2. HUD – Section 232 Mortgage Insurance for Assisted Living & Skilled Nursing Facilities 2,909 active loans Loan balances of about $20 Billion Roughly 12% of U.S. loan market Average of $87 Million Annually returned to Treasury (232/242 combined).

3. HUD – Section 232 705 loans fiscal year 2013 $5.5 billion fiscal year 2013 400 appraisals to review each year.

4. Lean Transformation In 2008 the 232 underwriting process was completely reengineered using Toyota Lean production principles. Uses “Market Value” based underwriting rather than a HUD prescribed valuation method.

5. Abandoned Allocation of Value Going-concern Value$11,363,636 Less Tangible Asset Value$10,000,000 Indicated Intangible Asset Value$1,363,636 Proprietary Earnings$250,000 Implied Capitalization Rate of Proprietary Earnings18.3%

6. Other Innovations Decision Circuit Standardized Charts Data Tracking

7. Appraisal Issues That Kill Mortgage Applications  Failure to account for new competition in the pipeline when forecasting demand, occupancy, payor mix, rents and cap rates.  Departing from the historic NOI experienced at the property.  We require “normalization” of the history to include typical expenses including management fee, real estate taxes, and reserves for replacements, even when the facility has not paid these in the past.  Cap rate developed from in-place or trailing NOI of the sales, applied to go-forward NOI for subject – consistency.  Failure to reconcile the going-concern value with the replacement cost.

8. Cost Approach - Continued When the cost approach is lower than the going concern, this may indicate excess or economic profit, which carries significantly higher risks. Excessive economic profit, where there are few barriers to entry (Certificate of need or other regulation) will be challenged. Total replacement cost should include the operating deficits during the initial absorption, plus reasonable developer fees and incentives. These "soft" costs are recognized as mortgagable collateral.

9. Contact Information Wayne.D.Harris@HUD.gov (971) 222-2647