Section 232 “Lean Thing” WHAT’S UP WITH THAT? Tim Coon Raelee Jones Scott Thurman WHAT’S UP WITH THAT?

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Kaizen Update with Raelee Jones

Bathroom Waivers Expedited Processing no longer available Need to meet Lean criteria Waivers typically only considered on Memory Care facilities Mixed Results on Waivers May not want to go there!

Appraisal Update – UPL/IGT UPL – Upper Payment Limit IGT – Intergovernmental Transfer Brief – Some States give an add on to Medicaid rate when Operators affiliated with Hospitals States – primarily IL and TX Issue – How to underwrite add on rate? How long will it continue? How is it valued? Email Blast - 6/27/2012 (“Special Income Sources”) Proceed with CAUTION. ORCF re-evaluating position

Appraisal Update – Decision Circuits Excel Templates for: Refinance New Construction Purpose: Help determine extent of appraisal review Aids Lender in Identifying issues needing thorough explanation

Appraisal Update – Decision Circuits Decision Circuits possibly replace Appraisal Section of Lender Narrative Needs to go through PRA process (Paperwork reduction Act) Decision Circuits are Optional, but encouraged Posted to Drafting Board Updated frequently In closing Raelee, you cant spell PRAY without P R A, which may explain why prayers frequently seem to go unanswered. Can’t spell TOMB without OMB, which is why sometimes good ideas die.

ORCF Drafting Table http://portal.hud.gov/hudportal/HUD?src=/federal_housing_administration/healthcare_facilities/residential_care/ORCF_Policy_Drafts

Healthcare Portal – Phase I Quarterly Operator Financials

Requirement GAO Audit Accountability Rule Change: 9/7/12 24 CFR Part 5.801 Federal Register Notice on 10/3/2014 See 2/25/2015 Email Blast for details. ‹#›

Timing and Commencement Quarterly Financials: Must be submitted to HUD within 60 Days of the End of the Quarter FYE Financials: Must be submitted to HUD within 90 Days of the End of the FY Required for FY’s commencing on or after 12/2/2014. Great majority of projects (CY) – 1st Q 2015 Due End of May, 2015 ‹#›

Basics Applies to all Section 232 projects No Lease, Operator = Mortgagor Operator Certified Financials OK. Mortgagor Annual Audited Financials Still Required. ‹#›

Overview of the Process Healthcare Portal calculates five ratios Chapter 4 of Section 232 Handbook (Asset Mgmt) DSCR Days Cash on Hand Avg. Payment Period Working Capital Change in Receivables Ratios immediately available to lender

Recent and Next Steps HUD verifying accuracy of contact information for operators: We sent out 3,000+ emails Updating our iREMS system with revised contact info 500 or so bounced We emailed servicing lender to ask for help in identifying operator contact See list of emails of servicing lender contact If incorrect, hhcp@hud.gov

Phase II of Healthcare Portal Envisioned Capabilities: Electronic submittal by lender of all Asset Mgmt transactions, requests, reporting: TPA’s, Change Operator, Partial Release, R4R Releases, New Lease up reporting, problems at a project, etc. HUD tracking of status and timing of requests Same system as Operator Financials

Medicare Stars –What are They? The elderly’s critique of various Celebrities? The 5 Star rating overseen by CMS to help consumers, their families, and caregivers compare nursing homes more easily FALSE

Medicare Stars –What is CMS? A disease commonly found on cruise ships? The Center for Medicare and Medicaid Services, an agency within the U.S. Dept. of Health and Human Services responsible for administration of several key federal healthcare programs. FALSE

Medicare Stars – Overview The Quality Rating System gives each nursing home a rating of between 1 and 5 stars. 5 stars = above average quality 1 star = below average There is one overall rating and a separate rating for each of the following: Health Inspections –based on three years of data Staffing* – info about the number of hours of care provided on average to each resident each day by nursing staff. Quality Measures* – info on all different physical and clinical measures for nursing home residents. *self-reported by facility

Medicare Stars – What’s New Late last year CMS announced changes that began implementation this year. The changes were aimed at Rescaling to create a more Balanced / Diversified rating system Continue to drive quality, better care in Nursing homes Add more Q measures of importance Tweak areas of measurement risk with better source data

Medicare Stars – Specific Changes Nationwide Focused Survey Inspection- enables better verification Payroll Based Staff Reporting – auditable back to payrolls to verify staffing information Additional Quality Measures – increases number and type of quality of measures (ex: antipsychotic medication) Timely and Complete Inspection Data – Ensure states provide accurate and timely information Improved Scoring Methodology – Revise Scoring, already weighing independent data more than self reported

