1 Closings How To Have A Smoother, Faster Closing The Office of Residential Care Facilities U.S. Department of Housing and Urban Development Eastern Lenders Conference Philadelphia, Pennsylvania March 13 & 14, 2013

2 WHERE WE ARE WHAT’S NEW WHAT’S AHEAD

3 CLOSINGS FY 12: 706 FY 11: 415

4 CLOSINGS 1 st Qtr FY 13: 181

5 Closing Queue As of March 1: 17 projects

6 What’s New New Documents Coming  Healthcare Facility Note (Multistate)  Security Instrument/Mortgage/Deed of Trust  Healthcare Regulatory Agreement – Borrower  Healthcare Regulatory Agreement – Operator  Escrow Agreement Non-critical, Deferred Repairs  Request for Endorsement  Many others!!

7 What’s Ahead Changes in ORCF Authorized Agent signatories Changes in Closing Coordinator staff (RAP) 232 Production Handbook – Closing Chapter

8 CONTRACTOR CLOSINGS

9 Due Diligence Contract Closings Performs closing coordination services for 223(f) and 223(a)(7) transactions within 120 business days of Firm Commitment issuance. Number of Closings to Date: 360*  223(a)(7): (f): 222  Average closings per month: 21  *Closings held between September 29, 2011 and February 21, 2013 Legal Contractor for Closings: Contract runs through September 30, unless capacity reached first.

10 CLOSING 223(F) AND 223(A)(7)

11 How to Help Make Them Smoother and Faster Return the executed Firm Commitment – 10 business days, to the Closing Coordinator Inform us as soon as possible of any special closing requirements; for example, closing must happen before a bond payment date Timely Closing Package – 7 business days for 223(a)(7), 15 business days for 223(f) or, risk going back to the queue

12 Smoother and Faster Closings Complete package as possible or, risk going back to the queue Allow sufficient time for ORCF and OGC review Package contents:  Checklist on top, tab the documents (OGC too)  Documents must be ACCURATE

13 Smoother and Faster Closings Package contents (con’d)  Proof of completion of critical repairs – clear, color, photographs, invoices, certificate of completion;  Label photographs and invoices, correspond to the repair number, certificates signed and dated  Great if non-criticals are done too; if so, need photos and invoices, certificate of completion  If partial non-criticals are completed, will need revised non-critical repair list, commitment amendment (new escrow agreement, Escrow Agreement for Non-critical, Deferred Repairs, HUD ORCF)

14 Smoother and Faster Closings Package contents (cont’d)  Proof of satisfaction of the Special Conditions  Special Conditions should be tended to immediately upon receipt of the firm commitment  If any questions, immediately contact the Closing Coordinator  Some Special Conditions may have to be approved by the Underwriter, Workload Manager, Account Executive, or HUD Closing Attorney  Include Special Condition Matrix (will be attached to Closing Coordinator announcement )

15 Special ConditionEvidence provided to clear condition (HUD USE ONLY) Approve d (HUD USE ONLY) If no, why? 1.ex. All deficiencies cited in the REAC Report date 08/10/2012 are classified as critical repairs to be evidenced as corrected prior to Endorsement. orms/AllItems.aspxhttp://hudsharepoint.hud.gov/sites/IHCF/DEVL/Special%20Conditions/F orms/AllItems.aspx (Click here for list of SC’s to enter) - Invoice and photographs were submitted - Cleared by UW Yes, 9/25/ Date: Project name: FHA #: Lender: Lender Attorney: Special Conditions Matrix U.S. DEPARTMENT OF HOUSING AND URBAN DEV WASHINGTON, DC

16 Smoother and Faster Closings Package contents (cont’d)  Insurance ACORDS: Provide for fidelity, property, and professional liability. Insurance policies must be current and meet all ORCF coverage requirements.  License: Facility license must be current and in the appropriate name. Use license number of beds/units in the regulatory agreements.  For both insurances and license, if about to expire in the month we close, provide proof of renewal

17 Smoother and Faster Closings Once interest rate is locked submit request to amend the commitment; include signed Supplement to Project Analysis, HUD-99264A (soon to be the Maximum Insurable Loan Calculation, HUD-92264a-ORCF); include other commitment changes – we want to minimize the number of commitment amendments Closing Statements – for 223(a)(7) attach invoices and current payoff letter

