Navigating Potential Pitfalls Associated With HUD Regulatory Agreements

William S. Vanos 407-418-6278 Direct

William S. Vanos
407-418-6278 Direct

By Bill Vanos It is not unusual for buyers in senior housing transactions to assume that any restrictions associated with the existing financing for a facility will terminate when that financing is terminated.  Unfortunately, that is not always the case, particularly when that financing is through, or guaranteed by, governmental entities such as the Department of Housing and Urban Development (“HUD”) and those restrictions are in the form of regulatory agreements.  While in our experience most regulatory agreements do indeed terminate when the HUD-backed financing is satisfied, we have encountered regulatory agreements that survive the satisfaction of the associated debt. Depending on the nature of the obligations set forth in the regulatory agreement, the survival of the agreement can present significant challenges for the buyer of senior housing facilities.  The regulatory agreements may contain requirements that the operator of the facility specifically market, or set aside a particular number of units for rental, to low income residents, which potentially  impacts the profitability of the facility.  The agreements may also contain certain record keeping and reporting requirements associated with those marketing and rental obligations, adding to the operating costs of the facility.  In addition, the regulatory agreements sometimes contemplate that if the low-income requirements are not satisfied, the rental income associated with the number of units that should have been marketed or rented to low income individuals could be disgorged from the facility owner.  Further compounding this problem is the fact that a successor owner may be subject to liability for its predecessor’s failure to comply with the regulatory agreement. Negotiation of proper representations in your purchase agreement, making the review of regulatory agreements a priority early in the life of a transaction, confirming that your seller has complied with the terms of those regulatory agreements and confirming that your contemplated operator can conform with those obligations going forward are some steps that you can take to avoid incurring significant due diligence costs in pursuing a transaction that may  ultimately be derailed by a predecessor’s failure to comply with regulatory agreements.

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