Assisted Living Facilities Under Section 232; Final Rule DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

SUMMARY: This rule amends HUD regulations to implement statutory

authority to insure assisted living facilities for the care of frail

elderly persons. The authorizing statute is section 511 of the Housing

and Community Development Act of 1992. The rule also expands current

regulations to include the refinancing of conventional (non-FHA

insured) nursing homes, intermediate care facilities, assisted living

facilities or board and care homes under section 232, pursuant to

section 223(f) of the National Housing Act, and to insure additions to

such projects. Finally, the rule makes certain conforming changes

required by the Housing and Community Development Act of 1992 and makes

other minor technical changes that remove ambiguities or reflect long-

standing Departmental policy.

EFFECTIVE DATE: December 29, 1994.

FOR FURTHER INFORMATION CONTACT: Linda D. Cheatham, Director, Office of

Insured Multifamily Housing Development, 451 Seventh Street, SW,

Washington, DC 20410-0500, telephone: (202) 708-3000; the

telecommunications device for the deaf (TDD) telephone number is (202)

708-4594. (These are not toll-free numbers.)

SUPPLEMENTARY INFORMATION:

I. Background

Currently, under section 232 of the National Housing Act (NHA), and

the accompanying regulations at 24 CFR part 232, the Department insures

mortgages for nursing homes, intermediate care facilities, and board

and care homes. Section 511 of the Housing and Community Development

Act of 1992 (Pub. L. 102-550, approved October 28, 1992) (1992 HCD Act)

amends section 232 to also authorize FHA mortgage insurance for

``assisted living facilities.'' In compliance with section 511, this

rule revises HUD regulations at 24 CFR part 232 to make assisted living

facilities for the care of the frail elderly eligible for mortgage

insurance.

Under the NHA and this rule, the term ``assisted living facility''

means a public facility, proprietary facility, or facility of a private

nonprofit corporation that:

(1) Is licensed and regulated by the State (or if there is no State

law providing for such licensing and regulation by the State, by the

municipality or other political subdivision in which the facility is

located);

(2) Makes available to residents supportive services to assist the

residents in carrying out activities of daily living such as bathing,

dressing, eating, getting in and out of bed or chairs, walking, going

outdoors, using the toilet, laundry, home management, preparing meals,

shopping for personal items, obtaining and taking medications, managing

money, using the telephone, or performing light or heavy housework, and

which may make available to residents home health care services, such

as nursing and therapy; and

(3) Provides separate dwelling units for residents, each of which

may contain a full kitchen or bathroom, and includes common rooms and

other facilities appropriate for the provision of supportive services

to residents of the facility.

Under the NHA and this rule, the term ``frail elderly'' has the

same meaning as that term has in section 802(k) of the Cranston-

Gonzalez National Affordable Housing Act (NAHA). Section 802(k)(8)

defines ``frail elderly'' as meaning an elderly person who is unable to

perform at least three activities of daily living adopted by the

Secretary. (The term ``elderly person'' means a person who is at least

62 years of age. The term ``activity for daily living'' in turn means

an activity regularly necessary for personal care and includes bathing,

dressing, eating, getting in and out of bed and chairs, walking, going

outdoors, and using the toilet.)

An assisted living facility may be free-standing, or part of a

complex that includes a nursing home, an intermediate care facility, a

board and care facility or any combination of the above. However, in

compliance with section 511 of the 1992 HCD Act, this rule does not

authorize mortgage insurance for an assisted living facility unless the

Secretary determines that the level of financing acquired by the

mortgagor and any other resources available for the facility are

sufficient to ensure that the facility contains dwelling units and

facilities for the provision of supportive services; the mortgagor

provides satisfactory assurances that no dwelling unit in the facility

will be occupied by more than one person without the consent of all

such occupants; and the appropriate state licensing agency for the

state, municipality or other political subdivision in which the

facility is or is to be located provides adequate assurances that the

facility will comply with any applicable standards and requirements for

such facilities.

Section 511 of the 1992 HCD Act also amends section 223(f) of the

NHA. In accordance with section 511, this rule authorizes the

refinancing of an existing assisted living facility. This rule also

expands the section 232 program to include the refinancing of

conventionally financed projects under section 223(f) of the National

Housing Act. Section 409 of the Housing and Community Development Act

of 1987 amended section 223(f) of the NHA to cover such refinancing of

the debt of an existing nursing home, existing intermediate care

facility, or existing board and care facility (collectively referred to

as ``residential care facility''), or any combination of the above.

