Eligible Section 232 Mortgage Insurance Programs Handbook Chapter 2

Ineligible Projects “Buy-in” Projects Projects not meeting program intent Project, Borrower, Operator, or affiliates filed or emerged from bankruptcy in last 5 years Project, Borrower, Operator is currently in bankruptcy Projects not providing continuous protective oversight Projects designated by CMS as (or about to become) Special Focus Facilities

Eligible Projects Skilled Nursing Facility  20 beds or greater  Licensed Intermediate Care Facility  20 beds or greater  Licensed  Provides minimum but continuous care 24 hours/day  Complies with DHHS definition of “Intermediate Care Facility”

Eligible Projects (continued) Assisted Living  5 or more units (<=4 residents/unit)  Frail elderly (62 and at least three ADLs)  Licensed  Include central dining, kitchen, lounges, recreation, and supportive services  Continuous protective oversight  Three meals per day  Consent for shared unit  <=1 bathroom for every 4 residents

Eligible Projects (continued) Board and Care  Each bedroom <= 4 residents;  Regulated by state in accordance with Section 1616(e) of the Social Security Act (Keys Amendment);  Room and board, offering 3 meals/day  Provide continuous protective oversight  Freestanding or identifiable separate portion of ALF, SNF, or ICF  Include central dining, kitchen, lounges, recreation, and supportive services  May assess charges for other services in addition to residential fees  1 bathroom for not more than 4 residents

Section 232 Loan Types  New Construction  Substantial Rehabilitation  Blended Rate  223(f) Purchase/Refinance  223(a)(7) Refinance  241(a)Supplemental Loans  223(d) Operating Loss Loan  232(i) Fire Safety Equipment Loan Program

General Requirements Regulatory Agreement – Borrower & Operator – Requirements have been expanded – Management Agents may be required to sign Operator Regulatory Agreement Licensing – Any modification (i.e., additions, deletions or major improvements) in the bed authority must be approved by ORCF. Single-asset/single purpose entity operator (SAE/SPE) – Exceptions may be considered at ORCF Director level

General Requirements (continued) Independent Living Units – Up to 25% of units or beds in the project – Do not need to be licensed – Need to be actual IL units – not a term just for marketing purposes Non-Resident Adult Day Care – Project may not contain day care only – Space may not be greater than 20% of gross floor area, and income may not exceed 20% of gross income – Must be self supporting, and licensed as required

General Requirements General Requirements (continued) Lender Site Visit – Conducted by the Underwriter, – Underwriter Trainee in rare circumstances, or – In-house licensed appraiser, with ORCF approval. Underwriting Existing FHA-insured Facilities – Requires prepayment approval via the Insurance Termination Request for Multifamily Mortgage (Form HUD-9807) HUD Fees – Application Fee o $3/$1,000 of the requested loan amount o Not applicable for 232(i) transactions

Inspection Fees New Construction $5/$1,000 of loan amount Substantial Rehab, Blended Rate, 241(a) $5/$1,000 of Total Structures 223(f) Repairs < $3,000/bed = $30/bed Repairs > $3,000/bed = 1% total cost of Repairs Delegated escrow administration = No Fee 223(a)(7) No inspection Fee 223(d) N/A 232(i) $5/$1,000 of loan amount General Requirements – HUD Fees

General Requirements – HUD Fees General Requirements – HUD Fees (continued) FY2014 MIP Rates – Healthcare Programs New Construction, Substantial Rehab, Blended Rate 0.77% 0.45% with LIHTC 241(a) 0.72% 0.45% with LIHTC 223(f) 0.65% 0.45% with LIHTC Upfront MIP = 1.0% 223(a)(7) 0.55% 0.45% with LIHTC Upfront MIP = 0.5% 223(d) 0.95% 232(i) 1% of loan balance

Fee Summary 232 New Construction/Sub Rehab 232 Blended Rate 241(a) 223(f) Refinance

General Requirements (continued) State Approvals – Certificate Of Need (CON) as required – States may conduct an independent study to assess need & impact. Must meet the standards of the American Institute of CPA’s. – Sub Rehab, Acquisition or Refinance If a CON is required submit Health Project and Assurance of Enforcement (Form 92576A-ORCF). If a CON is not required submit a statement from the State, along with a copy of the original CON. If Sub Rehab involves new beds and there is no state agency submit an alternative market study.

