Lean Asset Management (Section 232) SMAC May 15, :00 AM May 6, 2014‹#›

Section 232 Portfolio As of 4/21/ Projects - $21.5 Billion Outstanding Principal Balance – 153 Categorized as “Troubled” in HUD’s system Concentration in servicing: – 50 total lenders servicing Section 232’s. – $18.5 Billion (86%) is being serviced by 13 lenders Portfolio Interest Rate: – Currently = 4.20%; 2 Years Ago = 5.35% May 6, 2014‹#›

Full Claims (by FY)

Section 232 Claims

Partial Payment of Claim(s) Last Resort 4 PPC’s Completed in FY 2013 – 1 in 2012 and 1 in 2011 – 1 in FY 2014 and another 3 Being Contemplated Average Structure on PPC: – 65% of Claim - Restructured 1 st Mortgage – 35% of Claim – Soft 2 nd Mortgage

Primary Reasons For Claim Last 5 Years of Data Market or Rate Issues: 54% Operator or Survey Issues: 27% Money Follows the Person: 19%

Takeaways 8 of 14 Claims Since 2012: MI Population – Money Follows the Person – Initiative to move tenants to less institutionalized homes. New Construction Remains Highest Risk: – 52% of Projects on Priority Watch List vs. – 24% of Portfolio are/were NC

Asset Management Specialization Loan Modifications – done – success! Next up…… – TPA’s – R4R Reviews – Non-Critical Repair Escrow Reviews May 6, 2014 ‹#›

Asset Mgmt Process Re-Engineering Checklist and Punchlists Starting with High Volume Standardization and Transparency Partner Involvement Electronic Asset Management Portal May 6, 2014 ‹#›

Section 232 Healthcare Portal May 6, 2014‹#›

Proposed Components Operator Financials: See Other Slides Asset Management Transaction/Requests Portal and Tracking: – Just Began Development – All Asset Mgmt Processes and Requests – Electronic – Better Tracking Development Application Portal and Tracking: – Slated to begin development after 1 st 2 phases complete. 11

Phase I: Operator Financials

Background Accountability Rule Change: 10/9/12 – 24 CFR Part Required Quarterly Operator Financials – FY’s Beginning 60 Days After HUD Publishes CFR Notice Announcing Our System Applies to All Section 232’s – No Lease: Mortgagor = Operator May 6, 2014 ‹#›

Background, Continued Quarterly: Must be submitted to HUD within 30 Days of the End of the Quarter FYE: Must be submitted to HUD within 60 Days of the End of the FY Pursuing Reg. Waiver – 60/90 – also flexibility Operator Certified Financials OK. Mortgagor Annual Audited Financials Still Required. May 6, 2014 ‹#›

Logistics Operators will submit quarterly financial reports to their servicing lender. – HUD is not dictating format The lender will populate a standard excel template with key financial information on the Section 232’s they service. May 6, 2014 ‹#›

Draft Entry Items for Lenders on Spreadsheet Operating Cash Investments R4R Balance AR Current Liabilities Amortization Expense Net Income FHA Interest Expense Rent/Lease Expense Depreciation Expense Current Assets Total Expenses FHA Principal Pymt. MIP May 6, 2014‹#›

Logistics, Continued Lender uploads spreadsheet to a portal. – Can upload spreadsheet in batches. Lender will be able to view and run reports on ratios: – DSCR – Several Liquidity Measures – AR and AP Measures May 6, 2014 ‹#›

Logistics, Continued Work in Progress: – HUD generates an overall financial risk score for each project. – Determine how to follow-up on perceived weaker financial projects. Lender on front lines May 6, 2014 ‹#›

CURRENT DESIGNS OF PORTAL - LENDER VIEWS May 6, 2014‹#›

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Beta Testing with Several Volunteer Lenders In June Duration one hour on a specific date Testing will include: Log In to Test Site Retrieving and populating an Excel Template Uploading Files Reviewing uploaded files for data integrity. Lenders that want to participate send to: Subject line: 232 Healthcare Portal – Pilot (by 5/20/14) May 6, 2014‹#›

Timeline Goals Beta Test w/several Lenders: 6/14 All Lender Training: 7/14 Deployment: Voluntary Reporting: 8/14 CFR Notice: No Later Than 10/31/14 Mandatory Use: Fiscal Years Beginning after 12/31/14 May 6, 2014 ‹#›

Loan Modifications May 6, 2014 ‹#›

ORCF – Interest Rate Reductions (IRRs) IRRs are Loan Modifications proposing to simply lower the existing interest rate on performing loans (vs. Default Loan Mods) Lender Checklist and Lender Analysis are posted on HUD.gov: althcare_facilities/residential_care/loan_servicing May 6, 2014‹#›

IRR Loan Modifications Dedicated Box for Electronic Submissions: Specialized Team in Asset Management Quick accurate Preliminary Reviews (generally within 2 weeks) COMMUNICATION IS KEY- applies to lenders and lender counsel! May 6, 2014‹#›

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IRR Loan Modifications 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 May 6, 2014‹#›

IRR Loan Modifications (cont’d) 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 May 6, 2014‹#›

IRR Loan Modifications (cont’d) 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 May 6, 2014‹#›

IRR Loan Modifications Trade Premiums Cannot cover: Borrower Counsel Organizational Costs 3 rd Party Reports (e.g. PCNA) May 6, 2014‹#›

IRR Loan Modifications 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 May 6, 2014‹#›