However, after section 409 of the Housing and Community Development

Act of 1987 was enacted, the Department limited its implementation to

existing FHA-insured residential care facilities. (See August 31, 1988

Federal Register at 53 F.R. 33735). HUD's decision not to implement

section 409 in its entirety was based on the fact that HUD had no

experience in underwriting existing residential care facilities. By

limiting the insurance for refinanced transactions to currently FHA-

insured projects with a known track record (annual inspections,

availability of audited financial statements, etc.), the Department

could more adequately protect the General Insurance Fund.

However, the House Conference Report for the NAHA (H.R. 101-943,

101st Cong. 2d Sess, at 524) emphasizes Congress's intent that the

Department fully implement section 409 to include conventional (non-FHA

insured) projects. Accordingly, the Department is now expanding the

program to include mortgages for the purchase and refinancing of

existing, conventionally financed residential care facilities under

section 232 pursuant to section 223(f).

To implement other statutory changes, this rule makes projects

consisting of an addition to an existing (non-FHA insured) nursing

home, board and care facility, intermediate care facility, or assisted

living facility eligible for mortgage insurance under section 232 of

the NHA. Also, the rule increases the loan-to-value ratio for private

nonprofit mortgagors from 90 percent to 95 percent, and makes certain

conforming changes with respect to fire safety equipment for assisted

living facilities.

This rule also makes a number of technical amendments to part 232.

Specifically, it moves the definition of substantial rehabilitation

from Sec. 232.902(b) to the definitional section of the regulations

(Sec. 232.1), and revises the definition of substantial rehabilitation

to reflect the requirement that rehabilitation must involve two or more

major building components. The current wording ``more than one building

component'' could be erroneously interpreted.

Also, the word ``additions'' is removed from the definition of

substantial rehabilitation. The placement of ``additions'' in

Sec. 232.902(b) of the existing regulations has caused confusion

because it incorrectly suggests that the cost of an addition to an

existing building can be used in calculating the 15 percent of value

criterion. The term ``additions,'' as used in Sec. 232.902(b) was

intended to mean an addition of a new project element in a residential

care facility, such as a whirlpool bath, safety railing, etc. The

Department wants to emphasize that these revisions to the definition of

substantial rehabilitation do not reflect a policy change, but are

technical changes which reflect the Department's long-standing

administrative policy.

Finally, the rule increases the loan-to-value ratio for private

nonprofit mortgagors from 85 percent to 90 percent for the purchase or

refinance of a residential care facility which does not involve

substantial rehabilitation.

II. Public Comment on Proposed Rule

On February 3, 1994, the Department published a proposed rule (59

FR 5157) entitled ``Assisted Living Facilities Under Section 232''. A

total of 22 written comments were received from the public on this

proposal. What follows is a listing of the significant issues raised,

or recommendations made, in these comments along with HUD's response to

each.

80 Percent Medicaid Payor Requirement

Five commenters noted that current regulations for new construction

and substantial rehabilitation of nursing homes under section 232

require that 80 percent of all beds be underwritten at Medicaid bed

rates. They argued that, while this requirement may be appropriate when

projecting potential bed mix for a proposed nursing home, HUD should

not use the same requirement for an existing property.

The commenters argue that many nursing homes are economically sound

with a private-pay population of much more than 20 percent. They

therefore suggest that, when underwriting the refinancing of an

occupied nursing home, the Department assumes that the payor mix

remains as it is presented. If HUD artificially assumes an 80 percent

Medicaid payor rate, it will artificially lower the property's income

and may produce an artificially reduced and unworkable first mortgage.

The commenters argue that a major reason for expanding current

regulations to include the refinancing of existing conventionally

financed nursing homes and related facilities for the elderly is to

reduce the unnecessarily high cost of borrowing from conventional

conduits and Real Estate Investment Trusts (REITs). A reduction in

borrowing cost can help reduce the overall cost of health care in this

country but unnecessarily conservative underwriting assumptions will

work to thwart this goal.

HUD's Response

The processing provision relative to the use of 80-85 percent of

the Medicaid rate contained in the administrative instructions is not

regulatory, and thus it is not part of the rule. In establishing the

maximum mortgage amount, HUD uses the 80-85 percent of the actual or

average Medicaid rate. This may reduce the maximum amount of mortgage

that HUD will insure since the project's income will be based upon

Medicaid rates. However, it is a conservative approach necessary to

protect the general insurance fund. If HUD had to take back the

mortgage, there would be a stable income stream to meet the debt

service requirements. This does not mean that the facility must change

its payor mix to be eligible for mortgage insurance. The Medicaid

provisions currently apply to new construction and substantial

rehabilitation. The Department is in the process of determining what

parameters will be used in the administrative instructions for

establishing the maximum mortgage amount for existing non-HUD insured

projects. The 80 percent Medicaid rule does not apply to board and care

homes and assisted living facilities.

