1. 1 Master Leases and AR The Office of Residential Care Facilities U.S. Department of Housing and Urban Development Eastern Lenders Conference Philadelphia, PA March 13 & 14, 2013

2. 2 Tom McMillan (Lead) Panel Members – Carol Turner (OGC), Brenda Joseph- Chambers (OGC), Kathleen Burtschi (Vorys), Sara Mooney (OGC), Robert Baxter (Lancaster Pollard), Lauren Rexroat (Capital Funding, LLC)

3. 3 Introduction Opening Remarks – Tom McMillan Background – Brenda Joseph-Chambers

4. 4 Documentation Implementation Transitioning to the New Documents  All new projects to HUD (223(f), NC, SR) will be required to use the new documents as of the “effective date.”  When HUD receives an application for an (a)(7) refinance where the original application was endorsed prior to various policy initiatives, HUD will work with the lender to have the facility come into compliance with current policies.  Use of new documents will be required, as appropriate; however, some existing documents will be maintained (ICA, Rider, etc.)

5. 5 Documentation Implementation cont. Implementation and AR Financing  ORCF will allow those projects that make a good faith submission of the AR documents with an application before the “effective date” to close with the existing documents. It is ORCF’s current policy to have AR documents in near final form submitted with an application. If some lenders submit just “dummy documents” just to get in before the new documents become effective, then HUD would not accept them.

6. 6 Documentation Implementation cont. Implementation and AR Financing cont.  OHP will waive compliance with the new AR financing documents if there is just an addition to an existing approved line of credit and nothing else is changing in the line.  Existing, previously approved forms of ICA and Rider will continue to be used with the line of credit, notwithstanding implementation of new forms.

7. 7 Documentation Implementation cont. Implementation and Portfolio Transactions  With regard specifically to the master lease, we anticipate that in a great many cases, where there is a master-leased portfolio pre-dating the new documents’ effective dates, we would allow the parties to continue using the earlier master lease and simply add the new transactions to it. Even then, however, the other documents used in the new transaction would be (at least generally) the new documents (including the new master tenant regulatory agreement).

8. 8 Documentation Implementation cont. Waivers ???

9. 9 Master Lease Policy Background – ORCF’s master lease is based on the premise that a concentration of credit with any single owner or ownership group raises the possibility of an increase in risk to the insurance fund due to multiple correlated defaults arising from problems of financial or operational management repeated at multiple sites that are under common control.

10. 10 Master Lease Policy cont. HUD requires a master lease and an addendum to a master lease when:  The transaction includes three or more properties and/or $15 million or more in aggregate mortgage amount (passing either threshold is sufficient);  The properties in the master lease have the same ownership;  The operator of each property will be a lessee with the same ownership; and  The applications are submitted to HUD within an 18-month window.

11. 11 Master Lease Policy cont. Relationship between parties to Master Lease  The mortgagor and operator may be either identity- of-interest or independent entities, but the lessee of each of the properties to be included in the master lease usually has the same ownership (parent entity).

12. 12 Master Lease Policy cont. Alternatives to Master Lease  In situations where a master lease is not feasible, due to external factors such as jurisdictions where a master lease would be inconsistent with state law or policy or subject to asset transfer taxes, HUD may impose alternative risk mitigation requirements.

13. 13 Master Lease Policy cont. Sources of Policy Guidance  Email Blast from November 18, 2011  Email Blast from February 28, 2013 (http://portal.hud.gov/hudportal/HUD?src=/federal_housing_administration/healthcare_fa cilities/section_232/lean_processing_page/underwriting_guidance_home_page)http://portal.hud.gov/hudportal/HUD?src=/federal_housing_administration/healthcare_fa cilities/section_232/lean_processing_page/underwriting_guidance_home_page  Master Lease Documents  Section 232 Handbook – Production ( Being Drafted)

14. 14 Master Lease Policy cont. Clarification Regarding Master Leases  The 18 month Period - The November 18, 2011 Email Blast included interim guidance on portfolios and master leases. In that guidance as it relates to master leases, we indicated that HUD will reach back and require existing FHA facilities to be included in a new master lease if those facilities were submitted for financing/refinancing within the past eighteen months, or if credit considerations on a new transaction would warrant it.  Multiple Lender Master Lease - ORCF finds master leases to be an appropriate required risk mitigation tool regardless of whether the borrower chooses to use different lenders for the loans in its portfolio.

