1. Underwriting & Application Expectations

2. Overview  Role and expectations of Lender underwriter  Application submission requirements  Application components  Underwriting highlights  ORCF Loan Committee  Closing process  Contractor process  Lender Performance

3. Role & Expectations of the Lender Underwriter

4. Role of Lender Underwriter  Eyes & ears for 232—providing initial due diligence for the loan application  Ensures the accuracy of all reports, forms, and application exhibits  Provides a recommendation of approval to HUD, including appropriate risk mitigation

5. Role of the Lender Underwriter Role of the Lender Underwriter (continued)  Respond to questions from the HUD Underwriter and/or other staff  Site Visit  For existing facilities, UW makes a site visit to assess facility operations  For construction programs, reviews the site location as it relates to services and comparables

6. Section 232 Approved Lenders  Must be an approved Section 232 Lender underwriter to submit an application  Works with potential borrowers to explain the process from submission to underwriting to closing.

7. Application Submission Requirements

8. Application Requirements  Submit an electronic version of the entire application as well as one hard copy  Lender-generated forms… acceptable as long as it represents OMB-approved form (i.e., form details, content, order, etc.)

9. Application Requirements Application Requirements (continued)  Application checklists for all of the Section 232 programs are located on the Section 232 program website.  All exhibits on each application checklist are required, as applicable.  Review all exhibits to assure complete and accurate submission.

12. Application Submission Instructions Requesting an FHA Number:  Submit Form HUD-941-ORCF, Lender’s FHA Number Request Section to 232_fha_requests@hud.gov232_fha_requests@hud.gov  Once FHA number is assigned, lender may submit the Electronic Submission of the Firm Application

13. Submission of the Electronic Application Submit the following documentation to: Mike Luke U.S. Dept. of HUD 920 Second Avenue South Suite 1300 Minneapolis, MN 55402  Form HUD-90022-ORCF, Certification for Submission of Electronic Firm Application  Application fee  Electronic copy of the full Application

14. Common Ownership  Please make sure to accurately and completely fill out the common ownership section of Form HUD-90022-ORCF  Ensures proper naming and tracking of related projects

15. Submission of the Electronic Application  Use no more than 40 characters when naming files  Please use only letters, numbers and underscores, when naming files Avoid using special characters as part of the name: \ / : * ? " | # { } % ~ &

16. Organization of Media Section 223(f): 01_UW 02_Third_Party_Reports 03_Borrower 04_Borrower_Principal 05_Operator 06_Operator_Parent 07_Management_Agent 08_Real Estate 09_Operations 10_PLI 11_Additional Funding Sources 12_Accounts_Receivable 13_Master_Lease

17. Submission of the Electronic Application  Ensure that all electronic documents are less than 50 megabytes (MB) in size  Separate extremely large documents into smaller sections of 50 MB or less  Avoid adding the assigned FHA number in the file name, as it adds characters

18. Submission of the Electronic Application Submission of the Electronic Application (continued)  Avoid using spaces in file names  Use either an underline _ or dash – as an acceptable alternative.  For example: Instead of “Tab 01-Lender Narrative 171-22000” {39 characters}  Using a shorter naming convention “01- LndrNarr” {only 11 characters}

19. What Happens Next?  Once the entire electronic copy is received the application is placed in the queue.  An ORCF UW is assigned when capacity is available.  The lender should retain the hard copies of the application until the ORCF UW requests it.

20. Direct-to-Firm Application Process  Entire Firm Application is submitted at one time for ORCF review  ORCF issues a Firm Commitment or a Rejection Letter  HUD retains the Application Fee in either result  Applies to 223(f), 241(a), 223(a)(7), 223(d) and 232(i) programs  New Construction, Substantial Rehabilitation & Blended Rate projects may use this process

21. Two-Stage Application Process  Lender submits Initial Submission exhibits for review by HUD  ORCF issues either Firm Commitment or Rejection Letter  Application Fee is paid at Initial Submission, but 50% is refunded if rejected at Initial Submission  Applies to New Construction, Substantial Rehabilitation, & Blended Rate programs ONLY.

22. Two-Stage Application Process Two-Stage Application Process (continued)  If Initial application results in a Firm, Lender has 120 days to submit Final Submission  ORCF reviews Final Submission and issues an Amended & Restated Firm Commitment  Lender moves toward closing

23. Deficiencies  ORCF UW advises lender of any defects or deficiencies  Lender has 10 business days (or other brief time period) to correct deficiencies  Other applications pulled for review while the application is on hold awaiting lender revision take precedence over the hold application  If not cured, ORCF UW will take project to Loan Committee as is

24. LEANThinking@hud.gov  Waivers that impact feasibility of a project  Environmental Concerns  Unusual Site Conditions  Flood Hazards or Wetlands  State Historic Preservation Office (SHPO)/U.S. Fish & Wildlife Reviews where HUD involvement is required  Davis-Bacon applicability questions  Other questions you have while assembling the application

25. Application Components

26. Lender Narrative Purpose: To summarize the Lender’s analysis as it relates to each of the exhibits in the application.  Must be consistent with other exhibits  Please check the math  Strengths and risks should be fully analyzed here and mitigation of risk should be provided

27. Lender Narrative Lender Narrative (continued)  Keep formatting and font the same.  Include the information the tables request. If the table asks for “per resident day” please do not use “monthly” data.  Sources & Uses statement should be a copy of the 92264a-ORCF S&U.

