1. Basics of the Lean Underwriting Process & Frequently Encountered Underwriting Deficiencies

2. Players in the Lean Process

3. Amee Welch HUD, Seattle Amee.Welch@HUD.GOV Initial contact with HUD Adds project to SharePoint and DAP Uploads electronic lender submission files to SharePoint Deposits checks Coordinates documents signed by Renee’ Greenman

4. HUD Workload Managers Roger.Lewis@HUD.GOV Seattle Patrick.Berry@HUD.GOV Detroit Tim.Gruenes@HUD.GOV Minneapolis Mary.V.Walsh@HUD.GOV (a7’s) Fort Worth Assign workload to HUD Underwriters Review HUD Underwriter recommendations Lender contact for overarching issues Leanthinking@hud.gov Fill in for UW’s

5. HUD Underwriter Assigned based upon workload Located in a number of HUD Offices Primary lender contact. Processing/Underwriting Pre-Application/Firm Commitment

6. HUD Underwriter, Continued Early Commencement/Early Start Draws Cost Certification Closing(s) on Some Projects

7. OIHCF Closer Handle Program Portion of Closing John Radcliff : john.p.radcliff@hud.gov Adrienne Cohn : adrienne.cohn@hud.gov Kate Murray (a7’s): kate.f.murray@hud.gov 7

8. Upper Level Staff Roger Miller – Director of OIHCF Bill Lammers – Acting Director of 232 Renee’ Greenman – Acting Director – Field Mark Williams – Development – Policy Michael Vaughn – Asset Management 8

9. OIHCF Construction Manager Coordinates construction – works closely with HUD Inspector Addresses AE & Cost questions/issues Participates in Pre-Construction Conference Coordinates Change Orders, Permission to Occupy, Escrow Releases after Closing Main contact: Mike.Peeler@hud.gov

10. HUD HQ’s Portfolio Reviews Currently Mark Williams is performing this review Required on large and mid-size portfolios Details in Notices 01-03 and 04-15 General rule: if > 10 projects, required. There are also aggregate mortgage amount limits.

11. OIHCF Appraiser 232/223(f): HUD’s Risk Assessment determines whether review required. NC/241a/SR: All appraisals/market studies will be reviewed Some environmental reviews Currently 6 on staff Main contact: Wayne.Harris@hud.gov

12. Environmental Reviewer Prepares 4128 (Environmental) Local Multifamily staff Workload Manager arranges

13. HUD FHEO Staff Reviews Affirmative Fair Housing Marketing Plan on projects with new units HUD Underwriter coordinates review

14. HUD Labor Relations Staff Reviews Davis Bacon compliance

15. HUD Closing Attorney Assigned by Regional Office of General Counsel Workload Manager coordinates assignment May be local (to project)

16. HUD Inspector Attends Pre-Construction Conference May be OIHCF staff or contract staff

17. FHA Approved Lender Must be a MAP approved lender. The existing MAP lender and underwriter approval process will continue to be followed: LQMD: 202-708-2866

18. Lender Underwriter Must be a MAP approved 232 Underwriter, and Must have attended a LEAN training session or must have underwritten at least two LEAN projects under a LEAN approved underwriter

19. Example – Initial Contact to Closing – 223(f) Lender contacts Amee Welch Requests FHA # Amee enters project into SharePoint and DAP Lender assembles and underwrites the Firm Application If questions/concerns: leanthinking@hud.gov

20. Example, continued Firm Application complete - lender sends Amee Welch electronic version (CD or thumb drive) Amee uploads data to SharePoint and project enters queue APPS/2530’s processed – newly implemented

21. Example, continued New Procedure on projects in Queue: (Robert Wolfrey) Assignment of environmental reviewer. Email requesting Env. docs sent directly to Env. reviewer Assignment of OGC closing attorney: Email requesting OGC docs be sent to OGC As underwriter capacity becomes available, Workload Manager (WLM) assigns OIHCF underwriter (UW)

