The U.S. Department of Housing and Urban Development (HUD) has formalized an approval process for borrowers with existing HUD loans that request consent for accounts receivable (AR) financing. HUD Notice H 08-09 provides specific guidance allowing FHA-insured financing and third-party AR financing to co-exist if certain conditions are met.

The guidelines impact Section 232 health care and housing borrowers and Section 241 hospital borrowers. They were distributed to HUD's Office of Multifamily Housing and its Office of Insured Healthcare Facilities in November.

An AR Loan usually takes the form of a working capital loan secured by Medicare, Medicaid, long-term care insurance and private pay accounts receivable, and is provided by a qualified bank or other financial institution (AR Lender) to the operator’s parent/corporate entity, owner/operator, or operator/lessee. Where the FHA loan is secured by a mortgage on the property and its assets, an AR loan is secured by these future governmental and nongovernmental reimbursements. These payments are often made 30 to 90 days after services are rendered, and an AR loan is designed to provide liquidity for day-to-day operations.

HUD's primary consideration in whether to give consent will be whether the AR financing will facilitate, rather than jeopardize, the borrower’s ability to meet its financial obligations. Generally, HUD will not permit AR to be financed at more than 85 percent of its value, and the AR should not be aged greater than 120 days, though this limit is flexible if there are extenuating circumstances. The facility must also be able to maintain an acceptable debt service coverage ratio.

When submitting a request for consent, HUD will likely require the following information from the borrower, among other items:

• A narrative and detailed financial analysis addressing proposed terms and conditions, security, fees and interest rate for the AR loan
• An AR loan agreement between the borrower and the AR lender
• A narrative and/or diagram describing the legal structure of the mortgagor and the operating entity. A chart or description of the collection and flow of funds from the Operator’s receipt of AR to the AR Lender and the Operator’s uses of the AR loan proceeds also will be helpful.
• Any potential conflicts of interest among the principals, FHA mortgagee, depository banks, general contractor, management agent, consultants or other related parties
• Deposit control agreements for both governmental and nongovernmental receivables. These documents outline the depository bank’s receipt and disbursement instructions for government reimbursements and private pay/private insurance payments.
• An Intercreditor Agreement that expresses the priority of the collateral for the AR and FHA lenders, their respective rights to that collateral, and the remedies to one or both if the AR Loan or FHA Mortgage were to go into default.

If you have any questions on AR loans and HUD programs, please contact us.