Loan-to-Value Ratio

Five commenters support the Department's proposal to distinguish

between the underwriting of projects owned by profit-motivated and

nonprofit entities. They note, however, that existing facilities

involve fewer construction and leasing risks than the FHA-insured loan

programs for new construction which have more liberal underwriting

standards. Consequently, they recommend that HUD permit loans to cover

acquisition or refinancing costs up to 90 percent of value for profit-

motivated borrowers and up to 95 percent of value for nonprofit

borrowers. Similarly, some commenters also recommend that profit-

motivated and nonprofit borrowers be limited to maximum loans supported

by no more than 90 percent and 95 percent of net income, respectively.

HUD's Response

HUD has determined the loan-to-value for nonprofits for refinance

or acquisition to be 90 percent of HUD's estimate of value. For profit-

motivated mortgagor entities, the value limit shall not be in excess of

85 percent of HUD's estimate of the project. This limitation is the

same as the long-standing requirement for section 207/223(f) existing

rental housing projects. The maximum debt service mortgage limitation

will be 85 percent of net projected project income with the nonprofit

amount at 90 percent.

Licensure Requirements

Six commenters noted that the proposed rule defines assisted living

facilities, in relevant part, as ``a public facility, proprietary

facility, or facility of a private nonprofit corporation that is used

for the care of the frail elderly, and that: (1) is licensed and

regulated by the State or if there is no State law providing for such

licensing and regulation by the State, by the municipality or other

political subdivision in which the facility is located.''

These commenters observed that many states and localities do not

have licensure requirements or regulations for assisted living or board

and care facilities and in such cases it would be helpful to know what

documents would be acceptable to HUD in allowing project financing to

go forward.

One commenter recommended that language should be added to the rule

stating that section 232 will insure the financing of all features not

specified in this rule, but required by state licensure. If, for

example, a particular state's licensure requirement mandates complete

kitchens in each resident's unit, this feature should be covered under

the section 232 insurance program.

HUD's Response

Section 511 of the 1992 HCD Act requires licensure and regulation

by the appropriate State agency (or if there is no state law providing

for state licensure and regulation, by the municipality or other

political subdivision in which the facility is located). HUD requires

that the State comply with section 1616(e) of the Social Security Act

(Keys Amendment) for both board and care homes and assisted living

facilities. This means that there is an agency that is responsible for

licensure and standards. Licensure implies that the facility is

authorized to operate in the State. Standards involve monitoring

activities such as inspection for compliance and enforcement. HUD

understands that State regulations differ from State to State.

Therefore, HUD is flexible with respect to the existing State

regulations for board and care homes and assisted living facilities, as

long as such facilities meet the basic HUD requirements. In today's

rule, assisted living facility units may contain full kitchens,

kitchenettes, no kitchens or a combination depending on the design and

market. HUD will strive to accommodate the State's regulations whenever

possible without jeopardizing underwriting standards and other

requirements. In order for an assisted living facility to be endorsed

for mortgage insurance, it must be in compliance with all applicable

Federal, State and local laws.

One Person Occupancy Issue

Three commenters urged HUD to clarify Sec. 232.7(b) of the proposed

rule so that the resident consent requirement with respect to multiple

occupancy is only required with respect to the dwelling unit in

question. Under the proposed rule, some occupants of an assisted living

facility might believe that the consent of all project residents is

required, a standard virtually impossible to meet.

HUD's Response

The Department agrees that this provision requires clarification.

The final rule has been changed to reflect the requirement that only

the consent of the occupant(s) of the dwelling unit subject to the

multiple occupancy is needed to authorize the multiple occupancy. The

regulatory text in Sec. 232.7(b) of today's final rule reads, ``[n]o

dwelling unit in the facility will be occupied by more than one person

without the consent of all occupant(s) of such dwelling unit.''

Facility Requirements

Section 232.39 of the proposed rule requires that each assisted

living facility have a central kitchen and group dining facilities.

Eight commenters suggested that HUD modify this requirement so that

each facility either have a central kitchen or demonstrate its capacity

to provide hot meals to all residents. Such a modification would enable

facilities to utilize outside catering services or food service

provision from a near-by facility or institution. These commenters

believe this flexibility could be particularly beneficial to those

facilities serving low- and moderate-income residents.

Some of these commenters also made similar comments in connection

with the full bathroom requirement in Sec. 232.39 of the proposed rule.

HUD's Response

In the final regulations, an assisted living unit may contain a

kitchenette or a full kitchen, but is not required to do so. However,

the facility must still provide space for a main kitchen and dining

room. The facility must provide central dining to accommodate three

meals per day. The facility may contract with another facility for food

service. The meals may be catered and served in the dining room

depending on the State licensure standard. If the facility proposes to

contract catered meals and no central kitchen is desired, space for a

central kitchen must still be provided in the event that HUD must

foreclose and operate the facility.

