan could be refinanced as
part of a Section 242 loan, regardless of how long before application
they were completed.

[242.49 Funds and finances: deposits and letters of credit, (a)
Deposits]{.underline}

Because of the number of cases in which the mortgagee is not the holder
of the Mortgage Reserve Fund, HUD is considering a temporary waiver of
the regulatory requirement in the last sentence of Subsection (a) that
deposits held in the Fund "shall be the responsibility of the
mortgagee". That waiver would apply to all such cases for a specified
period of time, pending an amendment to the final rule. In the interim,
HUD will consider case-by-case requests for waiver of this provision.

[242.50 Funds and finances: off-site utilities and streets]{.underline}

In the first sentence, an exception to the requirement for assurance of
completion is made for cases in which a municipality or other public
body has agreed to install utilities and streets without cost to the
mortgagor. However, this section does not address the situation in which
the work is funded by grants from federal, state, or other public
sources, to be disbursed during the construction period for the Section
242 project. In such a situation, the escrow will be required only until
the funds are made available to the project.

[242.52 Construction contracts]{.underline}

This section requires competitive bidding procedures under each type of
construction contract. This requirement may be satisfied as follows:

[Lump sum]{.underline}. The mortgagor must obtain competitive bids from
three or more sources.

[Construction management]{.underline}. The construction manager (CM) may
be selected competitively from three or more sources. However, if the CM
is selected without competition, then the CM must competitively bid the
subcontracts as acceptable to HUD.

[Design-build]{.underline}. The mortgagor must obtain competitive bids
from three or more sources. In cases where three competitive bids are
not received, HUD will consider requests to waive the regulatory
requirement of a competitive bidding procedure for design-build
projects. In connection with such a waiver, HUD may require an
independent consultant to report on the reasonableness of the cost.

[Other forms of contract]{.underline}. HUD will review other forms of
contract and associated procedures and will determine if they are
acceptable.

[242.53 Excluded contractors]{.underline}

The last sentence of subsection (a) requires owners to consult the
government-wide list of excluded contractors. This list is available on
the General Services Administration (GSA) website. For a new user, HUD
will provide directions to the mortgagor early in the pre-application
process. Also, HUD contacts will be provided in HUD's Preliminary Review
Letter under the provisions of 242.16(a)(4)(iii) so that owners can call
and receive assistance as necessary as they check on potential
contractors.

In cases where it is discovered that an excluded person has begun work,
HUD may grant an exception to allow the excluded person to continue with
the work so that insured advances may continue and the project may
proceed without interruption. In this case, instead of the usual
practice of cost certifying once at the conclusion of the project, the
contractor should be required to cost certify, and the material used and
workmanship performed should be subjected to quality review,
periodically during the remainder of the construction period.

Sincerely,

Brian D. Montgomery

Assistant Secretary for Housing-

Federal Housing Commissioner