FHA Office of Residential Care Facilities Section 232 – Eligible Debt, A/R Financing, Portfolios, Master Leases

Eligible Debt 2 Year Seasoning Less than 2 Years seasoned: – Incurred for construction, purchase, or capital improvements; – Incurred by the Borrower as part of the normal course of business; – Unrecorded debt of the Borrower directly connected to the project

Eligible Debt Must not have been created with and Identity of Interest (IOI) between a Borrower and the proposed FHA lender. Must not exceed existing project debt except for HUD allowed financing expenses. May include fully documented HUD eligible and recent capital expenditures or structural repairs. Must not include operator’s debt

Debt Investigation HUD requires a Debt Investigation of the existing indebtedness when: – The creation of the debt involved an identity of interest lender, – The current loan was created less than two years ago, – Circumstances are present that indicate the previous financing may have included other forms of non-standard collateral that suggest the debt was not created in an arms-length transaction, – The current loan involved alternate financing structures (e.g., pooled debt, line-of-credit financing, and mezzanine debt) and requires further explanation, as deemed necessary by HUD, – The current lender held escrows or compensating balances that will be released back to the Borrower, or – Any other non-traditional debt or atypical obligations/interests/agreements are involved.

Debt Investigation continued An example of the current lender holding back escrows or compensating balances is: A commercial lender makes a loan for $8M, but increases the amount of the Note to $8.5M by holding an escrow of $500,000 (funded by the Borrower) to collateralize the increased amount. The Lender reports outstanding debt of $8.5M, but with HUD costs of $500,000, the total eligible costs are $9M and HUD insures a loan for $9M. The commercial lender then releases the escrow to the Borrower when the commercial loan is paid off. This results in the Borrower receiving equity cash out from HUD-insured loan proceeds and would violate program intent. The following are the types of documentation that may be provided to substantiate the eligibility of existing indebtedness when a Debt Investigation has been conducted: Fully executed mortgage note, settlement statement, payoff statement, purchase & sale agreement, purchase contract, option agreement, allonge, capital invoices, fully documented Title Search, Title Exceptions, release documentation and other updated loan documents

Accounts Receivable Financing – New Intercreditor Agreement March 2013 new documents published including the Intercreditor Agreement AR industry strongly opposed the published ICA Formed a Task Force to revise document Revision became available for use on February 27, 2014 Final OMB-numbered form document to be available by June 2014

Accounts Receivable Financing – New Intercreditor Agreement Changes include: – Definition of AR Loan Obligations – Cut-Off Time & Ceased Funding – Notices and Consent Rights Looking further into the “standstill provision”

Accounts Receivable Financing – Lender Experience Latoria

Portfolios – Midsize and Large Mortgagee letter published April 2014 Updated old Notice H01-03 for portfolio guidance

Portfolios – Midsize and Large New Guidance Increases threshold for midsize portfolio from $75 million to $90 million (triggers corporate credit review) Limits size of a single portfolio to no more than 5% UPB

Portfolios – Midsize and Large Formalizes Existing Practice List of corporate credit review submission materials 18 month rolling window Debt service reserve requirement Master lease requirement

Portfolios – Midsize and Large Mechanics of Review Lender contacts ORCF for concept call/intro meeting Understand nature of transaction, corporate structure, etc. Make sure review focuses on biggest risk areas

Portfolios – Midsize and Large Mechanics of Review Financial strength of the participants Quality of care Current debt Legal issues

Master Lease Purpose of the master lease – Reallocate cash flow – Bankruptcy protection (indivisible lease)

Master Lease Alternative master lease structures need to protect HUD equivalently – Multiple minority owners – Multiple operators – Multiple lenders – Legal restrictions – Contractual restriction

Master Lease Criteria & Legal Review ORCF makes portfolio determinations prior to assignment to HUD counsel. Portfolio: Two (2) or more projects that are under common control Common Control: Is exhibited by any individual(s) or entity(ies) that controls the borrower and/or operator regardless of the percentage of ownership interest, so long as the individual(s) or entity(ies) comprise each borrower and/or operator.

Master Lease Criteria  223(f) purchase or refinance  232 new construction or substantial rehab  223(a)(7) OR  TPA (change of operator, licensee, operating entity) AND Three or more properties and/or $15 million or more in aggregate mortgage amount The borrowers will either be under same ownership or a majority ownership individual or group will control the properties The operators of each property will be a lessee with the same ownership Subsequent applications received within 18 months from the last project with the same ownership and operating structure as an existing FHA- insured portfolio with a master lease in place, that property must be added to the existing master lease.

Terms of Master Lease & Subleases FHA-insured properties only Initial term of Master Lease = maturity date of mortgage or longer If long-term lease not feasible, propose alternative structure: 1.Sublease coterminous with one another 2.Addendum to Regulatory Agreement: borrower to enter into new master lease prior to expiration

Master Lease Review Package 1. Cross-Default Guaranty of Subtenants 2. Guide for Opinion of Master Tenant’s Counsel 3. Healthcare Regulatory Agreement - Master Tenant 4. Master Lease SNDA 5. Master Lease Addendum 6. Master Lease Estoppel Agreement 7. Master Tenant Security Agreement

Master Lease: Lender Requirements NARRATIVE: 1.Terms and conditions of master lease; 2.Waiver requests; 3. Proposed payments to or from master tenant; 4.Lease agreements between borrower and master tenant, and lease agreements between master tenant and subtenants; 5.Description of the collection and flow of funds from subtenants to master tenant and from master tenant to borrower. (Include AR flow of funds, if applicable). 6.Diagram showing flow of funds from each operator to the master tenant to the borrower. Specify the depositories for each individual project funds, as well as for the master tenant as applicable 7.Description of legal structure of borrower or master landlord entity, the master entity, and operating entity/subtenant, including all tiers of ownership.

Master Lease: Lender Requirements SPREADSHEET: 1. Names of facilities 2. Proposed mortgage amount for each facility; 3. Recommended appraised value of each facility; 4. Proposed debt service coverage ratio for each facility, including the mortgage insurance payment; 5. # of beds at each facility; 6. CMS Star Rating at each facility, if applicable; 7. Current balance of each facility's replacement reserve account; and 8. Any other reserve funds that will be available to the owner/operator to fund project costs.

ORCF/OGC Review 1. Master Lease and Subleases 2. Base rent amount 3. Escrow amounts (for example, taxes, MIP, property insurance, etc.) 4. Term of the master lease 5. HUD mandated immediate and/or critical repairs 6. HUD required replacement reserves 7. Any other required reserves

Issues Small portfolio: master lease still required even though portfolio credit review not required  The 18-Month Window is a rolling period, meaning that HUD may reach back or forward to projects assigned within 18 months of:  The first project to trigger the master lease threshold requirements; or  The last project added to the master lease Subsequent applications received within 18 months from the last project with the same ownership and operating structure as an existing FHA-insured portfolio with a master lease in place, that property must be added to the existing master lease. Certification of Multiple Projects (Consolidated Certification – Borrower): lender must obtain from borrower the current & proposed project applications within 18-month window.