15. 15 Master Lease Structure & Documents

16. 16 Documents Required for a New Master Lease Master Tenant Estoppel Certificate (HUD-92339-ORCF) with Master Lease and Master Lease Addendum (HUD-92211-ORCF) attached Memorandum of Master Lease Subordination Agreement/SNDA (HUD-92333-ORCF) with non- disturbance provisions (sections 4 and 7) stricken when operator and owner share an identity of interest, to be recorded

17. 17 Documents Required for a New Master Lease (continued) Cross-Default Guaranty of Subtenants (HUD- 92331-ORCF) Operator Lease Estoppel Certificate (HUD- 91117-ORCF) with Operator Lease and Addendum to Operating Lease (HUD-91116- ORCF) attached Memorandum of Operator Lease

18. 18 Documents Required for a New Master Lease (continued) Master Tenant’s organizational documents (certification, formation documents, governing documents, good standing certificate, resolution) Operator’s organizational documents (certification, formation documents, governing documents, good standing certificate, resolution)

19. 19 Documents Required for a New Master Lease (continued) Master Tenant Security Agreement (HUD- 92340-ORCF) and UCCs using the same collateral description, all to be filed/recorded with the exception of Exhibit C to the Master Tenant Security Agreement Operator Security Agreement (HUD-92323- ORCF) and UCCs using the same collateral description to be filed/recorded, and Assignment of Rents to be recorded

20. 20 Documents Required for a New Master Lease (continued) Guide for Opinion of Operator’s Counsel, and Certification (HUD-92325-ORCF) Guide for Opinion of Master Tenant’s Counsel (HUD-92335-ORCF) Healthcare Regulatory Agreement – Master Tenant (HUD-92337-ORCF) Healthcare Regulatory Agreement - Operator (HUD-92466A-ORCF)

21. 21 Structure of Master Lease Without Operating Leases Master leases are still required when the criteria are met, even if there are no operating leases  Owner-operated projects  Projects operated by management agents

22. 22 New or Clarified Policies Pledge of operator collateral  Pledge is in support of both the senior mortgage loan AND the operator’s obligations under the lease  Assignment of Rents and Leases Single asset operator regulation  Implementation of this regulation – application since promulgation of September 2012 final rule No need for comfort letters  Language included in Regulatory Agreement

23. 23 Tips for Portfolios Include portfolio acceptance letter in each Part I submission to HUD counsel Advise HUD counsel of loans that have closed before, and which HUD attorneys closed them Be prepared to provide redlines against previously approved documents from that same portfolio Clearly document any early discussions (waivers, litigation) to provide once HUD counsel is assigned

24. 24 MASTER LEASE- BORROWER & LENDER CONCERNS Kathleen Burtschi, of Counsel Vorys, Sater, Seymour and Pease LLP Washington, DC Phone No.: (202) 467-8825 Email: keburtschi@vorys.com

25. 25 Borrower’s Key Concerns SPE Requirement: Existing Operator might not be a Special Purpose Entity due to State Licensing Requirements & Medicare & Medicaid Provider Contracts, Large Asset Transfer Taxes to Create Prop Co/Op Co Structure SPE Requirement: Existing Operator might not be a Special Purpose Entity due to State Licensing Requirements & Medicare & Medicaid Provider Contracts, Large Asset Transfer Taxes to Create Prop Co/Op Co Structure Risk of Loss of Possessory Interest in All Facilities for Operational or Financial Problems with One Facility Risk of Loss of Possessory Interest in All Facilities for Operational or Financial Problems with One Facility

26. 26 Borrower’s Key Concerns Need Assurances that HUD Will Give Owners and Operators Time to Fix Delinquent Facility’s Problems Need Assurances that HUD Will Give Owners and Operators Time to Fix Delinquent Facility’s Problems Use of Excess Cash Flow (after Payment of Expenses of Performing Facilities) to Cover Delinquent Rent and Other Operating Expenses of Troubled Facility Use of Excess Cash Flow (after Payment of Expenses of Performing Facilities) to Cover Delinquent Rent and Other Operating Expenses of Troubled Facility