18 Smoother and Faster Closings For 223(f), provide a draft cost certification, with payoff letter and invoices (soon to be Borrower’s Certificate of Actual Cost, HUD- 2205A-ORCF); 223(f)’s require Closing Statements too, but without documentation For 223(f), an appraisal review of the title and survey may be necessary for some projects For 223(f), the management conference call must be scheduled before closing

19 Smoother and Faster Closings Documents sent for ORCF signature MUST be in final form.  Send a scan of the documents being sent for signature to the HUD counsel.  Package MUST include specific instructions on forwarding  Include all pre-paid shipping labels  Note may only be sent directly to the HUD Closing Attorney  Allow an adequate amount of time prior to closing for ORCF’s signing and shipping

20 Post Closing Refund of Application Fee Refunds (Section 223(a)(7) & Mortgage Reduction):  Send to write in subject line, “Refund for, project name, and  Attach request form, new form coming (HUD ORCF, Request for Overpayment of Firm Application Exam Fee)  If don’t receive refund 10 days after our acknowledgement, let us know – don’t wait

21 Smoother and Faster Closings Communicate, please! The sooner everything is completed, the sooner we can close Murphy’s Law applies (and underwriting or project flaws will surface in the closing process) Your project is not the only we have

22 CLOSING NEW CONSTRUCTION SUBSTANTIAL REHABILITATION 241(A )

23 NC/SR and 241(a) Architect’s Agreement – B-108  All changes made after Firm Commitment issued must be approved. Building Loan Agreement Construction Contract  The latest contract approved must be attached to the construction contract.  Latest Davis Bacon Wage rates must be attached. Performance Bond and Payment Bond Agreement and Certification  Include with closing signatory documents

24 NC/SR and 241(a) (cont’d) Escrows:  Off site  Demolition and Asbestos Removal  Mortgagor and Architect Certification of Payment  Escrow Agreement  Additional Sponsor’s Contribution  Minor Moveables  Working Capitol Lender Certification Special Conditions Matrix

25 NC/SR and 241(a) (cont’d) Initial Draw  Organize and separate by fly sheets Pre-Construction conference  Hold one week before closing  Invite Labor Relations

26 Why Cost Certify?--CFR “The mortgagor’s certificate of actual cost..shall be submitted upon completion of the physical improvements..before final endorsement. …(and) shall be verified by an Independent Certified Public Accountant.”

27 Key Dates In Process 100 per cent completion (determined by HUD) Construction cut-off date (0-60 days from 100 per cent completion determined by borrower) Date of financial responsibility (one day after cut-off date)

28 Participants Lender Borrower Independent Auditor (hired by borrower) Independent Auditor (hired by GC) General Contractor Subcontractors

29 Closing Coordinator Screens cost cert package Reviews package Issues Maximum Insurable Mortgage Letter Reviews and approves final requisition

30 Cost Certification Submission Package Audited Mortgagor and Operator Financial Statements Includes Balance Sheet as of Cut-off Date Cut-off Date is the last day of the construction period. Includes Income Statement if there were operations during the construction period.

31 Cost Certification (con’d) Form HUD-92330, Mortgagor’s Certificate of Actual Cost Available on Hudclips This is Multifamily form we will continue to use—not part of Paperwork Reduction Act (PRA) Borrower signs and dates form Title 18 certification t part of Paperwork Reduction Act (PRA)wer signs and dates fo

32 Cost Certification (cont’d) Form HUD-92330A, Contractor’s Certificate of Actual Cost Available on Hudclips This is Multifamily form we will continue to use— not part of PRA Contractor signs and dates form Title 18 certification

33 Cost Certification (cont’d) Form ORCF, Lender Certification Part of PRA process New LEAN form that requires lender review cost certification package before submission to ORCF. Lender signs and dates form Title 18 certification

34 Cost Certification (cont’d) Draft Maximum Insurable Mortgage Letter Lender utilizes this letter to request mortgage increases, decreases or additional or changed special conditions. ORCF signature provided and letter issued after ORCF cost certification review complete.