Submit IRR Package Prelim Review Finalize Mod Docs and Submit (30 Days) Final Review Execute Close IRR, Submit Recorded Docs (45 Days) General Ideal Process Flow of Interest Rate Reductions in ORCF May 6, 2014‹#›

IRR Loan Modifications Common Issues Slowing Down IRRs: Incorrect calculations (check: DSCR, Sources & Uses) Quality Control (Exhibits must be internally consistent) Letter from GNMA not included Lack of Communication May 6, 2014‹#›

IRR Loan Modifications As of February 21, 2014, we have received 37 requests for IRRs Fully Processed approximately 25 to date projected to realize over $3 million annual savings Streamlined Process; Specialized Team; OGC on board. May 6, 2014‹#›

Section 232 Draft Handbook May 6, 2014 ‹#›

Handbook Timeline OIG Audits: Considerable Pressure to Issue Latest on Timeline for Issuance Grandfathering Period? Necessary revisions will be made after issuance – similar to 242 handbook. May 6, 2014 ‹#›

Details Operator and Lender Responsibilities, Including…… May 6, 2014 ‹#›

Dealing With Issues on Section 232’s Failure to make Lease Payment Serious issues with State Inspections/Licensing Substantial Legal Judgments/Penalties/Fines Large PLI Claims Bankruptcy May 6, 2014 ‹#›

Continued…. Delinquent Mortgage Payments Default of Master Lease Significant HUD Compliance Issues: – Poor REAC Scores – Department Enforcement Center Actions May 6, 2014 ‹#›

HUD Intends to Provide an Optional Standardized Format for Reporting These: – What the Issue Entails – Actions Being Taken to Address May 6, 2014 ‹#›

Lender Responsibilities Quarterly, proactively Monitor CMS’s Special Focus List. Annually, proactively Monitor PLI and Fidelity Bond Coverage. Quarterly Operator Financials – Discussed in more detail later. Review and submission of Asset Mgmt Actions/Transactions May 6, 2014 ‹#›

Other Draft Handbook Changes Proposed for Asset Management……. May 6, 2014 ‹#›

Lender Review and Approval of R4R Requests: Option of Lender Lender approval: – Automatically approved if MF approves – If not, can request approval from ORCF Only R4R Releases Minimum of $1,500 per Unit in R4R After Release All Section 232 Loan Types Eligible May 6, 2014 ‹#›

Lender Non-Critical Repair Escrow Administration Option of Lender Lender approval: – Automatically approved if MF approves – If not, can request approval from ORCF Must be set up on each loan when in Development – no HUD Inspection Fee May 6, 2014 ‹#›

Lender Non-Critical Repair Escrow Administration Before closeout of account, inspection by PCNA provider (mortgagable cost) HUD must approve of closeout of account. HUD must approve of any revisions to scope. May 6, 2014 ‹#›

Handbook Draft Also Addresses….. Environmental Review Required per CFR when: Remodeling, Adding to, Subtracting from, Reconstructing, or Demolishing – Language in Reg. Agreements Defines Remodeling as Substantial Rehab. Will be built into checklist and punchlist for processes. May 6, 2014 ‹#›

Other Hot Topics May 6, 2014 ‹#›

Flood Insurance On projects requiring flood insurance, Security Agreement requires coverage at lesser of: – The maximum amount available under NFIP, – Replacement cost minus land, or – The existing loan balance. May 6, 2014 ‹#›

Flood Insurance On 6/1/14, the maximum amount available under NFIP is increasing for “Residential Buildings with 5 or More Units” – Going from $250k to $500k Maximum amount available on “Non- Residential Buildings” is not impacted (nursing homes). ORCF working with Multi-Family to come out with joint guidance May 6, 2014 ‹#›

Financials: Recent Blast Mortgagor: Notice H – Audited still required unless original amount of mortgages < $500,000 May 6, 2014 ‹#›

Financials: Lessee/Operator Many Regulatory Agreements require: – Notice in 1996 required – OHP has had Lean Rider since December 2008 New address: Or via mail to: Jacob K. Javitz Federal Building Attn: Simon Kleinman 26 Federal Plaza, Room New York, NY May 6, 2014 ‹#›

MDDR System 2/27/14 Blast Addresses Important to follow rules regarding entering delinquent projects into MDDR and properly submit requests for extensions of election to assign. May 6, 2014 ‹#›

Production Branch Tom McMillan Deputy Assistant Secretary For Healthcare Programs Roger Miller Director, Office of Residential Care Facilities Roger Lewis, Acting * Office of Healthcare Programs Office of Residential Care Facilities Section 232 Primary Organization Chart (Unofficial) Director, Production Patrick Berry, Acting* Director, Production Patrick Berry, Acting* Director, Asset Management and Lender Relations Division Tim Gruenes* Director, Asset Management and Lender Relations Division Tim Gruenes* Associate Deputy Assistant Secretary Roger Lukoff Production Branch Susan Gosselin Production Branch Rita Dockery Loan Management Branch Ed Chlystek Loan Management Branch Catherine Worley Loan Management Branch Angela Collier Director, Policy and Risk Analysis Division John Hartung* Director, Policy and Risk Analysis Division John Hartung* Risk Management Branch Tim Coon Lender Relations Mary Walsh * Lender Relations Mary Walsh * Credit Risk Jen Buhlman* Credit Risk Jen Buhlman* Closing Team Carol Jun Closing Team Carol Jun * Denotes Loan Committee Voting Member

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Tim Gruenes