27. 27 Borrower’s Key Concerns Do Not Divert Cash Flow so as to Cause Delinquencies in Other Performing Facilities Do Not Divert Cash Flow so as to Cause Delinquencies in Other Performing Facilities Reach Resolution on Problem Facility but Others are Left Intact if Performing Reach Resolution on Problem Facility but Others are Left Intact if Performing

28. 28 Existing Subordination Agreement Project Operating Deficiencies (POD)  Proposed Termination of Provider Contract  Fast Track Decertification  Proposed Denial of Permits & Approvals These did not cause a default under the Loan Documents, and HUD refrained from exercising its rights to terminate the Lease as long as License was maintained, the Operator performed under its Lease, and Rent was current.

29. 29 Proposed Subordination Agreement Project Operating Deficiency- Expanded Definition and Treatment Under HUD Loan Documents  Adds Additional Financial Indicators (Negative Working Capital, Low Debt Service Coverage) and State Regulatory Actions (Denial of Payments Notice, Special Focus Facility)  Project Operating Deficiencies Defaults under the Loan Documents?

30. 30 Borrower & Operator Expectations ORCF Be Reasonable and Flexible in Granting Time to Cure Deficiencies  In interests of all parties to resolve problems  Can Still Pursue Turnaround through a Consultant, Replacement of Operator, Prepay Loan from the Portfolio

31. 31 Operator Concerns-Proposed Documents Restrictions on Distributions & Use of Operator Cash for Non-Project Purposes HUD Has Greater Rights to Terminate Operator or Management Agent Expanded Financial Reporting Requirements  Retroactive Impact on Existing Projects HUD May Appoint a Consultant if HUD Determines License, Provider Contracts or Ability of Facility to Admit New Patients is at Risk.

32. 32 Third Party Operator’s Concerns Proposed Documents Assets and Accounts Receivable are Pledged as Collateral for the FHA-Insured Loan Rather Than for the Lease Obligations Obligations under the New SNDA and Regulatory Agreement that Create Lease Defaults Will Be Particularly Challenging since they Materially Alter the Negotiated Terms under the Existing Lease with the Borrower

33. 33 Alternatives to Master Lease for 223(a)(7) Transactions Seek Waiver Based On:  High Debt Service Coverage Ratio  Satisfactory State Surveys For Last Three Years  Acceptable Level of Professional Liability Insurance Claims for Last Several Years  History of Compliance with ORCF’s Asset Management Requirements  Offering Another Risk Mitigant (Debt Service Escrow, Lease Payment Guaranty, Letter of Credit)

34. 34 Multiple Lender Master Lease As Lenders Do Not Have Access to the Financial Performance of Loans of Other Lenders  Do Not Penalize Lenders whose Loans Go Into Default Due to Being Cross-Defaulted with a Defaulted Loan from Another Lender’s Portfolio  Recognize HUD Will Have to Perform Increased Monitoring of these Transactions and Orchestrate a “Cooperation” Among Lenders Should A Default Occur.

35. 35 ACCOUNTS RECEIVABLE FINANCING

36. 36 Lauren R. Rexroat Senior Counsel Capital Funding, LLC 410.342.3155 lrexroat@capfundinc.com Carol Turner OGC 312.913.8616 Carol.E.Turner@hud.gov

37. 37 Topics to be Covered Current Process/Forms What’s Changing? Key Concepts In New Intercreditor FHA Lender Monitoring

38. 38 Current Process/Forms Submit lender narrative (with A/R analysis/addendum) Submit A/R documents with Part I documents, as per checklist Check lean website for latest closing checklist Include portfolio letter and any waiver requests, if applicable

39. 39 Current Process/Forms (continued) If A/R loan is being put in place at closing, submit to OHP underwriter and OGC  Provide redline of lender narrative showing any changes in in A/R terms since firm application If A/R loan is being put in place after closing, submit to HUD account executive (asset manager). Include the same documents (except submit executed FHA lender security agreement and filed UCC’s).