General Requirements General Requirements (continued) Experience of the Development Team  Borrowers, Operators, Management Agents must have 3 years of successful experience with proposed facility  If only one other facility experience must be > 3 years  Lack of Borrower experience is not mitigated by Operator or Management Agent  Experience in the market is valued over experience in a different region  Including marketing, operating, developing and lease up  Participants must understand the health-related & hospitality-oriented needs of residents

General Requirements General Requirements (continued) Short-Term Debt Service Reserve Escrow  May be funded with cash or irrevocable letter(s) of credit  Includes MIP  Released after maintaining an average of underwritten Debt Service Coverage Ratio for 12 consecutive months

General Requirements General Requirements (continued) Long-Term Debt Service Reserve Account  May be required if ORCF determines loan represents atypical long- term risk  Mortgageable expense for the life of the loan  Released only in extreme situations, with ORCF approval  Account must be refunded if funds are released  No distributions until fully refunded

General Requirements – Changes  Working Capital Escrow  Increased to 4%  2% for construction contingency  2% for accruals of taxes, insurance, and interest in the case of construction delay, or other contingencies  Required on for-profit & non-profit projects  Released at latter of 12 months after final closing OR 6 months of break-even occupancy  Non-profit Developer and Housing Consultant Fees  Not permitted as mortgageable expenses

General Requirements – Changes Details in later Sessions  Insurance Requirements  Risk Management Plan  Initial Operating Deficit – New template (HUD ORCF) – Analysis is required and underwriting will determine if an IOD is required

Section 232 New Construction Purpose: – Construction of a new project under a construction contract – No work done prior to issuance of the HUD Firm Commitment – Early Commencement Construction start prior to application Extenuating circumstances Must receive ORCF Director approval Entirely at Borrower’s risk – NOT a guaranty of receiving a Firm Commitment! – Early Start Construction start prior to Closing, but after receiving a Firm Commitment Approvals are at UW/Closer level – Builder and Sponsor’s Profit and Risk Allowance (BSPRA) – N/A for Section 232

Section 232 Substantial Rehabilitation Purpose: – Substantial rehabilitation of an existing facility – Cost of repairs & improvements exceed 15% of project value – 2 or more major building components being substantially replaced – Additions (outside the existing building footprint) not including new units are permitted – Additions including new units processed as Blended Rate

Section 232 Substantial Rehabilitation Section 232 Substantial Rehabilitation (continued) Hard costs of repairs, replacements, and improvements exceeds 15% of the project’s value after completion 15% does not include major movable equipment Costs of the addition are not included in the eligibility test 2 or more major building components being substantially replaced. Component must be significant, expected to last the useful life of the structure; not minor or cosmetic At least 50% of the component must be replaced

Section 232 Blended Rate Project combines new construction of units/beds with the purchase or refinancing of existing units/beds that do not require substantial rehabilitation. Requirements blend together Section 232 New Construction and Section 232/223(f) underwriting requirements. – Loan-to-Value: Use Refinance LTV for existing beds; Use NC LTV for new beds

Section 232 Blended Rate Section 232 Blended Rate (continued) LTV Calculation Example: Project has 77 existing beds and 39 new construction beds: 1.77 beds multiplied by.8 (80% 223f LTV) = beds multiplied by.75 (75% NC LTV) = Total = divided by 116 (total # of beds) = Blended LTV of 78.3%

241(a) Supplemental Loans Purpose: – To provide projects with a means to keep the project competitive, extend its economic life, & finance replacement of obsolescent equipment. – NOT to provide luxury items or extensive hospital-type equipment. – Available without refinancing the existing loan(s). Used to: 1.Finance improvements or additions to the existing facility; 2.Provide financing for furniture and major movable equipment to be used in the operation of the project; and/or 3.Finance energy conservation improvements. Working Capital – Not Required Labor Relations – Applicable as required based on primary loan.

