1. Operator & Management Agent Analysis Handbook Chapter 8

2. Why so many Operator & Management Agent requirements? Critical to the success of the project over the life of the mortgage. Two Goals: – Assure Prudent Operations so mortgage will be paid timely and fully. – Provide excellent Resident Care.

3. Operators

4. Definition of an Operator The legal entity licensed by the applicable state licensing authority to “operate” a particular healthcare project. In certain jurisdictions, the state licensing authority may name more than one entity on the project operating license. These entities are considered an Operator.

5. Operator Requirements Must be licensed as the project Operator by the state. Must be a single-asset entity. Must possess all powers necessary and incidental to operating the healthcare project.

6. Typesof Operators Types of Operators

7. Owner/Operator When the same entity is both Borrower and Operator, the same entity signs: – Healthcare Regulatory Agreement-Borrower, Form HUD- 92466-ORCF; – Healthcare Regulatory Agreement-Operator, Form HUD- 92466A-ORCF (in addition to Borrower Reg Agreement); – Security Instrument, Form HUD-94000-ORCF; – Operator Security Agreement, Form HUD-92323-ORCF. – Both the Opinion of Borrower’s Counsel, Form HUD- 91725-ORCF and the Opinion of Operator’s Counsel, Form 92325-ORCF are also required.

8. Lessee Operator Operator Leases the Facility from the Borrower HUD requires that the operating lease between the Borrower and Operator conform to HUD Program Obligations. Incorporates the Operating Lease Addendum, Form HUD-91116-ORCF, which ensures that the Operator is held accountable for all business and healthcare services and related cash flows.

9. Non-Lessee Operator Entity is subject to Operator requirements when: – Operator, rather than leasing the project, contracts with the Borrower to operate the project for a negotiated fee (“Operating Agreement”, “Management Agreement”). – Management Agent is the co-licensee. – Other similar circumstances.

10. Non-Lessee Operator Contract between the Borrower and Operator requires ORCF approval. HUD ORCF enforces the Operator’s responsibilities via the Healthcare Regulatory Agreement-Operator.

11. Non-Lessee Operator Management Agent may be considered an Operator by ORCF if any of the following apply: – the entity’s name appears on the state-issued facility operating license; – the entity holds the Provider Agreements with CMS; – the entity contracts to provide patient services (Admissions Agreement); or – the entity holds the state awarded Certificate of Need (if applicable).

12. Operator Firm Application Exhibits Organization Chart Organizational Documents Resume/Explanation of Qualifications APPS/2530 Submission Consolidated Certification Credit Report Financial Statements Operating Lease & Addendum

13. Operating Lease Requirements Lease payments must be sufficient to: – enable the Borrower to meet debt service and impound requirements – enable the Operator to properly maintain the project and cover operating expenses. – minimum annual lease payment must be at least 1.05 times the sum of the annual principal, interest, mortgage insurance premium, Reserve for Replacement (R4R) deposit, property insurance and property taxes.

14. Operating Lease Requirements Minimum operating lease term is five years; longer term may be required if ORCF is relying on the Operator for experience. Lease must provide a description of the responsibilities of the Borrower and Operator including: – payment of real estate taxes; maintenance of building; capital improvements; replacement of equipment; property insurance; and fidelity bond coverage.

15. Operating Lease Requirements All ORCF leases must incorporate by reference the HUD-required lease addendum Additional Master Lease Requirements. Operators subleasing the facility from a master tenant are subject to additional operating lease requirements to be discussed in the Master Lease session.

16. Operator Regulatory Agreement Highlights HUD will allow Operators sufficient time to correct problems, however, in instances where the permits/approvals are at substantial or imminent risk, HUD may intervene immediately. HUD can require a consultant to assist with improving operations in rare instances where the Operator is not able to correct problems.

17. Operator Regulatory Agreement Highlights The Operator must notify HUD of threats to permits/approvals. Operators are expected to maintain sufficient working capital in the project. Other new requirements: – Risk Management Program; – Professional Liability Insurance; – Quarterly and YTD Financials.

18. Management Agents

19. Definition of a Management Agent Directs the day-to-day functions as a contracted agent for either the Borrower or the Operator. Performs its duties under the oversight of either the Borrower or Operator. Limited in powers and project authority to the levels expressed in a negotiated “management agreement.”

20. Management Agents Management Agent must be approved by ORCF prior to participation; Management agreement must be approved by HUD prior to execution. Regulated by the management agreement and the terms of the Management Certification- Residential Care Facility (Form HUD-9839- ORCF).

21. Management Agent Firm Application Exhibits Organization Chart Organizational Documents Management Certification (HUD-9839-ORCF) Management Agreement Resume/Evidence of Qualifications APPS/2530s Consolidated Certification Credit Report on Agent and Sampling of Other Business Concerns

22. Management Agreement Requirements The Management Agreement must include the following: – Scope of Services – Project Authority Limitations – Required HUD Provisions – Length/Term of the Agreement – Management Fee

23. What is an acceptable Management Fee? A Management Agent is typically paid a negotiated fee for services provided, often in an amount based on a percentage of gross receipts of the project. Fees must be sufficiently described in the management agreement. Must be in line with the market fees for similar services. Lender is to make a recommendation of a reasonable fee.