28. Lender Narrative Lender Narrative (continued)  Proofread your Lender Narrative before you submit!  If something is not applicable, explain why (Please don’t make us guess!)  The better the Lender Narrative, the faster the ORCF review!

29. Maximum Insurable Loan Calculation 92264a-ORCF  Replaces both Form 92264-HCF & Form 92264a  Provides a standardized Sources & Uses  Includes a chart that shows which criteria apply to which programs  Includes specific tabs for the Construction Programs  Fancy new acronym (MILC)!

30. Application Exhibits  Firm Commitment Templates: Updated to incorporate frequently used Special Conditions into the body of the document  Special Conditions: Must clearly explain what is required for satisfaction and when

31. Special Condition Example Not so great: The Management Agreement must be executed. What we are looking for: Prior to initial endorsement the Management Agreement must be executed.

32. Application Exhibits Consolidated Certifications:  Lender should review to assure that these are fully completed  Previous Participation Section is NOT currently required  Fully explain legal actions, bankruptcies, etc., in an attachment to the Certification and in the Lender Narrative  When completed correctly and in its entirety, our UWs can review quickly!

33. Application Exhibits Application Exhibits (continued)  Include copies of any email guidance from LEANThinking or other HUD staff regarding your project.  Other exhibits will be discussed throughout the training, but if you have questions, please ask!

34. Underwriting Highlights 223(f) Refinance

35. Underwriting Highlights Valuation Issues & Concerns:  Aggressive NOI conclusions  NOI Conclusion not yet Achieved  Fluctuating NOI History  Declining NOI trend  Aggressive Expense Ratio  Aggressive Cap Rate 35

36. Underwritten Net Operating Income  Make sure UW NOI is less than or equal to T12  Problems occur when underwritten NOI is optimistic compared to recent performance  Loan Committee does not like: UW NOI > T12 and recent year-end figures When annualized NOI is used to support UW NOI Big delta between NOI for value and NOI for DSCR Normalized NOI for any expense items other than management fee, replacement reserves, and property taxes

37. Underlying Reasons for Using NOI higher than currently achieved Loan-to-Value Degree of Aggressiveness Use of Aggressive NOI in Underwriting Combination of: Risk to HUD Reduce Mortgage Debt Service Reserve - to be held for 12 consecutive months at underwritten NOI Reserve amount equal to 6-12 months of debt service Accept As-Is Do Not Approve Defer to Let Season and Prove Out Appropriate Mitigation

38. Unacceptable Example

39. Acceptable Example

40. Debt Service Coverage  1.45 DSC is a bare minimum benchmark  Typically, we see an average of 1.80 DSC for ALFs and 2.50 DSC for SNFs

41. Underwriting Highlights New Construction Programs

42. New Construction Issues  Experienced Owner & Operator/Management Agent  Similar facilities (in size & type)  Knowledge of local requirements and market  Successful documented rent-up & operation  Equity: 20-30% of Total Project Cost  Cash equity is preferable  Escrows/Letter of Credit are acceptable  Land may be included in equity calculation, but is subject to scrutiny since value may not be realized if claim during construction & lease-up, for example

43. New Construction Issues New Construction Issues (continued)  Financial Capacity:  Principals must demonstrate ability to support project throughout the construction period (unanticipated change orders) and loan term  We are looking for capacity beyond just cash available to close  Project Strengths & Weaknesses:  Lender Narrative to present coherent and persuasive analysis that is consistent with application exhibits

44. New Construction Issues New Construction Issues (continued)  Lease-up Risk Mitigation:  Initial Operating Deficit (use template) Prelease only allowed for very strong markets and/or replacement facilities; Lender to demonstrate with waiting lists or other documentation Absorption should be conservative  Short-Term Debt Service Reserve Escrow 6 to 12 months of P+I+MIP held until average of 12 months of underwritten DSC Lender to propose a Debt Service Reserve Escrow

45. New Construction Issues New Construction Issues (continued)  Comparables:  Market comparables used must be comparable (example: size, payor mix, age, services provided)  Comparability of comparables should be discussed in the Lender Narrative  For example, Medicaid Waiver Assisted Living must be addressed even if proposal does not include Medicaid residents when comparables do have Medicaid residents

