FHA Office of Residential Care Facilities Section 232 – Underwriting Highlights, Insurance, Closings, New Construction

Underwriting Highlights Queue updates, Closings & Timing

Firm Commitments Issued as of 4/25/2014

Firm Applications in Review as of 2/19/2014

Firm Application Queue Numbers as of 4/25/2014

ORCF Underwriting Contract Current Contract Underwriter Assignments   Total in Firm Review 219 Contract Underwriters ORCF Underwriter 178 41 82% 18% 223(f) = 170 (a)(7) = 8

Applications Received FY 14 to 3/21/14 Type of Application FY 11 FY 12 FY 13 FY 14 223f 347 458 456 187 223(a)(7) 302 221 399 23 Other 59 35 34 14 Total 708 714 889 224

Firm Commitments Issued FY 14 to 4/25/14 Type of Application FY 11 FY 12 FY 13 FY 14 223f 231 404 250 239 223(a)(7) 210 354 522 40 Other 32 25 34 19 Total 473 783 806 298 Production is picking up: 39 Firm Commitments issued in the past 2 weeks

Insurance Changes Proposed changes were vetted with MBA and large FHA servicing lenders along with FNMA New Requirements: 90 % of Estimated Replacement Cost. Loss of Business Income Windstorm coverage Expanded flood insurance coverage if facility is located in flood zone

Decision Circuit Tool for setting the scope of the appraisal review. All applications are looked at by an ORCF appraiser. The scope of review is on a spectrum depending on risk factors.

Flags - Continued NOI trending down for 3 years. Recent NOI at half of concluded rate. Private Pay or Medicare census higher than proven history. Medicaid census lower than history. Occupancy lower than 75% Change in potential resident days Recent purchases

Green Flags (tend to offset red flags) DSCR over 2.00 LTV under 80% (LTV evaluated under two Scenarios) As underwritten Using most recent NOI and Avg Market Cap rate.

Special Consideration Loans over $25 million History doesn’t match Operating Statement. Purchase within 3 years. Loans over $25 million – Will trigger a full appraisal review and a site inspection. History doesn’t match Operating Statement – We have been seeing some adjustments to the NOI we are not comfortable with, such as adjusting administration or management costs. The historical summary should represent reality. Sometimes adjustment are needed to explain conclusions. The most straightforward way to present those adjustments is on a separate table. An appraisal review can be avoided if an explanation is included in the LN. Purchase within 3 years. – We rarely see enough analysis of a purchase in the appraisal or LN. What were income expectations of the buyer? What was the cap rate? How was it marketed? Reconcile the purchase price with the appraised value!

ORCF Loan Committee For 223f main concerns and example mitigation: Valuing/sizing the loan using prospective NOI Mitigation: Debt service reserve, reduce mortgage Patient/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, management/marketing efforts Loan term as it relates to some functional obsolescence Mitigation: Reduce loan term, reduce mortgage

Continued ORCF Loan Committee New construction concerns Borrower/Operator’s lack of experience in developing and operating similar facilities Low equity contribution less than 20 % Market concerns Size of facility in relation to comparable Aggressive metrics used in loan sizing

Underwriting Highlights What is going well New Process for Reviews – changes Expediting Processing & Reviews Expediting Processing & Reviews: We will be going out with a 4128 Environmental guidance checklist soon. It includes guidance on each of the 4128 checklist review items for lenders to use in assembling applications. It is not a required exhibit, but we would encourage lenders use it to try and minimize any delays for back and forth for HUD to be able to finalize the 4128 review.

Underwriting Highlights Valuation Issues & Concerns Prospective or Aggressive NOI conclusions NOI Conclusion not yet Achieved Fluctuating NOI History Declining NOI trend Aggressive Expense Ratio Aggressive Cap Rate

New Construction New Construction Remains Highest Risk: 52% of Projects on Priority Watch List vs. 24% of Portfolio are/were NC

Proposed New Construction SUPPLY Competition – existing and proposed (pipeline) Market position within PMA Saturation rates Reasonable capture rates

Replacement Facilities SUPPLY Proximity Same demographics Same services – adding or deleting How many current residents will transfer

New Construction Supply CON’s and Moratoriums CON (Certificate Of Need) Moratoriums on adding new beds State need calculations Only transfer within county

New Construction Supply Transitional Rehab Facilities Hospital discharges to rehab ALOS (Average Length of Stay) Hospital incentives Rehab purpose (cardio, stroke, hip, orthopedic, etc.)

New Construction Demand Demand determinants for Assisted Living Age Household Income Home Value Income Qualification Living Status Acuity, Mobility and Care Limitations Memory Care Adjustments

New Construction Demand Demand determinants for Skilled Nursing Age Acuity Income Qualification Mobility Demand for Transitional Rehabilitation

Expediting Section 232 Closings

Closing Team Updates ORCF’s Closing Team is keeping the “conveyor belt” of closing moving! FY 2013 had 766 closings, compared to 706 in FY 2012, 415 in FY 2011, and 309 in FY 2010 Fiscal year to date volume much lower, mostly due to 223a7 volume dropping off.

How do I get a HUD Closer assigned? For a HUD Closer assignment (and any other closing related issues, including extensions) email ORCFCloser@hud.gov when the HUD Attorney closing package is mailed. Average turnaround time for closer assignment right now: 1-2 business days ORCF has 11 full time Closers and 3 contract Closers (most pictured below at our January 2014 Closing Kaizen)

Partnership & Collaboration Closing Docs Closing Table Partnership & Collaboration Please Remember: Complete, clean, and accurate closing packages get reviewed and closed quicker All special conditions must be met and properly documented prior to closing Use the Special Conditions Matrix! Responsiveness to HUD Closer and HUD Attorney and fast turnaround is KEY Send in your packages, we’re ready!