40. 40 Current Process/Forms (continued) Submit all material A/R loan documents A/R loan agreement, security agreement(s) and any guaranties A/R lender UCC financing statement Cash flow chart, DAISA, and DACA’S

41. 41 Current Process/Forms (continued) Include Intercreditor and Rider  Currently, forms are samples only Some Intercreditors included rider provisions rather than making separate Sometimes a single ICA was used for A/R line with multiple facilities, sometimes separate ICA’s were used

42. 42 Current Process/Forms (continued) Operator searches: submit with Part I documents Searches often disclose existing lines that take time to resolve to HUD’s satisfaction (UCC-3’s, releases, untangling of non-FHA insured, etc.)

43. 43 Current Process/Forms (continued) FHA lender operator security agreement and UCC’s – currently must submit with Part I documents when there is A/R If identity of interest, secures mortgage loan and lease payments Should include default provision linked to DAISA’s and DACA’s (revocation of sweep, closure of accounts, etc.) Should include sample (broad) collateral description

44. 44 Current Process/Forms (continued) HUD lease addendum: sample form includes provisions regarding A/R loans No OMB-approved HUD forms for any of the above in the past Sample forms for intercreditor, Rider, DACA, Operator Security Agreement, and HUD lease addendum

45. 45 What’s Changing? The categories of documents that are required to be submitted remain very much the same Anticipate documents must still be submitted with the Part I documents for the near term.  ENABLES HUD TO REVIEW PRIOR TO LOAN COMMITTEE  HUD is reviewing how to streamline process

46. 46 Key Changes Certain documents are now OMB-approved forms whose use will be mandatory Operator single asset regulation A/R loan modification - process for pre- approval of certain changes

47. 47 Key Changes (continued) Lender narrative  Use correct OMB-approved form depending on whether an (a)(7), a 223(f), etc.  A/R addendum with A/R analysis A/R loan certification is now an OMB form HUD lease addendum is now an OMB form  Does not include 1.05 coverage – revise to add?  Provides lessee shall be an SPE – what if exception to operator single asset is obtained?

48. 48 Key Changes (continued) The checklist was removed from OMB process. Latest checklist will be on LEAN website. Anticipate checklist update, but until then, take care not to omit any new forms once they become applicable

49. 49 Key Changes (continued) Intercreditor is now an OMB form and its use will be mandatory Intercreditor and rider have been collapsed into one document Lease cost payment method selected must be acceptable to HUD  How will this method be selected and approved? One Intercreditor for each FHA loan

50. 50 Key Changes (continued) DAISA’s and DACA’s were removed from OMB process; so unchanged from current process Bank can use its forms, but must address key areas of concern  Expect to address in 232 handbook Sample forms for DACA Check LEAN website for sample form updates

51. 51 Key Changes (continued) FHA lender operator security agreement is now an OMB form and its use will be mandatory No distinction between IOI and non-IOI; all must secure both mortgage loan and lease payments Includes provisions regarding healthcare assets, DACA’s and DAISA’s, and as to what is an eligible A/R loan

52. 52 Key Changes (continued) FHA lender operator security agreement includes a form of assignment of rents and leases as an exhibit. This will be a separate recorded document.

53. 53 Process for pre-approval of certain A/R loan modifications Currently, the sample HUD lease addendum prohibits changes to material terms of A/R loan documents without prior consent, including, e.g., any extensions or changes in interest rate. Sample 08-09 ICA was silent on modifications issue; provisions often negotiated deal by deal.

54. 54 Process for pre-approval of certain A/R loan modifications (continued) Why lenders and operators want flexibility: A/R loans are short term Parties often expect it will be rolled over either on same terms and conditions or with change in rate only Fear that HUD will not approve promptly enough to avoid a default Additional time and expense burden on all Operators dislike lack of flexibility and can trigger lease default

55. 55 Process for pre-approval of certain A/R loan modifications (continued) Why silent treatment of 08-09 a problem FHA/lender and HUD must know the scope of the subordination and that the approved loan will not be materially changed State law doctrines on how changes affect subordination differ; desire consistent approach Deal by deal negotiations also lead to inconsistency and time/costs

56. 56 Process for pre-approval of certain A/R loan modifications (continued) New intercreditor includes standard provisions restricting certain modifications without consent These restrictions bind A/R lender New Operator Security Agreement and Operator Regulatory Agreement continue the restrictions on changes (which were removed from the new operating lease addendum) Operator Regulatory and Security Agreements bind the operator but not A/R lender

57. 57 Process for pre-approval of certain A/R loan modifications (continued) However, parties can request that HUD consider, at the underwriting stage, pre- approving a certain amount of extensions on the same terms and conditions, and/or subject only to a rate change within certain defined parameters. If approved, this exception will be included in the Intercreditor.