24. Management Certification Form HUD-9839-ORCF New form specifically for 232 projects Describe fees Management Agent Must Comply with Program Obligations Management Agent must notify HUD of major issues that put the project at risk HUD provisions for termination of the Management Agent

25. Consultants

26. Definition of a Consultant Consultants make recommendations and have no contractual or other authority to commit or exact resolutions of their own. Consultants advise on matters within specific areas of expertise for a specific time frame.

27. Consultants Consultants or contractors may be engaged to provide assistance and/or guidance in specialized areas. For Example: Hiring of legal counsel, which are services clearly beyond the traditional scope of managerial expertise. For Example: Hiring of a highly specialized skill in a narrow area of project operations, such as pharmacy, psychiatry, rehabilitation management and case coding.

28. Consultants A consultant may be considered to be a Management Agent by ORCF if they have project commitment authorities or are providing a wide scope of managerial services over an extended time period. If considered a Management Agent the entity must be reviewed and approved as a Management Agent.

29. Operator & Management Agent Qualifications

30. The Lender must ensure that the proposed Operator and/or Management Agent have the business and healthcare expertise to market and operate the proposed project. This includes knowledge of the intended clientele, their specific health-related and hospitality needs, and the best approach to meeting these needs.

31. Qualifications ORCF is seeking assurance that the Operators and Management Agents are committed to the long-term success of the project and have the requisite experience to operate and manage the project.

32. Qualifications At least one principal or entity of the proposed Operator or Management Agent must have a proven track record of successful operations in the type of project proposed (e.g. Nursing Home, Assisted Living, Memory Care or Board & Care).

33. Qualifications Principals must have at least 3 years of experience participating in multiple properties. Longer operating histories may be required for participants with only one project. Experience must include developing, marketing, operating, and, as applicable, lease-up of the type of project proposed.

34. Evidence of Qualifications Provide Evidence of Experience: Project examples including project name, type of care provided, location, and unit/bed count. Projects Adding Units: include year opened and key operating metrics (fill pace, occupancy, net operating income margins), and specific responsibilities for the management and operation of the project.

35. Lender Underwriter Review Goal: To assure that Operator and/or Management Agent is capable of operating the project in a responsible and effective manner. Experience Track Record Operational History Creditworthiness and Financial Strength Previous HUD Experience Duties and Responsibilities

36. Lender Underwriter Review State Survey Performance & CMS Star Rating Staffing Levels Project Administrator Marketing, Leasing and (if applicable), Relocation Plan Past Performance with IOI Contractors Management Fee Fidelity Bond Coverage Additional Documentation

37. Lender Narrative Example Experience/Qualifications >

38. Insufficient “The operator is a newly formed entity. The key experience of the operator is Mr. Smith. He is a CPA and has over 25 years of residential healthcare experience.” OR “Loan Committee already knows them, so we don’t need to explain their experience.”

39. Acceptable “The key experience of the operator is Mr. Smith. He is a CPA and has over 25 years of experience owning and operating SNF and ALF projects. Mr. Smith currently operates 10 SNFs and 5 ALFs all located in the same state as the subject. The SNFs have an average CMS Star Rating of 3.5, with no “G” or higher tags in the past 3 years. Two of these projects are FHA insured projects. The FHA insured projects are X and X. Mr. Smith purchased the subject project in 2000, and has successfully owned and operated it ever since.”

40. Acceptable when Adding Units to a Market The previous slide plus Mr. Smith has successfully developed and leased-up 6 skilled nursing facilities. See the below table: Project Name & Location/ HUD Insured? Year Open ed Number of Beds/Unit s Fill PaceOccupancyResident Care XYZ Project, XYZ City, State; HUD Insured XXX-43XXX 2008100/100100 total beds; 20 preleases and 6 beds per month Reached 93% occupancy 13 months after opened; This was 6 months ahead of schedule 5 Star CMS rating; no “G” or higher tags

41. ORCF Underwriter Review Focuses on Three Areas: 1.Experience of the Operator/Management Agent; 2.Quality of Care Provided; 3.Compliance with HUD requirements. ORCF will review the Lender’s recommendation and application documentation and will make the final determination to accept or reject the proposed Operator and/or Management Agent.

42. ORCF Underwriter Review Management Agent Forms: Management Agreement and Management Certification meet program requirements and are consistent with the application. Management Fee: Review Lender’s determination regarding the reasonableness of the management fee & approve the Management Certification if the management fee is determined to be acceptable.

43. ORCF Underwriter Review State Surveys (SNFs and ALFs with State Surveys): The ORCF underwriter will review state surveys for the last three years and the Lender’s explanation for projects where there are instances of actual harm and/or immediate jeopardy, and for projects with open findings. TEAM TSI Review (SNFs only): ORCF has contracted with TEAM TSI to provide a survey outcome reporting dashboard that captures health inspection reports and flags special focus facilities or watch list designations.

44. Questions