1 223(f) Underwriting 101 The Office of Residential Care Facilities U.S. Department of Housing and Urban Development Eastern Lenders Conference Philadelphia, PA March 13 & 14, 2013

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3 223(f) Refinancing or Purchase Susan Gosselin, Workload Manager Tom McMillan, Workload Manager Tracy Shepherd, Senior Account Executive Mike Peeler, Senior Construction Manager Susana Araoz, Housing & Healthcare Finance

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7 Lender Narrative Template Do Not Omit Sections—if N/A explain why Consistency of Numbers:  Executive Summary  Relevant Narrative Sections  Firm Commitment & Firm Commitment Exhibits Explain any Deviations from Third Party Reports (no older than 180 days) Identify Risk Factors & Mitigation

8 Loan Term Useful & Economic Life (Marketability)  Aged, without updates?  3-4 Bed wards?  Communal bathrooms?  Institutional Feel?

9 Updated Financials Dated within 90 days, if not, use ORCF Excel template to update revenue, occupancy, expenses, payor mix, NOI T-12 financial data is preferable Current data departing from underwritten levels – provide explanation and/or mitigation with submission

10 Value & LTV Aggressive Valuation Historical vs. Estimated NOI Rates/Payor Mix Expenses Occupancy Prospective? Stabilization at Concluded NOI Inappropriate Cap Rates

11 Underwritten NOI Not Supported by Historical NOI Negative Trend in Occupancy, Payor Mix and/or NOI NOI jumping dramatically (Why? Sustainable?) Lender Narrative must fully discuss Prefer some history at near underwritten levels.

12 Underwritten NOI Not Supported by Historical NOI Tough sell for ORCF Loan Committee Propose Risk Mitigation:  Initial Operating Deficit and/or Debt Service Reserve  Cap Rate must reflect additional risk of prospective income. Possible Reduction of Requested Loan Amount.

13 Common Environmental Concerns Mitigate or Resolve prior to submitting application:  Asbestos  Lead-Based Paint  SHPO  Floodplains  AST’s

14 Project Capital Needs Assessment (PCNA) Statement of Work What’s New and Different?  HUD.gov (March 17, 2011, version) vs.  Draft Section 232 Guide, version Suggestions to Improve Submissions Replacement Reserves

15 Accessibility Matrix for Section 232 Most Current Version, dated December 5, 2012, (Published with December 19, 2012, Blast) Summary of Applicability for Purchase / Refinance Loans Programmatically Required Repairs vs. Recommended Repairs

16 Participants Review You might have a great kitchen, but do you have a Chef that can use it.

17 Participants Review – Credit/ Character Mortgagor Operator Principals/Parent Entity Management Agent Experience Credit History Financial Stability Other Facilities Previous Participation Review the Parent

Reviews Significant delays in processing continue because of form errors. Follow instructions carefully for paper 2530s.  TINs/SSNs must match!  Schedule A BPRS registration – Required for paper 2530s. Loans cannot proceed to Loan Committee without 2530 approval.  Active flags must be resolved

19 Why APPS is LEAN Reduces HUD’s review burden from hours to minutes Insures Business Partner Registration complete Significantly decreases errors and increases security of TIN’s and SSN’s Allows applicant to see and address HUD Flags before 2530 submission.

20 Important APPS Reminders A Baseline is NOT a 2530 submission “ Edit Certification ” in APPS is NOT a 2530 submission Inspection Scores do NOT automatically update on the participant’s list Previous Participation experience does NOT carry over from iREMS

21 Participants Review – Character Operating Experience  Length of time  Other facilities owned/operated  Type (SNF/ALF/MC/ILU?)  Size & Average Occupancy Levels  CMS Ratings  Locations  Other FHA-insured facilities

22 Participants Review – Character Evaluate 3 years State Surveys  “G” tag citations  Instances of actual harm or immediate jeopardy  Open findings  Patterns of repeat findings/systemic deficiencies  CMS Star Rating, Team TSI risk analysis report  Special Focus Facilities

23 Care Issues Low star ratings or patient care issues need full discussion/ explanation/ mitigation. TSI risk ratings Risk Management Plans Escrows are not adequate mitigation for care issues

24 Master Lease If contemplated, describe the terms, lease payments, all parties/properties involved, renewal provisions, etc. If no master lease is contemplated, describe why. HUD Lease Addendum must be attached to the master lease.

25 A/R Financing Ensure the AR lender is experienced in providing AR financing. List all facilities (name, location, FHA or non-FHA) within the AR line. AR aging:  Max AR loan not exceeding 85% of Medicaid & Medicare account receivables less than 120 days.  Less than 30% of Medicaid & Medicare account receivables over 90 days old.

26 A/R Financing Terms & Conditions Mechanisms for Operator receipts, disbursements and control of operator funds. Collateral/Security Permitted Uses & Payment Priorities Costs

27 PLI Must comply with HUD Notice H years of loss history If policy covers 50+ facilities, HQ review/approval (along with actuarial study) is required. Must explain any claims over $35K, open claims, or any history indicating patterns.

28 Eligible Debt – Seasoning > 2 years old = eligible debt. < 2 years – lender must determine no cash out to mortgagor or principals to be eligible IOI Purchase/Partner Buyout – not considered eligible if < 2 years

29 Eligible Debt – Other Recorded Indebtedness Mechanic's Liens; Tax Liens; Must not be a result of personal obligations of the borrower Evidence of payoff or subject to Surplus Cash Note

30 Eligible Debt – Unrecorded Debt Directly connected with the project. Supported by documentation from the mortgagor. Lender must verify that the obligation is directly connected to the project. Examples include:  Indebtedness incurred in making needed improvements and betterments to the property.  Indebtedness incurred or advances made to cover operating deficits.

31 Eligible Debt – Other Eligible Costs Examples of other eligible costs associated with paying off the eligible debt are:  Reasonable delinquent and accrued interest,  Reasonable prepayment penalties on the mortgage,  Bond defeasance penalties are NOT eligible  Recording, release, and re-conveyance fees,  Documentation or processing fees.  Swap Fees

32 Allocating Debt Pooled Debt:  Facility specific release price or debt allocation stated in current loan documents  If no allocation specified in loan documents, allocate based on appraised values  Review all allocated debt, address other assets such as land or other business Clear discussion of allocation basis Lender must make good faith effort to assure “no cash out” rule is enforced.

33 New Documents Lender Narrative MILC (new a) – Maximum Insurable Loan Calculation Firm Commitment Regulatory Agreements

34 Questions