Nursing Homes Star Ratings % Medicare Stars & HUD ORCF began incorporating 5 star rating information into loan committee memos back in 2010. CMS Ratings for Quality Measures have been sliding up. Nursing Homes Star Ratings % Stars 2008 2011 2014 5 10% 15.9% 47% 4 24% 27.3% 34% 3 23% 21.2% 13% 2 20% 5% 1 15.6% 2%

Medicare Stars - Future Expect a periodic re-scaling of the 5 star rating system All NH’s will be affected by this action Expect new Q measures to be added or changed periodically; often influenced by interests in improving care and economic value About 2100 NH’s in the existing 232 portfolio There is a key metric/stretch goal to maintain/exceed the average (CMS) quality rating of ORCF portfolio by issuing skilled NH commitments to facilities with an average CMS rating of 2.8 or higher. HUD recommends: Lenders and Operators become familiar with how the changes impact your ratings of your properties Operators be prepared to address local family concerns about their rating status. Operators think ahead and prepare for the staffing capture, periodic new QMs.

Medicare Stars - Conclusion HUD trying to increase average CMS trying to lower the average Reaching for the Stars

Section 232 Claims Fiscal Year 2014 claims rate remained excellent: 2 claims and 1 PPC = .06% claim rate Recent Claims: Operator: # Cause: Fraud or poor (financial/quality of care) Olmstead: Next slide Market

Section 232 Claims 8 of 14 Claims Since 2012: MI Population Olmstead Decision Initiative to move tenants to less institutionalized homes. Also 2 empty buildings (Ohio and Indiana) New Construction Remains Highest Risk: 52% of Projects on Priority Watch List vs. 24% of Portfolio are/were NC

Average Monthly Default* Data * Default = 60+ days delinquent Fiscal Year UPB in Default (60+ days) Default Rate 2012 $302 Million 1.65% 2013 $285 Million 1.45% 2014 (Partial) $303 Million 1.43%

Red Flags Actions that are out of the ordinary i.e. late payment pattern. Loan moving to a rolling delinquency from current status Responsiveness of property to information requests i.e. delaying by Operator/Owner Financials showing trend of late payables/receivables Operator/Owner not pursuing receivables

Red Flags Operator/Owner having legal issues i.e. Judgments or liens from Vendors Ratios declining over time Actions taken by third parties i.e. State slowdown on reimbursements Property being represented by Legal Counsel in discussions with HUD/Lender Loan moving rapidly from current to default and no plan to correct

Red Flags Operator/Owner not having plans or understanding what to do to fix or address changes impacting the business negatively Decline in surveys, SFF designation, star rating decline, CMPs or other sanctions from CMS or State toward property Sudden compliance issues that are severe I.e. sanctions, cancelling CMS certification or participation notices, State action against the property On set of legal action against the property that could impact the facility Legal action against the Owner/Operator that could result in incarceration

Eligible Debt Bridge loans Debt seasoning Identity of interest debt Operator debt

ORCF Asset Management PROCESS IMPROVEMENTS

General Process Improvements 1st Step: Standardization Lender submittal: checklists, templates HUD review: Punchlists Stakeholder involvement - volunteers Transparency

General Process Improvements 2nd Step: HUD AE Specialization: LEADER!!! New Unit Lease up R4R Releases and Non-Critical Repair Escrow Change in Participant (TPA, Operator, Mgmt Agent) Other Processes – AR Financing, Capital Improvement, etc.? 3rd Step: Healthcare Portal – electronic transfer of data and tracking.

Lease up of new units Projects currently with 15+ AE’s Specialized team of HUD AE’s being created: You will be notified of change to AE Goal will be to keep all of lender’s projects in lease up under one AE Sustaining occupancy – regular AE See IOD form – aggregating data - sharing Submittal of form: Near term: email AE, Long term: Healthcare portal

R4R Releases Ongoing meetings with HUD and lenders Team has made recommendations: Checklists and Detailed AE Punchlist Slight revisions to existing forms – no narrative Handbook changes (must go through process) Specialized team to be led by Mary Walsh When ready to accept R4R requests in this manner, we’ll announce via email blast. Request by email – until portal: 232R4Rrequest@hud.gov

Non-critical Repair Admin September Kaizen Breakout Session Team is still working on process – close….. Specialized team in next two months or so. When ready to accept Repair Escrow requests in this manner, we’ll announce via email blast. Request by email – until portal: 232R4Rrequest@hud.gov

Change in Participant September Kaizen breakout item Rita Dockery and Angela Collier leading effort. Using standardize Production documents (generally) Draft checklists, narrative templates, punchlists under review by OGC and ORCF After this, stakeholder involvement (volunteers?) Change in Operator – UPL specific info Specialized team will be created.

