1. Participant Credit & Financial Review Handbook Chapter 6

2. Chapter Overview This chapter provides guidance on: Determining acceptability of the Borrower, Operator, Parent of the Operator, and General Contractor Completing participant financial review Evaluating non-profit borrowers and participants

3. What’s required? Assess the Borrower and/or Operator’s ability to successfully manage the project based on: Credit worthiness and history Experience Financial capacity

4. Identify Ownership Review the organizational structure to identify individuals or entities that have control All participants must receive approval via the APPS/2530 submission Borrower must be a single- asset entity

5. Identify Ownership (continued) Acceptable single-asset entity types include: General Partnership(GP) Limited Partnership (LP) Corporation (“C” or “S” corporation) Limited Liability Company (LLC) Trust Non-profit corporation Any combination of ownership forms used to establish a joint venture Any other public or private single-asset borrower entity May not be owned by a natural person or as tenants in common

6. Identify the Principals A “Principal” may have an…. Active role (i.e., direct activities/affairs or be involved in decision-making of borrower entity) OR Passive role (i.e., participation is limited to ownership interest)

7. Identify the Principals (continued) The borrower principals are…. Any entities and/or individuals with a significant ownership interest in the borrower entity Any affiliate(s) of the borrower entity (individual or entity) with a significant ownership interest in the borrower entity

8. Identify the Principals (continued) PartnershipsCorporationsLLCsOther All general partners, regardless of ownership interest Limited partners with 25% or more interest All corporate officers (i.e., president, vice president, treasurer, etc.) All officers of the board of directors Each stockholder with 10% or more interest For non-profits, all officers of the board of directors & any staff designated as corporate officers All managers & managing members Members with 25% or more interest General contractors Management agents (Note: financial & credit analysis of management agent is not required) Packagers (persons or organizations hired to furnish advisory services in connection with financing, construction, or operation) Consultants (except architects & attorneys engaged arms-length to provide professional services & do not have ownership interest)

9. Identify the Principals (continued) Foreign nationals and corporate entities may participate as principals. The single-asset borrower must be registered in the U.S. and at least one principal with decision-making authority must be a U.S. citizen. The USA Patriot Act requires terrorism checks and verifications on all principals prior to closing. This is covered by the “program obligation” language in the Lender’s Certification, HUD-92434-ORCF.

10. Identify Non-Principals The following are not considered principals for purposes of credit and financial investigations: Stockholders with less than 10% interest Limited partners with less than 25% interest Attorneys and architects with arms-length fee arrangements Minor corporate officers Subcontractors, brokers who perform limited services, Public Housing Authorities, board of director members who are not officers or decision-makers, officers of passive investors, and management agents

11. Trusts as Principals Determine which individuals control the assets of the trust and what restrictions are placed upon them.  Individuals who have effective control of trust assets should be treated as principals  The Lender Narrative should explain the Lender’s identification of trust principals

12. Liability of Principals Section 38 of the Healthcare Regulatory Agreement – Borrower (HUD-92466-ORCF), requires that individuals or entities who will be personally liable for certain enumerated matters be identified within the document See Chapter 6.1.E.3. for signature requirements of particular entity types

13. Credit Investigation Lenders are required to obtain and evaluate credit reports or credit histories. A commercial credit report for business or a residential mortgage credit report for individuals must be no older than 60 days at the time of application.

14. Credit Investigation (continued) Lenders must evaluate the credit histories for:  Borrower entity  Principals of the Borrower  Businesses with pending judgments  10% of the sponsors other business ventures  Facility Operator  Parent of the Operator  General Contractor  Consultants on non-profit transactions  BOD Officers with decision- making authority

15. Lender’s Review of the Credit Report Lenders should:  Compare information in credit reports to financial statements  Make reasonable inquiries to determine if there are federal debt defaults or judgment liens against the property  Review data for inconsistencies, incompleteness or discrepancies and resolve the discrepancies  Investigate adverse information and require written explanation of items from participants

16. Delinquent Federal Debt Delinquent Federal Debt requires additional application exhibits and Lender analysis…. Detailed written explanation from the applicant or principal Letter from the affected agency, on that agency’s letterhead Lender’s reason for recommending the applicant in the Lender Narrative

17. Additional Review Lenders must perform a thorough internet search and review of the principals to determine if there are any additional concerns to credit- worthiness.

