1. 1 New Construction Programs New Construction, Substantial Rehabilitation, Blended Rate & Section 241(a) 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 WELCOME

3. 3 New Construction Programs Patrick Berry, Workload Manager Rachel Coleman, Account Executive Gary Golding, Senior Account Executive Mike Peeler, Senior Construction Manager Raelee Jones, Wells Fargo

4. 4 Presentation Overview Welcome Prescreening New Construction Program Overviews Problem Areas New Section 232 Documents Architecture and Cost Construction Management Tips from a Lender

5. 5 Other Queue Staffing Time in Queue Priority for Tax Credit Projects Top of the Queue (when 5 th from the top)  Update financials for relevant entities  Update Working Capital Calculation for GC  Update any exhibits that have changed

6. 6 Key Decision Criteria Borrower & Operator/Management Agent Experience  10 or more relevant facilities (strong)  3 to 9 (medium) Marketing & Leasing Up  10 or more relevant facilities (strong)  3 to 9 (medium) Financial Strength  Net Worth > Loan Amount (strong)  Equal to Loan Amount (medium)

7. 7 Key Decision Criteria Land Value  Not included in equity contribution (strong) Unemployment Rate  >100 basis points below national average (strong)  National average +/- 100 basis points (medium) Barriers to Entry  High Barriers such as a CON (strong)  Some Barriers (medium)

8. 8 Key Decision Criteria Achieved Rates Compared to Subject  Equal to or Less (strong)  Up to 10% above existing (medium) Percent Total Equity in Deal  30% or more (strong)  20% to 30% (medium) # of Units at our facility compared to existing facilities in the PMA  Same or Fewer (strong)  0% to 100% larger (medium)

9. 9 PRESCREENING OF APPLICATIONS

10. 10 Prescreening New Construction, Sub-Rehabilitation and Blended Rate Projects Purpose: To identify and correct problems that cause delays prior to assignment of an ORCF Underwriter or Appraiser

11. 11 Prescreening Experience of the principals Financial qualifications of the borrower Cash Investment as a percentage of total project cost Whether the application is eligible under the proposed Section of the Act Dates of third party reports APPS/2530 review and approval Environmental Waivers

12. 12 Prescreening Categories No Revisions Needed  Remains in queue; Assigned to UW and Appraiser Minor Revisions Needed  Remains in queue; Assigned to UW and Appraiser once revisions are submitted Major Revisions Needed  Long-term hold until revisions are made  Re-enter queue based on date revisions are submitted

13. 13 NEW CONSTRUCTION PROGRAMS

14. 14 New Construction All project and construction elements are installed as part of the construction contract Up to a 40 year term Davis Bacon applies

15. 15 Substantial Rehabilitation Improvements exceed 15% of value OR 2 or more major building components are substantially replaced Up to a 40 year term Davis Bacon Applies

16. 16 Blended Rate Existing building with an addition  223(f) + New Construction Blend LTVs based on # of units Repairs may be made on existing building, but may not reach sub-rehab level Historical NOI must support UW NOI on existing portion (similar to 223f) Davis Bacon is required on the addition; not on the 223f portion

17. 17 Section 232/241(a) Supplemental Loan Currently FHA Insured Second Mortgage Provide projects with a means to keep the project competitive, extend its economic life, and provide for financing replacement of obsolescent equipment. Completing repairs or addition that add value Loan terms must be co-terminus Continued on next slide…

18. 18 Section 232/241(a) Supplemental Loan Davis Bacon requirements determined by requirements of existing first mortgage Repairs on the existing facility (non-contract) should be shown as Borrower’s Other Fees In Lender Narrative ORCF needs to see new replacement cost (92264A-ORCF) as well as total Replacement Cost calculation (appraisal).

19. 19 Early Commencement Allowed only on Section 241(a) projects Full risk of the borrower No processing/queue priority for Early Commencement projects Documents are posted on hud.gov/healthcare Pre-Construction Conference Notify Construction Manager per Feb. 5, 2010 Email Blast—45 days notice

20. 20 PROBLEM AREAS

21. 21 Lender Narrative Consistency Updated exhibits need to be reflected Executive summary needs to tie to body of narrative Strengths and weaknesses need to tie to data in narrative Follow format of narrative in all respects, use N/A as appropriate

22. 22 Project History Land History—Lender Narrative  What entity acquired the land?  When did they acquire it?  What price did they pay?  What were previous uses?  What are key (current) purchase provisions?  Subdivision details—acreage, frontage