In regard to the full bathroom requirement in the proposed rule,

HUD has changed Sec. 232.39 of the final rule to reflect the statutory

provision that a full bathroom is an option, but not a requirement.

Section 202 and 221(d)(3) Elderly Projects

One commenter suggested that the Department consider authorizing

mortgage insurance for the addition of assisted living units to Section

202 and Section 221(d)(3) elderly housing projects, provided that the

existing indebtedness is refinanced as part of the transaction. This

commenter argued that the resultant facilities would provide an

internal feeder source for the new assisted living units, and would be

the first facilities to offer a continuum of care for the lower-income

elderly.

HUD's Response

The Department has no statutory authority to do as the commenter

suggested. The NHA provides separate requirements for elderly rental

housing and residential health care facilities. A project eligible

under one Section of the NHA (e.g. an elderly project under

Sec. 221(d)(4)) would not necessarily qualify as an assisted living

facility under section 232. Moreover, section 202 is implemented under

the Housing Act of 1959 (not the NHA), and contains different statutory

requirements.

HUD currently has a continuum of care under the section 232

program. The delivery of care includes skilled nursing facilities (sub-

acute care), intermediate care facilities (ICF/MR), board and care

homes, and assisted living facilities. In addition, a day care center

may be added if it is in conjunction with one of the above facilities.

An assisted living facility and board and care home could be the

logical place for the frail elderly who are currently residing in

elderly housing that does not offer supportive services to individuals

who need assistance with activities of daily living. Unfortunately,

many state Medicaid payment systems do not pay for coverage that would

offer continuity of care. Most section 232 board and care homes are

market rate.

Three Year Requirement

The proposed rule states that (1) the project must not require

substantial rehabilitation and (2) three years must have elapsed from

the date of completion of construction or substantial rehabilitation of

the project, or from the beginning of occupancy, whichever is later, to

the date of application for insurance.

One commenter believes that this ``three year requirement'' needs

clarification since it is not uncommon for existing projects that were

originally constructed several years ago to subsequently add a modest

number of beds. In many such instances, the cost of adding these beds

would not be a major expenditure (compared to the total project value).

As currently proposed, the rule is unclear as to whether it is possible

to process a section 223(f) application for a project that has added

additional beds within three years of the application date.

Another commenter urged the Department to modify both its section

223(f) multifamily mortgage program and this rule by replacing the

requirement that eligible existing rental housing projects be at least

three years old with a requirement that projects must have achieved an

occupancy level that produces enough income to pay all expenses,

including debt service. Such a change would end the exclusion of sound

and worthwhile projects from the section 223(f) program.

HUD's Response

The section 207/223(f) program for purchase and refinance of

existing rental projects requires that projects be completed for at

least three years. This has been carried over to the Section 232/223(f)

program. The three year rule in a section 223(f) refinance transaction

means that the project must be in operation for at least three years

after completion of construction or substantial rehabilitation prior to

filing an application. For section 232 projects, this would include any

additions.

Definition of Frail Elderly

Six commenters argued that the rule's definition of a frail elderly

person as one unable to perform at least three activities of daily

living is unduly restrictive. They recommended that the requirement be

changed either to: (1) Reduce the daily activities from three to one,

(2) rely on state licensure to provide assurance that the program will

not be used to refinance other types of facility, or (3) instead of

requiring that a person be ``unable to perform'' certain activities

provide that the person ``may require assistance with'' certain

activities.

HUD's Response

The definition of ``frail elderly'' is statutory. It is included in

section 802(k) of NAHA. HUD does not have the authority to decrease the

number of activities of daily living (ADL) for assisted living

projects. Board and care homes are not limited to the frail elderly

population and may be used for other types of occupants, such as

developmentally disabled persons who are unable to perform one or two

activities of daily living.

Age and Disability Qualifications; Income Qualifications

One commenter stated that assisted living facilities should be

considered a need driven product, and for this reason, market

feasibility should focus on the population aged 75 or older

experiencing problems with one or more ADLs. The Senate Aging

Committee, the Administration on Aging, and the Health Care Financing

Administration all publish statistics on the percentage of elderly

persons aged 75 or older that experience problems with one or more

ADLs. This methodology for quantifying the number of age- and

disability-qualified elderly in a particular market area may

underestimate the number of qualified individuals by excluding younger

persons with physical or cognitive impairments. Nevertheless, the

commenter believes it is a sound method for quantifying the primary

market, and would require only slight adjustments to account for usage

by younger physically or mentally impaired persons. Such a method would

rarely result in positive feasibility determinations for projects in

excess of 100 units.