22. Example, continued UW emails lender – 1 hard copy (plus second copy of 3 rd party reports and narrative) to UW – Select documents to OGC Closing Attorney – if not previously requested when in Queue UW begins Underwriter Punchlist for Firm OGC Closing Attorney - Legal Punchlist

23. Example, continued UW completes Risk Assessment Worksheet Appraiser review needed - refer to OIHCF Appraiser Coordinated by UW: OGC Review OIHCF Appraiser Review Environmental Review

24. Example, continued UW completes punchlist UW documents uploaded to SharePoint Loan committee Results sent to lender – if Firm, with Closing Checklist Uploaded to SharePoint

25. Example, If Reject…… Potential debriefing with lender 25

26. Example, If Firm Commitment Issued…… OIHCF Closer identified Draft closing documents OIHCF Closer OGC Closing Attorney OIHCF Closer – Closing Punchlist Amendment processing Cost Certification Clearing programmatic conditions

27. Example, If Firm Commitment Issued…… OGC Closing Attorney OGC Closing Punchlist OIHCF Closer, OGC Closing Attorney and lender agree on closing date. Closing occurs 27

28. HUD.GOV www.hud.gov/healthcare 28

29. LEAN Section 232 Home Page Welcome to the home page for the Office of Insured Health Care Facilities’ Section 232 LEAN program. Our website contains information on "Underwriting Guidance" and "Loan Servicing Guidance" as well as a "General Overview of FHA Insurance and LEAN Section 232." Underwriting Guidance--Deals with situations where you will be placing a new FHA Insured Loan on the project. Loan Servicing Guidance--Deals with asset management activities of FHA-Insured Loans. General Overview of FHA Insurance and HUD’s LEAN Section 232 Program

30. Lender Processing Information Revised Section 232/223(f) Documents Original Section 232/223(f) Documents Pre-Application (Link removed per 12/18/09 Email Blast) Initial Submittal of Firm (NC, SR, 241a): (Under Construction) Existing Construciton with New Addition: (Under Construction) Section 232 New Construction Section 232 Substantial Rehabilitation Section 232/241(a) Section 223(a)(7) on a 232 Section 223(d): (Under construction) Early Commencement of Construction Accounts Receivable Financing Documents Sample Closing Documents TAP OIHCF Processing of 232’s: (Under Construction) Underwriting Guidance Home Page

31. Questions? Visit our Frequently Asked Questions section. The LeanThinking Mailbox is now available! Please send any questions regarding processing LEAN 232’s to: LeanThinking@hud.gov Interested in getting updates on the LEAN 232 Program? Join our email list by sending your contact information to: Kristine.Martin@hud.gov Previous E-Newsletters Want to view Powerpoint presentations regarding LEAN 232? Visit the "Powerpoint Presentations" section. Want to view a list of new construction and substantial rehabilitation projects that are proposed or under construction under Lean? Visit the "List of Lean NC and SR Projects" section Underwriting Guidance Home Page

32. Lender Email Blasts Usually sent every two weeks Hot topics, underwriting guidance for Lean projects Example – next page

33. HUD’s LEAN 232 Program Office of Insured Health Care Facilities (OIHCF) Update as of February 20th, 2009 As a Stakeholder in HUD’s LEAN 232 Program, we are committed to providing you with the best, most up to date information on the status of the Lean Program. As of February 20th, 2009, we would like to share with you the following: New Tools Posted on FHA.GOV: FHA.GOV now includes the lender tools required for assembly of a Firm Application (and Pre-application) on 232 New Construction, 232 Substantial Rehabilitation, Section 232/241(a), and Section 223(a)(7). Moreover, there is guidance posted that deals with Early Commencement of Construction. We will soon be posting the closing documents required for each of these programs as well as the Section 223(f) documents that we have revised as a result of our first KAISAN event.