241(a) Supplemental Loans 241(a) Supplemental Loans (continued) Commercial Space – Limited to a maximum of 10% of the gross floor area of the project and 15% of the gross project income. – Space intended to exclusively serve the residents is not counted toward space & income limitations. – Use a minimum vacancy of 20% when underwriting commercial space income. Reserves for Replacement – The Lender must complete an analysis of the existing replacement reserve account to determine whether additional deposits to the account will be required as a result of the supplemental loan.

223(f) Refinance Purpose: – Provide refinancing or financing for acquisition. – Properties acquired after application submission treated as a purchase. – Purchases involving an identity-of-interest between Seller & Purchaser treated as a refinance – No Equity Takeout allowed Review of the Project’s Financial Performance – Review the annual historic and trailing 12 month financial statements to assess financial performance, – Underwritten income & expenses must be based on consideration of both Commercial Space – Limited to a maximum of 20% of gross floor area & 20% of gross project income.

223(f) Refinance 223(f) Refinance (continued) Repairs – Include all repairs identified in the PCNA or provide explanation why not included. Critical repairs – complete prior to closing Non-critical repairs & Borrower-Elective Repairs – may be completed after closing – Non-mortgageable escrow equal to 120% established at closing – Completion of repairs to be performed within 12 months of closing. Reserves for Replacement – Lender submits a 15-Year Replacement Reserve analysis with recommendations for Initial and Annual Reserve Deposits.

223(a)(7) Refinance Purpose: – Provides streamlined refinancing for existing FHA-insured projects – Multiple FHA-insured loans on the same property may be refinanced under one loan – HUD-held, Coinsured & Risk Share loans are NOT eligible Application Fee – An application for Firm Commitment must be accompanied by an application commitment fee equal to $3 per $1,000 (0.3%) of the requested loan amount. – Post-closing a refund of half of the application fee may be requested. – Due to this refund, use an application fee of.15% of the loan amount on the Maximum Insurable Loan Calculation, including the Sources & Uses.

223(a)(7) Refinance 223(a)(7) Refinance (continued) Loan Term and Extensions – Generally, the term will not exceed the remaining term of the existing loan – A term extension may be approved if ORCF determines that the longer term is to the benefit of the FHA Insurance Fund. The extended loan term: Cannot be greater than the remaining term of the existing loan plus 12 years Cannot be greater than the statutory loan term of the original loan program Cannot be greater than the term of the original loan at the time it was first insured by HUD.

223(a)(7) Refinance 223(a)(7) Refinance (continued) Prepayment Approval – Required via the Insurance Termination Request for Multifamily Mortgage (Form HUD- 9807) Physical Assessment of the Property – PCNA Required >10 years, term extension, and/or not fully sprinklered R4R Schedule must be included that is based on PCNA Lender Site Visit – Required if no PCNA Environmental – The Lender must consult the most recent Federal Emergency Management Agency (FEMA) Flood Map to determine if the property is located in a 100-year or 500-year floodplain. In a floodplain, Standard Flood Hazard Determination Form Flood insurance may be required

223(d) Operating Loss Loan (OLL) Purpose: – Provides for recouping out-of-pocket expenditures to fund unforeseen operating deficits during the early years of a project’s operation. – Must demonstrate that the project is financially viable (i.e., sufficient NOI to meet the increased debt service obligations of the OLL). – Covers losses that occurred during a 24-month period Types – Section 232/223(d)(2): Loss period is the 24 months immediately following the cost cut-off date. Application must be submitted within 3 years following the end of the loss period. – Section 232/223(d)(3): Loss period is any 24-month period within the first 10 years following the cost cut-off date. Application must be submitted within 10 years following the end of the loss period.

232(i) Fire Safety Equipment Loan Purpose: – Used to purchase & install fire safety equipment, primarily fire sprinkler systems. – Costs may also include structural modifications where necessary to install the equipment. – Equipment installation must be in compliance with or exceed the requirements approved by CMS. – For non-CMS regulated residential healthcare facilities, provide evidence that the fire safety equipment complies with the State’s regulatory authorities.

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