58. 58 Process for pre-approval of certain A/R loan modifications (continued) This is not new, in the sense that HUD has considered such requests in the past and if approved, incorporated them into the ICA. Now process will be formalized and communicated more clearly Clause incorporating approved changes is an optional clause to be inserted into ICA where applicable.

59. 59 Process for pre-approval of certain A/R loan modifications (continued) Such insertion will satisfy the requirement for consent in the HUD Operator Regulatory Agreement to such specifically identified changes (and Security Agreement as FHA lender signs ICA). Except as to the above, restriction provisions remain in effect To the extent they are more restrictive than provisions binding A/R lender, operator must comply

60. 60 Process for pre-approval of certain A/R loan modifications (continued) This approach is intended to balance HUD’s need to periodically review the feasibility of the A/R loan with the need for flexibility and undue strain on resources Requests for unlimited extensions or rate changes will not be entertained Modifications that exceed the pre-approved parameters must obtain prior consent

61. 61 Process for pre-approval of certain A/R loan modifications (continued) Submit post-closing requests for consent to assigned HUD asset manager, not OGC. Requests should include drafts of the modification documents, together with copies of the existing documents and any prior amendments Requests must be submitted sufficiently in advance

62. 62 Key Concepts: New Intercreditor FHA Lender Priority Collateral includes all but the AR Lender Priority Collateral  08-09 had the converse arrangement. AR Priority Collateral was broadly defined to include all but FHA Lender Priority Collateral, which was narrowly defined  AR Lender Priority Collateral is now more narrowly defined

63. 63 Key Concepts: New Intercreditor AR Lender Priority Collateral does not include any insurance proceeds, except CAN include business interruption: (i) to the extent proceeds support continued funding at a level not otherwise supportable without its inclusion; OR (ii) As approved by FHA Lender and HUD, BUT (iii) Shall exclude such proceeds after FHA lender has elected to apply casualty/condemnation proceeds to its debt

64. 64 THE OBLIGATIONS SECURED AR Loan Obligations  Those obligations that HUD permits to be secured by project collateral Priority Obligations  Those obligations that can be recovered out of A/R lender first lien from and after the Cut-Off Time 08-09 defined by reference to AR loan agreement, resulted in unintended results and inconsistencies

65. 65 More Key Concepts: New Intercreditor The Triggering Event, Cut-Off Time and the 30 days notice  Are cure periods included prior to the occurrence of a HUD Triggering Event? Distinction between AR Loan Triggering Event and other Triggering Events  Including maturity of the AR Loan as an AR Loan Triggering Event could leave AR lender exposed on amounts for which it otherwise held a 1 st position lien if the AR loan is not repaid in full by maturity

66. 66 More Key Concepts: New Intercreditor Protective advances made after Cut-Off Time but before Possession Date Notice (first lien).  AR loans made for key payables such as payroll, taxes, insurance, etc.

67. 67 More Key Concepts: New Intercreditor A Cut-Off Time that is based on an A/R Loan Triggering Event as to one Facility shall also be deemed a Cut-Off Time for Other Facilities, unless otherwise agreed by FHA Lender and approved by HUD prior to the Cut-Off Time. Flexibility for HUD in providing Cut-Off Time Notice, goal of which is to allow HUD and AR lender time to work together to prevent further deterioration at the project(s)

68. 68 FHA LENDER MONITORING FHA lender will need to monitor and administer the intercreditor and DACA FHA lender needs to timely give notices Anticipate parties will come to table if Cut-Off Time is issued

69. 69 Other Issues More than one FHA lender involved Master lease involved Borrower representative

70. 70 Questions