The commenter also suggested that, in determining the income-

eligible population for a proposed assisted living facility with a

given monthly rental charge, the Department should take into account

that elderly persons who are driven by need to move into such a

facility are willing to spend up to 65 percent of their income for the

monthly charge. The traditional affordability standard of ``30 percent

of income for rent'' does not apply, as the rental charge would include

shelter, meals, and additional supportive services. Also, it is quite

common that family members will provide financial support for relatives

in assisted living facilities. This further supports the argument that

income eligibility should be established on the basis of the 65-

percent-of-income-for-rent standard.

HUD's Response

The Department does not get involved in income eligibility nor does

the program include a 30-percent-of-income-for-rent standard. From an

underwriting standpoint, the processing takes into consideration the

demographics, licensed facilities, level of competition, rates,

physical settings, service component, occupancy, income sources, type

of clientele, staffing and location. HUD market analysis considers the

type of project and the services offered.

In addition to the above, the Department looks at the developer's

expertise in developing, operating and managing board and care homes

and assisted living facilities. The experience and qualifications of

the mortgagor entity will be reviewed along with the sponsor's

marketing plan. It was HUD's intention that assisted living facilities

would be of modest design and not appeal to the limited market as

luxury retirement projects. Assisted living facilities are not designed

to provide comprehensive nursing care.

Medicaid Reimbursement

One commenter noted that many states are developing Medicaid waiver

programs to provide reimbursement for care provided to low-income

elderly residing in assisted living facilities. Currently, Medicaid

reimbursement is only available for persons who are Medicaid-eligible

and nursing home eligible (i.e., low-income persons who have problems

with three or more ADLs), who will reside in licensed assisted living

facilities. The commenter believes that the Department should take

steps to ensure that the Section 232 program and state Medicaid waiver

programs can be combined to finance affordable assisted living

facilities. In particular, the commenter believes that the Department

should consider waiving market feasibility tests for projects, or

portions of projects, that have been certified for participation in the

state's Medicaid waiver program.

HUD's Response

Medicaid is a State administered program and HUD has no control

over the State's reimbursement payment system. Each State budgets the

amount of money to be spent on Medicaid and chooses the services that

will be Medicaid eligible. In 1989, the State of Oregon chose to pay

for assisted living services with Medicaid monies. Even if states

adopted the Oregon plan, only a small portion of a particular project

would be Medicaid certified. The resident would still have to be

eligible for Medicaid based on medical need.

The President's Health Security Act would retain current Medicaid

nursing home benefits while making improvements in the home and

community-based services for assisted living facilities. Due to high

cost of nursing home care, the board and care home and assisted living

facility may be less expensive and offer an alternative to nursing

homes. States may request a State Medicaid waiver to use Medicaid

monies for home and community-based services or implement a plan to use

Medicaid monies to pay for residential care services. However, HUD

still has a responsibility to ensure that insured projects are

marketable and that the Department's interests are protected in the

event of default.

III. Other Matters

A. Regulatory Flexibility Act

The Secretary in accordance with the Regulatory Flexibility Act (5

U.S.C. 605(b)), has reviewed and approved this rule, and in so doing

certifies that this rule does not have a significant economic impact on

a substantial number of small entities. Specifically, the rule expands

eligible projects for FHA mortgage insurance to include assisted living

facilities, and additions to existing projects, neither of which are

expected to have a significant economic impact on a substantial number

of small entities.

C. Environmental Impact

A Finding of No Significant Impact with respect to the environment

was made in accordance with HUD regulations at 24 CFR part 50, which

implement section 102(2)(C) of the National Environmental Policy Act of

1969, at the time of development of the proposed rule. The Finding

remains applicable to this final rule and is available for public

inspection during regular business hours in the Office of General

Counsel, the Rules Docket Clerk room 10276, 451 Seventh Street, SW.,

Washington, DC 20410.

D. Executive Order 12612, Federalism

The General Counsel, as the Designated Official under section 6(a)

of Executive order 12612, Federalism, has determined that the policies

contained in this rule will not have substantial direct effects on

states or their political subdivisions, or the relationship between the

Federal government and the states, or on the distribution of power and

responsibilities among the various levels of government. Specifically,

the rule is directed to owners of residential care facilities, and will

not impinge upon the relationship between the Federal Government and

State and local governments. As a result, the rule is not subject to

review under the order.

E. Executive Order 12606, The Family

The General Counsel, as the Designated Official under Executive

Order 12606, The Family, has determined that this rule does not have

potential for significant impact on family formation, maintenance, and

general well-being, and, thus, is not subject to review under the

order. No significant change in existing HUD policies or programs will

result from promulgation of this rule, as those policies and programs

relate to family concerns.

F. Regulatory Agenda

This rule is listed as item no. 1797 in the Department's Semiannual

Agenda of Regulations published on November 14, 1994, (59 FR 57632,

57655) in accordance with Executive Order 12866 and the Regulatory

Flexibility Act.