18. Rejection Due to Unacceptable Credit Use professional judgment in approving or rejecting a principal based on credit-worthiness Individuals may be rejected for lack of timely payment, lack of liquidity, ongoing delinquent federal debt, judgments, or actions that can impact financial viability

19. Analyze Previous Experience Evaluate resumes and confirm that each principal has proven experience in developing, owning, and operating healthcare facilities similar to the proposed property. Pay particular attention to:  Type and size of property  Geographic area  Length of time of the principal’s involvement  Past roles performed by each principal Any issues with applicable experience should be identified by the lender as a risk factor in the lender narrative AND the lender should propose mitigation (additional participants or staff, escrows, etc.)

20. Analyze Previous Experience (continued) Borrowers whose primary business is not healthcare facility development or operations, that have little residential healthcare experience, or that are new to a particular market or state regulatory environment may be required to bring additional parties to the development team to satisfy experience requirements.

21. Participant Financial Review Use information in financial statements to determine whether the parties have the financial capacity to develop, build, complete, and operate the project. The lender must complete a financial review to determine the level of funds available for investment and working capital, and which assets will be available to secure the FHA-insured loan.

22. Participant Financial Review (continued)  Individuals must submit Personal Financial Statement (Form HUD-92417) or substitute statement acceptable to HUD.  Business entities must submit financials for the last 3 years, or length of existence if less than 3 years.

23. Participant Financial Review (continued) Financial review documents:  Balance Sheet  Income Statement  Statement of changes and all notes if financials are audited  Supporting schedules (i.e., AR/AP aging, pledged assets, legal proceedings, etc.)  General Contractors must submit work in progress  Other data necessary and as requested  Financial Statements must be certified  Mid-year updates provided to HUD should be in the form of T-12 (not annualized)

24. Process Financial Statements Review financial statements no more than 3 months old Analyze participant and general contractor liquidity and net working capital (adjusted for contingent liabilities) Recommend approval based on “true net worth”, based on existing assets (not working capital) Equity for NC projects can be in the form of debt, but cannot be an obligation of the borrower (must be debt of sponsor/parent/affiliate) Certification is required from the sponsor/parent/affiliate and must specify the amount of funds being committed to the project.

25. Process Financial Statements (continued) Letters of Credit may be used to set up escrows at closings Individual participant may not abandon a project after firm commitment issuance; Lender will obtain certification of commitment and availability of funds General Contractor’s adjusted working capital should equal 5% or more of the estimated contract for the project Parent companies of General Contractors may not be relied upon for financial capacity or working capital

26. Evaluate Non-Profit Borrowers  Must have experience and financial strength  Evaluate the Borrower and ALL other entities performing different functions (i.e., ownership, property management, acquisition, development, resident services, and asset management)  Non-profit sponsor should have diverse and stable funding sources  Lender should determine and recommend the borrower based on experience and financial capacity

27. Evaluate Non-Profit Borrowers (continued) Investigate credit of individuals and entities who have operational authority:  Order credit reports  Check for defaulted or delinquent federal debt  Check for outstanding or unresolved credit issues  Analyze financial data for liquidity, sound decisions in prior business affairs, overall condition of the non-profit entity, and multiple fund accounts (common in larger non-profits and could involve interfund payables and receivables)  Review capacity of sponsor to handle size and complexity of proposed project  Review the Developer’s Fee

28. Non-Profit Sponsor & For-Profit Borrower A non-profit may form a for-profit borrower to own a tax credit project or obtain distributions of surplus cash. This arrangement may be approved with HUD OGC oversight and if the non-profit agrees to comply with terms and limitations applicable to profit motivated entities. (See 6.3.C. for details.)

29. The End