46. New Construction Issues New Construction Issues (continued)  Operating Expenses:  Must be conservatively underwritten  For existing projects adding units, there may be some economies of scale, but these must be quantified by the lender and documented with comparables  Lender Narrative should not stress high quality of care and have lower per resident day expenses than comparables

47. Reasons for Rejection Market/demand Lack of experience with type and complexity Financial capacity Aggressive expense underwriting Aggressive capitalization rates Waivers that cannot be approved (e.g., Regulatory), submit to LEANThinking first Environmental issues (i.e., site unacceptable)

48. ORCF Loan Committee

49.  ORCF UW completes application review, confers with WLM, and makes a recommendation of approval or rejection to Loan Committee  Loan Committee reviews and will either approve or reject  Loan Committees are Tuesday/Wednesday/Thursday  ORCF UWs must have LC Documents posted at least 48 hours in advance (longer for New Construction programs)

50. ORCF Loan Committee: Inside Scoop 223f: Main concerns and examples of mitigation:  Valuing/sizing the loan using Net Operating Income (NOI) that is optimistic compared to historical  Mitigation: Debt service reserve, reduce mortgage  Patient/Resident care issues  Mitigation: Third-party risk management (one-time or on-going)  Market concerns, facility low historical occupancy levels  Mitigation: Let season until operations turn-around, management/ marketing efforts  Loan term as it relates to some functional obsolescence  Mitigation: Reduce loan term, reduce mortgage 50

51. ORCF Loan Committee: Inside Scoop ORCF Loan Committee: Inside Scoop (continued)  New Construction concerns:  Borrower/Operator’s lack of experience in developing and operating similar facilities  Low equity contribution less than 20%  Market concerns  Size of facility in relation to comparables  Aggressive metrics used in loan sizing 51

52. Closing Process

53.  Once a Firm Commitment is issued, an OGC attorney will be assigned (if not previously assigned)  Lender sends Closing Documents to OGC Attorney and emails ORCFCloser@hud.gov for a Closer AssignmentORCFCloser@hud.gov  OGC and Closer work with lender to schedule closing date and assure documents meet HUD requirements  Closing occurs  Everyone celebrates a job well done!

54. Closing Process Closing Process (continued)  Amendments to Firm Commitment should be consolidated into as few as possible  Extension Requests go to ORCFCloser@hud.gov ORCFCloser@hud.gov  Closing Session will go into more detail

55. Contractor Process

56.  Contract UW and Contract Closer are your main point of contact  GTMs should be copied on all correspondence  GTMs do not get into details on UW side until review of the LC package, unless Contractor or Lender raises questions/concerns

57. Lender Performance in Underwriting

58. Lender Performance Key Metrics 1.Math calculations 2.Quality control 3.Responsiveness 4.Due diligence 5.Program/legal issues 6.3 rd party review of reports

59. FY 14 Lender Performance Issues FY 14 Lender Performance Issues (337 deals) as of June 12, 2014

60. Lender Performance Issues in Underwriting

61. FY 14 Lender Performance Issues in Underwriting FY 14 Lender Performance Issues in Underwriting (continued)

62. Lender Performance ORCF “Pet Peeves”  Incomplete or weak Lender Narratives  UW NOI is optimistic compared to historical  Math errors in UW, application fee, Sources&Uses  Revisions to Standardized ORCF Forms  Missing documents, lack of consistency among exhibits  Lack of full due diligence (CMS Surveys, other FHA projects with affiliation to participants)

63. LENDER XYZ- Detailed View Total Deals No Significant Issues Significant Issues Mathematical Calculations Quality ControlResponsiveness Due Diligenc eProgram/Legal 3rd Party Reports/Lender Assessment LENDER NAME HERE413311020 Issues Breakdown by Deal Type 223f413311020 223a7000000000 232NC/SR/BR000000000 232i000000000 241a000000000 Lender UW Performance Lender UW Performance Sample Lender Profile - Example

64. Lender UW Performance Lender UW Performance ORCF Comments 223f FHA number here Ultimate Senior Care Math, QC, Responsive ness Lender resistant to reductions in value and loan amount from risk perspective, significantly delayed deal 223f FHA number hereRetirement City Math, Program 2530 Problems-Lender failed to assist Borrower despite HUD requests resulting in borrower continually seeking OHP guidance. LC: Lender needs to fully describe significant drops in NOI as part of key data. 223f FHA number here Shady Pines Campus of Care Math, Program LC: Prospective UW data that did not demonstrate support of requested mortgage; failure to explain significant historical drops in NOI;UW further marginal due to request below standard 1.45

65. Lender Performance ORCF/Section 232 works in conjunction with:  FHA Lender Approval and Recertification  Lender Qualifications and Monitoring  Ginnie Mae

66. Questions?