G. The Catalog of Federal Domestic Assistance program number is 14.129.

List of Subjects in 24 CFR Part 232

Fire prevention, Health facilities, Loan programs--health, Loan

programs--housing and community development, Mortgage insurance,

Nursing homes, Reporting and recordkeeping requirements.

Accordingly, 24 CFR Part 232 is amended as follows:

1. The authority citation for 24 CFR part 232 continues to read as

follows:

Authority: 12 U.S.C. 1715b, 1715w, 1715z(9); 42 U.S.C. 3535(d).

2. The heading of 24 CFR part 232 is revised to read as follows:

PART 232--MORTGAGE INSURANCE FOR NURSING HOMES, INTERMEDIATE CARE

FACILITIES, BOARD AND CARE HOMES, AND ASSISTED LIVING FACILITIES

3. Section 232.1 is amended by revising paragraph (j) and by adding

new paragraphs (m), (n), (o), and (p) to read as follows:

Sec. 232.1 Definitions.

* * * * *

(j) Project means a nursing home, intermediate care facility,

assisted living facility or board and care home, or any combination of

nursing home, intermediate care facility, assisted living facility or

board and care home, approved by the Commissioner under provisions

under this subpart. A project may include such additional facilities as

may be authorized by the Secretary for the nonresident care of elderly

individuals and others who are able to live independently but who

require care during the day.

* * * * *

(m) Assisted Living Facility means a public facility, proprietary

facility, or facility of a private nonprofit corporation that is used

for the care of the frail elderly, and that:

(1) Is licensed and regulated by the State or if there is no State

law providing for such licensing and regulation by the State, by the

municipality or other political subdivision in which the facility is

located;

(2) Makes available to residents supportive services to assist the

residents in carrying out activities of daily living such as bathing,

dressing, eating, getting in and out of bed or chairs, walking, going

outdoors, using the toilet, doing laundry, preparing meals, shopping

for personal items, obtaining and taking medications, managing money,

using the telephone, or performing light or heavy housework, and which

may make available to residents home health care services, such as

nursing and therapy;

(3) Provides separate dwelling units for residents, each of which

may contain a full kitchen or bathroom, and includes common rooms and

other facilities appropriate for the provision of supportive services

to residents of the facility.

(n) Elderly person means a person who is at least 62 years of age.

(o) Frail elderly person means an elderly person who is unable to

perform at least three activities of daily living. Activity of daily

living means an activity necessary on a regular basis for personal care

and includes bathing, dressing, eating, getting in and out of beds and

chairs, walking, going outdoors and using the toilet.

(p) Substantial rehabilitation consists of repairs, replacements

and improvements:

(1) The cost of which exceeds the greater of fifteen percent (15%)

of the Project's value after completion of all repairs, replacements,

and improvements; or

(2) That involve the replacement of two or more major building

components. For purposes of this definition, the term major building

component includes: roof structures; ceiling, wall, or floor

structures; foundations; plumbing systems; heating and air conditioning

systems; and electrical systems.

4. A new Sec. 232.7 is added to the end of the undesignated center

heading, ``APPLICATION AND CERTIFICATION'', in subpart A, to read as

follows:

Subpart A--Eligibilitiy Requirements

* * * * *

Application and Certification

* * * * *

Sec. 232.7 Additional requirements for assisted living facilities.

In the case of an assisted living facility, or any such facility

combined with any other home or facility, the Secretary shall not

insure any mortgage under this part unless:

(a) The Secretary determines that the level of financing acquired

by the mortgagor and any other resources available for the facility

will be sufficient to ensure that the facility contains the dwelling

units and facilities for the provision of supportive services in

accordance with Sec. 232.1(m);

(b) The mortgagor provides assurances satisfactory to the Secretary

that no dwelling unit in the facility will be occupied by more than one

person without the consent of all occupant(s) of such dwelling unit;

and

(c) The appropriate state licensing agency for the state,

municipality or other political subdivision in which the facility is or

is to be located provides such assurances as the Secretary considers

necessary that the facility will comply with any applicable standards

and requirements for such facilities.

5. Section 232.30 is revised to read as follows:

Sec. 232.30 Maximum mortgage amounts for new construction and

substantial rehabilitation.

The mortgage for a project involving proposed new construction or

substantial rehabilitation by a profit motivated mortgagor shall

involve a principal obligation not in excess of 90 percent of the

Commissioner's estimate of the value of the project, including

equipment to be used in the operation, when the proposed improvements

are completed and the equipment is installed. The mortgage for a

project involving proposed new construction or substantial

rehabilitation by a private nonprofit mortgagor shall involve a

principal obligation not in excess of 95 percent of such value,

including equipment.