23. 23 Project History Land Value  Comparables must be reasonable  Liquidation value in event of assignment  Included in analysis of equity contribution  Equity with and without land value reviewed by Loan Committee

24. 24 Two Stage Application Process Initial Submission Application Submitted  Application Fee submitted—1/2 refunded if application is rejected HUD Completes the Following Reviews:  Underwriting Review  Appraisal & Market Study Review  Part 1 Legal Review  Title/Survey Review  Environmental Review

25. 25 Two Stage Application Process Initial Submission Firm Commitment Issued  120 Days to submit Final Submission Final Submission Application Submitted HUD Completes the Following Reviews  Updated Underwriting  Architectural & Cost Review  Professional Liability Insurance Review  Labor Relations Amended & Restated Firm Commitment Issued Proceed to Closing

26. 26 Equity Contribution by the Borrower This could be contribution by mortgagor entity or any combination of participants. Email blast of 9-1-2011 indicates 20-30% is anticipated and % part of lender narrative. Land equity may be included in calculation. 25% or lower is not a deal strength. 20% or lower is a deal weakness that requires mitigation. Letters of credit are included.

27. 27 Financial Capacity Email blast of 9-1-2011  Initial equity contribution  “Willingness and ability of principals to support the project over the long term”  Experience and community relationships  Current financial reports  Evaluation of current working capital in lender narrative  Capacity to address construction and operational issues.

28. 28 Waivers ORCF has a new HUD-2 Waiver Form! (HUD-2- ORCF  What needs to be on the form.  What specifically is being sought as a waiver? Cite the Handbook, Mortgagee Letter, Housing Notice, E- Mail Blast.  Include reasoning for the waiver sought.  If this is for multiple projects include that as well.  If waiver request is for asking for a waiver of a Regulations allowed significant lead time for that  ORCF cannot waive statutory provisions

29. 29 Waivers When to submit  When the approval or denial of a waiver impacts the feasibility of a project, ORCF may review waiver requests in advance of the application submission.  If more of routine waiver e.g. number of soil borings required, can be submitted with firm applications Stale Reports  Environmental reports that are stale can not be granted a submission waiver  Market Study, Appraisal report and PCNA if submitted within 30 days expired date may consider waiver

30. 30 Lender Narrative Recommendations Strengths are not just meeting minimum requirements.  Tie details together to show coherent picture.  Equity currently on hand  Waiting list in market (or all full facilities).  Low LTV  High (2x +) debt service coverage  Participant experience in PMA and state including industry awards, honors  Successful track record with HUD/ORCF

31. 31 Lender Narrative Recommendations Weaknesses should be identified with mitigation proposed.  Larger facilities than market norm.  Weak housing market  Expense ratios below regional norms  Cap rates below regional norms  Lack of data to support market or appraisal conclusions (rural areas)  Experience unrelated to project type

32. 32 NEW SECTION 232 DOCUMENTS

33. 33 Lender Narratives Added 2 Stage Documents for Blended Rate Consistency across programs Streamlines internal processing Tables updated throughout Sources & Uses—Use 92264a-ORCF Financial Capacity Environmental Section—Clarifies requirements Professional Liability Insurance

34. 34 Maximum Insurable Loan Calculation New form HUD-92264A-ORCF replaces HUD- 99264A and HUD-92264-HCF  Excel spreadsheet to minimize errors and expedite revisions, lender and ORCF review  Tabs for different project types  Instruction tab includes waiver procedure

35. 35 Maximum Insurable Loan Calculation Criteria by program type chart Sources and Uses—construction and refi tabs Land calculation tab (from old 92264-HCF) Other Fees tab (construction) Replacement Cost tab (construction, from 92264) Criteria tabs—letters (A-L) instead of numbers Notes include liq. damages and incentive estimates

36. 36 ARCHITECTURE AND COST

37. 37 Lender’s Architectural Reviewer and Cost Analyst’s Statement of Work What’s New and Different?  HUD.gov (December 23, 2011, version) vs.  Draft Section 232 Guide, version Suggestions to Improve Submissions

38. 38 CONSTRUCTION MANAGEMENT

39. 39 Navigating the Process with ORCF’s Construction Manager

40. 40 PreConstruction Conference

41. 41 70% Construction Completion HUD Permission to Occupy Final Trip Report

42. 42 Items of Delayed Completion Warranty Items Final Labor Relations Clearance

43. 43 TIPS FROM A LENDER

44. 44 Lender Tips Put yourself in the shoes of the reader Review of Third Party Reports The hard copy application Managing borrower expectations Quality Control

45. 45 Questions