35 Cost Certification (cont’d) ORCF Request For Final Endorsement of Credit Instrument (PRA document) Invoices not previously received Lender Advance Register Appraisal documents (in case of mortgage increase where value revision proposed)

36 Cost Certification (cont’d) Lender Narrative Cost Certification Supplement (LNCCS), Form 9444-ORCF Part of PRA Process Appendix of Handbook Chapter 13 Major change from Multifamily

37 Why the LNCCS In complex cost certifications we want lenders to take responsibility for the submission. We want lenders to carefully review the cost cert, document their review, and disallow costs that are not reasonable or necessary. Required for sub rehabs and mortgage increase requests.

38 Why LNCCS (cont’d) For the first time Excel spreadsheets are provided for both the lender and the ORCF reviewer to use as work papers. This provides better documentation of procedures, provides consistency in the calculations, and reduces errors. This is a supplement to the Handbook Chapter 13 with detail on specific accounts and calculations.

39 Contents of LNCCs Cover Page identifies requirements and attachments Executive Summary provides key dates and other significant data Cost Certification Review Team Additional Owner Cost Certified Items Analysis Increased Owner Certified Cost Items Analysis Calculation of Replacement Cost Mortgage Determinants Sources and Uses Secondary Sources Conclusion and Lender Signatures

40 Contents of LNCCS (cont’d) Operator Entity Income Statement Analysis if applicable General Contractor or Subcontractor Cost Certification Analysis if applicable Change Order Analysis—Necessity, Betterments, Time Change Orders Incentive and Liquidated Damages Computations Determination of Total Allowable Construction Cost

41 Contents of LNCCS (cont’d) Architect’s Fee Analysis Interest Computation Property Tax Computation and Analysis Insurance (Property, Liability etal) Analysis M.I.P., Exam Fee, Inspection Fee Analysis Title and Recording Fee Analysis Non-Profit Developer Fee Analysis Financing Fees Analysis Legal, Organizational, Cost Cert Fee Analysis Mortgagor Other Fee Analysis

42 Contents of LNCCS (cont’d) Major Movable Equipment Analysis Marketing Fees Analysis Relocation Fees Analysis

43 Common Issues Clerk of Works Interior Decorators Consultants Facility maintenance crew completes job Architect sub-contract duplication Accrual (per-diem) on soft costs Liability insurance usually not allowable Allocated costs over multiple projects

44 Common Issues (cont’d) New long-term liabilities on balance sheet Balance Sheet notes Tying mortgage proceeds to balance sheet Change order reconciliation “Other” needs to be clarified Timing of Mortgagor Other Fees Warranted Price of Land --possible duplication— should not be part of

45 Common Issues (Cont’d) Substantial Rehabilitation  Income During Construction (windfall)  Duplication between construction and operating costs  Contingency  Relocation  The original 92264A-ORCF underwriting approach should be utilized.

46 Delays in cost certification submission will delay final closing. Discuss causes of delay and what all of us can do to mitigate those.

47 CLOSING HUD OFFICE OF GENERAL COUNSEL

48 OGC CLOSING Initial draft submissions should be reviewed by lender’s counsel.  Submission should be organized and tabbed in the order of the Part 1 Legal Punchlist, include all documents.  Indicate where the HUD requirements are met  Tie exception documents to the title policy by writing corresponding numbers on each.  If there is Accounts Receivable financing, include those documents with the Part I. Also include the UCC searches.  Make the review easy for the HUD counsel. The easier this review is, the faster you’ll get our comments, and the faster we’ll get to closing.

49 OGC closing (cont’d)  If a portfolio, include the ORCF approval letter, and any relevent flow charts. Also let us know if affiliated deals in the portfolio have been previously closed or been submitted; include the name of the HUD counsel that closed them (redline documents of previously accepted documents may be required).  Make the review easy for the HUD counsel. The easier this review is, the faster you’ll get our comments, and the faster we’ll get to closing. Operator

50 OGC Closing (cont’d) If changes to form documents, documents should be redlined against the form. The master lease can include projects closed with the old documents and projects closed with the new documents. Operators must be single asset entities unless approved by the FHA Commissioner.

51 OGC Closing (cont’d) For a TPA in connection with a 223(a)(7):  All TPA documents will be reviewed  223(a)(7) must be a true refinance Waiver procedure. Searches must be timely.

52 OGC Closing (cont’d) For closings “by mail” the document packages must be complete and organized. We do not want to collate documents or slip correction pages. By mail closings are at our discretion.

53 QUESTIONS & ANSWERS What can HUD do to make closings smoother and faster? LEAN is about continuous improvement Suggestions, send to