1. Office of Residential Care facilities Atlanta, GA May 12, 2016 2016 SMAC Conference Corley Audorff Healthcare Account Executive, Office of Residential Care Facilities, HUD

2. ORCF Staffing Changes New staff from Seattle & Portland Offices – Wealth of experience/expertise from MF – Trained for ORCF – New Seattle/Portland Staff in each ORCF division An additional WLM team in Asset Management (7) – Volume per AE remains high 1 new underwriter 4 joining Wayne’s team – 2 appraisers and 2 environmental reviewers

3. PRODUCTION 2

4. Processing Times – Key Drivers 223f Underwriting – Average 74 days – Maximum 129 days, Minimum 21 days – Slows down (> 90 days) Environmental issues Lender delays Debt allocation – Expedites (< 35 days) Passed Decision Circuit – no appraisal review needed Complete/clean application package Clean environmental Low LTV, 5-star

5. 223f Application Trend

6. Processing Times – Key Drivers 223a7 Underwriting – Average 43 days – Maximum 134 days, Minimum 6 days – Slows down (> 90 days) TPA or change in operator required Low star rating Poor REAC score; DEC referrals – Expedites (< 35 days) Complete/clean application package 5-star

7. Processing Times – Key Drivers 232NC/SR/BR & 241(a) Underwriting – Characteristics of smooth projects (30-45 days) Environmental issues clearly identified and addressed in advance Other issues and risks presented early in the lender narrative with appropriate mitigation Application follows lender narrative instructions, includes everything in the checklists, and adheres to 232 Handbook guidance Good comps, similar services

8. Tips for a Smooth Application LeanThinking@hud.gov – Environmental, program eligibility, waivers ORCF Website> UW > 223(f) > Environmental – Lender’s Environmental Checklist Review master lease and master lease alternatives

9. Tips for a Smooth Application Give clear explanations – Good: “The reason NOI decreased in 2015 was because of an abnormal decrease in occupancy due to a number of deaths, therefore decreased revenue, and a non-recurring expense of additional marketing dollars to back fill vacated beds” – Squishy: “The reason NOI decreased in 2015 is because revenue decreased and expenses increased”

10. Tips for a Smooth Application Use specifics – Good: “NOI has increased an average of 1% per year over the past 3 years” – Squishy: “NOI has generally been trending positively over the past 3 years”

11. Tips for a Smooth Application For 223f: Concerns and example of mitigation: Valuing/sizing the loan using prospective Net Operating Income (NOI) – Mitigation: Debt service reserve, reduce mortgage Resident care issues – Mitigation: Third-party risk management (one-time or on-going) Market concerns, facility low historical occupancy levels – Mitigation: Let season until operations turn-around Loan term as it relates to some functional obsolescence – Mitigation: Reduce loan term, reduce mortgage

12. Tips for a Smooth Application Make sure UW NOI is less than or equal to T12 Problems occur when underwritten NOI is prospective – Loan Committee Does Not Like: UW NOI > T12 and 2015 When annualized NOI is used to support UW NOI Big delta between NOI for value and NOI for DSCR Normalized NOI for any expense items other than management fee, replacement reserves, property taxes 12

13. 13 Underlying Reasons for Using Prospective NOI Loan to Value Degree of Aggressiveness Use of Prospective NOI in Underwriting Combination of: Risk to HUD Reduce Mortgage Debt Service Reserve - to be held for 12 consecutive months at underwritten NOI Reserve amount equal to 6-12 months of debt service Accept As-Is Do Not Approve Defer to Let Season and Prove Out Appropriate Mitigation

14. Decision Circuit Going through PRA process (form approval) Locking down data inputs required – If changes are needed in the future we will issue patch notes for version control. Relies on cell names instead of cell location – Embracing automation – Allows for sharing data between Word or your proprietary Excel worksheets. All inputs appear in one tab (sockets)

15. ASSET MANAGEMENT 11

16. Section 232 Claims Claims rate on 232’s has remained low: – FY 2014: 2 full claims and 1 PPC – FY 2015: 0 full claims and 1 PPC – FY 2016: 0 claims to date 2 working their way through claims process but not final Recent Claims: – Operator: Causes: Fraud or poor (financial/quality of care) – Olmstead: See next slide – Market

17. Recent Experience - Olmstead 9 of 16 claims since 2012: – High % or entirely Mentally Ill (MI) or Developmentally Disabled (DD) population – 7 of these 9 claims were in Texas – 1 in Illinois (2014) – 1 in Indiana (2014) 2 additional facilities (Ohio and Texas) now empty but haven’t claimed yet

18. MIP—Billing Update Beginning with FY13, FHA changed MIP rates via Fed Register for Residential Care, Hospital & MF loans Charged higher MIP during construction period than published in Federal Register FHA has identified loans affected from FY13 to present FHA is modifying its system to correct the billings Adjustments being phased: Res Care, Hospitals, MF FHA expects the adjustments to the billings to be complete no later than 9/30/2016

19. Healthcare Portal—Financial Reporting Servicing lenders began submitting quarterly operator financials to ORCF in May 2015 Were required to submit 23 data elements, defined on ORCF’s web, to Portal on each loan Based on industry & ORCF collaboration, this # has been reduced to 8 key data elements Reduced submission will be implemented in June HUD plans training for lenders & operators in mid-May on the new 8 key data elements

20. Change of Participant Processing New optional docs announced in 2/29 Blast Consistent form for already-required info Lacked standardized format beyond checklists Both original & optional formats on ORCF web Currently Required Processing Documents – TPA: HUD-92266-ORCF, pages 1-5 and all supporting material on the (original) Checklist – Operator and/or Management Agent: All supporting material on the (original) Checklist

21. Change of Participant Processing Optional Processing – TPA: HUD-92266-ORCF, adds pages 6-42, which includes Lender Narrative and standardized format for providing the information, and corresponding optional Checklist – Operator/Agent: HUD-92266A-ORCF/HUD- 92266B-ORCF, respectively, and corresponding optional Checklist

22. POLICY & RISK ANALYSIS

23. Handbook Edits 3/24, began clearance; to post (Drafting Table) Aim to post draft edits to DT in May Welcome voluntary industry feedback, e.g., – Eligible Debt, Davis Bacon, Property Insurance – In Asset Management, lender role clarifications Feedback window will be 21 days Will then review feedback, make further edits Re-submit into clearance for final publication

24. 232 Document Collection Current collection expires June 30, 2017 Starting review now! – Existing docs to update & new docs to incorporate Portal Access form; DSR Escrow Agmt; Lender Nar. for AR – Internal process & two public comment periods

25. 232 Document Collection Looking to make the 8 new optional documents more permanent Incorporating current sample documents – Load Mod (IRR) submission requests – 241a Supplemental docs, – MFH construction docs still being used by ORCF Examples of new/proposed documents – Portal Access forms; Lender Narrative for changes in A/R; DSR Escrow Agreement

26. Lean Thinking Inquiries--Examples Using “scattered site” for non-adjacent facilities Deals involving more than 25% ILUs Ground Lease Addendum, HUD purchase option Three-year rule—waiver inquiries

27. Thank You! www.hud.gov/healthcare Please email 232 related questions to: leanthinking@hud.gov leanthinking@hud.gov