Email Blast Signup http://portal.hud.gov/hudportal/HUD?src=/subscribe/signup&listname=Lean%20232%20Updates&list=LEAN-232-UPDATES-L

ORCF Asset Management Lender delegation

Lender Delegation Review & Approval 232 HB establishes for R4R & Non-Critical Repairs MF only has a process for Non-Critical Repairs Several lenders approved by MF AMCOD will review lender approval requests We will publish procedures for this on HUD.GOV

R4R: Lender Delegation Review & Approval Non Critical: Must be set up on each loan in Development (inspection fee language in handbook) Until blast issued, email if you want to pursue: 232NCRrequest@hud.gov R4R: Please wait until blast issued (next 2 months)

Market Study Update Updating Chapter 5 Team – 4-5 outside appraiser w/ 2-3 HUD appraisers Most significant change – Case Studies required Show how Demand Model works in Stabilized Market

Interest Rate Reductions (IRR) IRRs are Loan Modifications proposing to simply to lower the existing interest rate on performing loans (vs. Default Loan Mods) Lender Checklist and Lender Analysis are posted on HUD.gov Also new docs: Lender Certification and OGC Review Checklist http://portal.hud.gov/hudportal/HUD?src=/federal_housing_administration/healthcare_facilities/residential_care/loan_servicing

IRR Loan Modification SUBMISSIONS Dedicated Email Box for Electronic Submissions: ORCFLoanModification@hud.gov Specialized Team in Asset Management Quick accurate Preliminary Reviews COMMUNICATION IS KEY- applies to lenders and lender counsel!

IRR Loan Modification SUBMISSIONS NOTE: IRRs have a two stage ORCF review OGC actively involved only in 2nd review. Therefore, a preliminary and a final review process is performed for all streamlined Section 232 IRRs prior to final approval being granted and documents executed by ORCF Checklists give clear direction!

Process Flow of Interest Rate Reductions in ORCF Submit IRR Package (Use ORCF Checklist and Lender Analysis) Prelim Review Finalize Mod Docs and Submit (Use OGC Checklist) Final Review, OGC Concurrence HUD Approves Close IRR, Submit Recorded Docs (45 Days)

IRR Loan Modification – GNMA Letter Lender includes a Letter from GNMA if loan in GNMA pool to address investor consent. Project must be out of prepay lockout Project must pay any required prepayment penalties GNMA recognizes the Issuer of Record and provides letter to that entity New prepayment premium schedule is acceptable in modification document

IRR Loan Modification – other Other Considerations: RfR Balance: If below $1000/per unit – address Sprinklers: If SNF check that it is Fully Sprinklered per CMS Requirements Troubled: If loan is still below 1.11 DSCR after IRR – address (Plan of Action) CMS Star Ratings: If SNF and poor history or quality of care – address Whether a PCNA is due

IRR Loan Modification – PCNAs Submit if >10 years since last PCNA Note in Lender Analysis if change in RfR Payments Describe sources of funds and timeline for any required repairs. Propose Special Conditions if applicable

IRR Loan Modification – Trade Premiums CANNOT cover: Borrower Counsel Organizational Costs 3rd Party Reports (e.g. PCNA)

IRR Loan Modification – Trade Premiums Trade Premiums CAN cover: Any portion not retained by Lender can be applied to Lender Costs (Lender Counsel, GNMA commitment fee),Title/Recording or defray prepayment premium. Remaining can be applied to RfR Balance Please indicate use of Trade Premium in Sources and Uses and Lender Analysis Narrative

IRR Loan Modification – ISSUES Common Issues Slowing Down IRRs: Incorrect calculations (check: DSCR, Sources & Uses) Quality Control (Exhibits must be internally consistent) Letter from GNMA not included Affiliated projects not identified hindering better workload efficiency Lack of Communication

IRR Loan Modification – STATS Total = 230 Received IN QUEUE 12 IN REVIEW 22 PRELIM REVIEW DONE 65 APPROVED/COMPLETED 123 EXTENDED 1 WITHDRAWN 7 11/12/2018

Questions Please submit to: LeanThinking@hud.gov