34. Lender Submission

35. Where to Find Guidance Checklist (including Endnotes) Lender Narrative Consolidated Certifications

36. Firm Application Checklist 36

37. Firm Application Checklist Lists Required Documents Standardized Specialized for Each Loan Type Includes Draft Firm Commitment with Attachments Differences btwn new and old checklist 37

38. Lender Narrative Template 38

39. Lender Narrative Template Consistent for all lenders – Guides lenders in analysis HUD reviewers know where information is Differences btwn new and old Lender Narrative 39

40. Lender Narrative, Items Included Summary of all pertinent project information Sensitivity Analysis Results of Lender Loan Committee Project #’s: LTV and DSCR Program Eligibility Risk Factors 40

41. Lender Narrative, Items Included Strengths Weaknesses and Mitigation Historical NOI Occupancy: Subject Historical & Comparables Appraisal Environmental Physical Plant 41

42. Lender Narrative, Items Included Credit, Character, Experience of: Mortgagor Principals of Mortgagor Operator Parent of Operator Management Agent 42

43. Lender Narrative, Items Included Lease Accounts Receivable Financing State Surveys Professional Liability Insurance Eligible Debt Maximum Insurable Mortgage 43

44. Consolidated Certification 44

45. Consolidated Certification Consolidates previous separate certifications Parties: Lender Mortgagor Operator Parent of Operator Management Agent 45

46. Phase in of new documents New documents will be posted to HUD.GOV. When posted, lenders notified by Email Blast Initially: Lenders have option of using either version When lender sends hard copies, lender notifies HUD UW whether old or new are used. Lender must entirely use either all old or new docs 90 days from day rolled out – all submissions must use new documents.

47. Statistics

48. Lean Closings – Calendar Year Loan# ofDays ClosingProjectsTo OccurredClosedFirmClosing 200833454 Quarter 1, 2009174973 Quarter 2, 2009475294 Quarter 3, 20092270136 Quarter 4, 20096375163

49. Average Time to Lean Closing Average Days to Firm = 64 Average Days to Closing = 126

50. Firm Issued or Closed # of Type of LoanLoans% Section 223f15784% Section 223a72413% New Construction53% Section 223d1<1%

51. QueueStatistics Queue (non-223a7’s) = 91 Projects Of these, currently 32 with Risk Assessments that passed 223a7 Queue = 23 Projects

52. Month Entered the QueueAverage # of Days Before Assignment of Underwriter July, 200931 August63 September73 Most Recently Assigned100 Average Days in Queue by Month Entered in Queue

53. Improvements Green Team – and preliminary results Of 91 223f’s in Queue: 41 Passed the Risk Assessment 9 of these have been assigned to Green team Lead = Tom McMillan Tracy Shepherd, Rita Brown, Diane Ellingwood, Gary Golding

54. Improvements Assignment of Env. and OGC reviewers while in Queue Processing of APPS/2530’s while projects in Queue Team to review Pre-applications in queue Removed Preapplication process and implementing revised Firm process to replace – details in next section

55. Frequently Encountered Underwriting Deficiencies

56. Not a Lean-approved underwriter Must work for MAP Approved 232 Lender Must be MAP-approved UW for 232s Must Attend a Lean Training or Do 2 deals under a Lean-approved UW Show proficiency in Lean standards Request approval from Amee Welch 56

57. Loan Sizing – 11/20/09 Email Blast Type ofNew/ExistingMortgagorMax UnitUnitsTypeLTV SNF/ILUBothFor Profit80% SNF/ILUBothNon-Profit85% ALFNewFor Profit75% ALFNewNon-Profit80% ALFExistingFor Profit80% ALFExistingNon-Profit85% 57

58. Loan Sizing – Continued Not-for-Profit Owners and Operators: To achieve the more liberal LTV benchmark, must demonstrate: A successful operating track record Significant project operating and management experience A solid financial track record If exceeding LTV’s on previous slide, need significant justification/mitigation. 58

59. Underwriting – Items to Consider Avoid Aggressive Valuation Historical vs. Estimated Revenue Expenses Occupancy Appropriate Cap Rates (2/6/09 Blast)

60. Underwriting – Items to Consider Debt Coverage Ratio Adequacy of Initial Operating Deficit Replacement facility = less risk of rent up Strength of market Trends in NOI, Occupancy, Payor Mix

61. Underwriting – Items to Consider Marketability of project Strength/Experience of Principals Equity investment State/Fed Rental Assistance Subsidies

62. Existing Project w/ NC Units NC = where adding units outside existing building foundation 12/2008 Lean Training Process as 223f or SR November 20, 2009 Email Blast Must be done as a ‘straight 232’.