6. Section 232.32 is amended by revising the section heading, the

introductory paragraph, and paragraphs (b) and (c) to read as follows:

Sec. 232.32 Adjusted mortgage amount--substantial rehabilitation

projects.

In addition to the limitations of Sec. 232.30, a mortgage having a

principal amount computed in compliance with the applicable provisions

of this subpart, and which involves a project to be substantially

rehabilitated, shall be subject to the following additional

limitations:

* * * * *

(b) Property subject to existing mortgage. If the mortgagor owns

the project subject to an outstanding indebtedness, which is to be

refinanced with part of the insured mortgage, the maximum mortgage

amount shall not exceed:

(1) The Commissioner's estimate of the cost of the repair or

rehabilitation; plus

(2) Such portion of the outstanding indebtedness as does not exceed

90 percent (95 percent for a private nonprofit mortgagor) of the

Commissioner's estimate of the fair market value of such land and

improvements prior to the repair or rehabilitation; or

(c) Property to be acquired. If the project is to be acquired by

the mortgagor and the purchase price is to be financed with a part of

the insured mortgage, the maximum mortgage amount shall not exceed 90

percent (95 percent for a private nonprofit mortgagor) of:

(1) The Commissioner's estimate of the cost of the repair or

rehabilitation; and

(2) the actual purchase price of the land and improvements, but not

in excess of the Commissioner's estimate of the fair market value of

such land and improvements prior to the repair or rehabilitation.

7. In Sec. 232.39, a new paragraph (c) is added to read as follows:

Sec. 232.39 Construction standards.

* * * * *

(c)(1) An assisted living facility shall be one or more free-

standing structures (architecturally independent of any other

structure), an entity of an existing structure such as a board and care

home, or connected to a main building or identifiable separate portions

of one or more free-standing structures containing not fewer than five

residential efficiency, one-bedroom or two-bedroom units. Residential

unit means a separate apartment or unit for one or more persons.

(2) An assisted living unit may contain a full bathroom and may

contain a kitchenette or a full kitchen depending on the design and

market. A kitchen is not required in each unit; however, the facility

must have areas for a central kitchen (adequate space, site and

building layout) and group dining facilities. The assisted living

facility or designated portion of the structure shall not contain any

nursing home or intermediate care beds, but may contain board and care

beds. In addition, assisted living facilities must meet State and local

licensing requirements, governmental building codes, and other

occupancy standards.

8. A new Sec. 232.42a is added to subpart A to read as follows:

Sec. 232.42a Additions to existing projects.

A mortgage which covers an addition to an existing project is

eligible for insurance under this part, provided that, if there is a

mortgage on the existing project, such mortgage must be refinanced

under this part. The mortgage amount for an addition in all cases shall

be determined under Sec. 232.30. If the existing project requires

substantial rehabilitation then the mortgage amount for refinancing the

existing facility shall be determined under Secs. 232.30 and 232.32. If

the existing project does not require substantial rehabilitation then

the mortgage amount for refinancing the existing facility shall be

determined under Sec. 232.903. The resulting determination for the

mortgage on the addition and the resulting determination for the

refinanced mortgage on the existing project must be blended and both

the addition and the existing project must be subject to the same

mortgage.

9. Section 232.89 is revised to read as follows:

Sec. 232.89 Reduction in mortgage amount.

If the principal obligation of the mortgage exceeds 90 percent (95

percent for a private nonprofit mortgagor) of the total amount as shown

by the certificate of actual cost plus the value of the land (the cost

shown by the certificate of actual cost in rehabilitation cases), the

mortgage shall be reduced by the amount of such excess prior to final

endorsement for insurance.

10. Section 232.90 is amended by revising the section heading, the

introductory paragraph, and paragraphs (b) and (c) to read as follows:

Sec. 232.90 Substantial rehabilitation projects.

In the event the mortgage is to finance substantial rehabilitation,

the mortgagor's actual cost of the substantial rehabilitation may

include the items of expense permitted by new construction in

accordance with this part and the applicable cost certification

procedure described therein will be required; provided such mortgage

shall be subject to the following limitations:

* * * * *

(b) Property subject to existing mortgage. If the insured mortgage

is to include the cost of refinancing an existing mortgage acceptable

to the Commissioner, the amount of the existing mortgage or 90 percent

(95 percent for a private nonprofit mortgagor) of the Commissioner's

estimate of the fair market value of the land and existing improvements

prior to the repair or rehabilitation, whichever is the lesser, shall

be added to the actual cost of the repair or rehabilitation. If the

principal obligation of the insured mortgage exceeds the total amount

thus obtained, the mortgage shall be reduced by the amount of such

excess, prior to final endorsement for insurance.

(c) Property to be acquired. If the mortgage is to include the cost

of land and improvements, and the purchase price thereof is to be

financed with part of the mortgage proceeds, the purchase price or the

Commissioner's estimate of the fair market value of land and existing

improvements prior to repair or rehabilitation, whichever is the

lesser, shall be added to the actual cost of the repair or

rehabilitation. If the principal obligation of the insured mortgage

exceeds the applicable 90 percent (95 percent for a private nonprofit

mortgagor) of the total amount thus obtained, the mortgage shall be

reduced by the amount of such excess prior to final endorsement for

insurance.

11. Section 232.500 is amended by revising the introductory text of

paragraph (c)(1), and paragraph (d), to read as follows:

Sec. 232.500 Definitions.

* * * * *

(c)(1) Fire safety equipment means equipment that is purchased,

installed, and maintained in a nursing home, intermediate care

facility, assisted living facility, or board and care home and that

meets the following standards for the applicable occupancy:

* * * * *

(d) Fire safety loan means any form of secured or unsecured

obligation determined by the Commissioner to be eligible for insurance

under this subpart and, in the case of an assisted living facility or a

board and care home, made with respect to such a home located in a

State which the Secretary has determined is in compliance with the

provisions of section 1616(e) of the Social Security Act.

* * * * *

12. Section 232.505 is amended by revising paragraph (b) to read as

follows:

Sec. 232.505 Application and application fee.

* * * * *

(b) Filing of application. An application for insurance of a fire

safety loan for a nursing home, intermediate care facility, assisted

living facility or board and care home shall be submitted on an

approved HUD form by an approved lender and by the owners of the

project to the local HUD office.

* * * * *

13. Section 232.615 is amended by revising paragraph (b) to read as

follows:

Sec. 232.615 Eligible borrowers.

* * * * *

(b) Also eligible as a borrower shall be a profit or nonprofit

entity which owns an assisted living facility or board and care home

for which HUD has determined that the installation of fire safety

equipment is approvable under the definition contained in

Sec. 232.500(c).

14. Section 232.901 is revised to read as follows:

Sec. 232.901 Mortgages covering existing projects are eligible for

insurance.

A mortgage executed in connection with the purchase or refinancing

of an existing project without substantial rehabilitation may be

insured under this subpart pursuant to section 223(f) of the Act. A

mortgage insured pursuant to this subpart shall meet all other

requirements of this part except as expressly modified by this subpart.

15. Section 232.902 is revised to read as follows:

Sec. 232.902 Eligible project.

Existing projects (with such repairs and improvements as are

determined by the Commissioner to be necessary) are eligible for

insurance under this subpart. The project must not require substantial

rehabilitation and three years must have elapsed from the date of

completion of construction or substantial rehabilitation of the

project, or from the beginning of occupancy, whichever is later, to the

date of application for insurance. In addition, the project must have

attained sustaining occupancy (occupancy that produces income

sufficient to pay operating expenses, annual debt service and reserve

fund for replacement requirements) as determined by the Commissioner,

before endorsement of the project for insurance; alternatively, the

mortgagor must provide an operating deficit fund at the time of

endorsement for insurance, in an amount, and under an agreement,

approved by the Commissioner.

16. Section 232.903 is amended by revising the first sentence in

the introductory text of paragraph (a), the first sentence in paragraph

(b), and the first sentence in the introductory text of paragraph (d)

to read as follows:

Sec. 232.903 Maximum mortgage limitations.

* * * * *

(a) Value limit. The mortgage shall involve a principal obligation

of not in excess of eighty-five percent (85%) for a profit motivated

mortgagor (ninety percent (90%) for a private nonprofit mortgagor) of

the Commissioner's estimate of the value of the project, including

major movable equipment to be used in its operation and any repairs and

improvements. * * *

* * * * *

(b) Debt service limit. The insured mortgage shall involve a

principal obligation not in excess of the amount that could be

amortized by eighty-five percent (85%) for a profit motivated mortgagor

(ninety percent (90%) for a private nonprofit mortgagor) of the net

projected project income available for payment of debt service. * * *

* * * * *

(d) Project to be acquired--additional limit. In addition to

meeting the requirements of paragraphs (a) and (b) of this section, if

the project is to be acquired by the mortgagor and the purchase price

is to be financed with the insured mortgage, the maximum amount must

not exceed eighty-five percent (85%) for a profit motivated mortgagor

(ninety percent (90%) for a private nonprofit mortgagor) of the cost of

acquisition as determined by the Commissioner.

* * * * *

Dated: November 21, 1994.

Nicolas P. Retsinas,

Assistant Secretary for Housing-Federal Housing Commissioner.

[FR Doc. 94-29362 Filed 11-28-94; 8:45 am]

BILLING CODE 4210-27-P