63. Existing Project w/ NC Units Davis Bacon: Applies to both NC and Existing Work We’re working on new guidance Continue using MAP Guide 8.8B and refer to 11/20 Email Blast Use Substantial Rehabilitation Checklist posted to HUD.GOV – modify as needed Projects in Queue: we’ll work with you to meet the changed guidance

64. Blending LTVs Example: 77 existing & 39 new construction beds 77 multiplied by.8 (80% applicable to existing) = 61.6 39 multiplied by.75 (75% applicable to NC) = 29.25 Total = 90.85 90.85 divided by 116 (total beds) = Blended LTV of 78.3% 64

65. Eligible Debt If project debt is over 2 years old, no further investigation required, provided: No IOI btwn Mortgagor and Lender/Bridge Lender If IOI, must season for 5 years. 65

66. Eligible Debt Debt less than 24 months old will require investigation and must meet “Eligible Debt” definition in 4/10/09 Email Blast Construction or Capital Improvements with no cash out to Mortgagor or Principals If above was through IOI or partner buy- out, then must be “seasoned” 66

67. Eligible Debt >2yrs, continued Recorded liens not a result of personal obligation of Mortgagor Unrecorded debt directly connected to project, and supported (e.g. operating deficit advances or improvements) 67

68. Eligible Debt >2yrs, continued Other: Reasonable delinquent & accrued interest Reasonable prepayment penalties Recording, release & re-conveyance fees Documentation or processing fees 68

69. Non-eligible Repair Items Ineligible items are being included in the mortgage, such as: Computers Bed Spreads Expensive artwork Other “minor” movables 69

70. Medicare and Private Pay % Limits - Existing No change to previous rule No limits set on existing projects payee mix Based on last 3 years of financials or on what the market will support 70

71. Medicare and Private Pay % Limits - New or Rehab Facilities February 6, 2009 Email Blast For NC (or SR that will change from the original payee mix): The combined percentage of Medicare and Private Pay beds (of the total SNF beds in the project) underwritten must not exceed 30% Waiver guidance is in the Blast 71

72. Insurance Amounts on 223(f)s Professional Liability Property (NC = cost; 223f = value) Fidelity Bond/Employee Dishonesty Flood

73. Filling out the 92264 & 92264A November 20, 2009 Email Blast Not an Appraisal Summary anymore Should summarize the Narrative Reflect Lender’s conclusions (not appraiser) Signed by Lender (not appraiser) 73

74. Filling out the 92264 & 92264A Section D ‘Expenses’ not required Section H ‘Replacement Cost’ not required if appraiser didn’t utilize cost approach 74

75. Third Party Reports Review details Ensure repairs are clearly specified Survey deficiencies must be addressed, particularly repetitive findings Remaining Economic Life 75

76. Application Packages Include completed Firm Checklist Tab according to HUD checklist Don’t bind too many docs together Include any prior OIHCF staff guidance If clean submission (Title, License, PLI, A/R) then quicker/easier to close 76

77. Other General Issues Proofread! Math (Is it right? Is it consistent?) Charts (do they contradict each other?) Complete the Business Partner Registration System (for paper 2530s) 77

78. Other General Issues Ensure Narrative matches other docs in the submission and vice versa Submit all required docs the first time Include all docs that you reference in Narrative Complete all sections 78

79. Reasons for Rejections by HUD Loan Committee

80. Physical Obsolescence Extremely aged, without updates Large wards Communal bathrooms Short Ceilings Institutional Feel 80

81. Independent Living Units Section 232 Statute: Serves Frail Elderly – those in need of assistance with 3 or more ADL’s Maximum of 25% ILU’s in 232 New Units – market study must demonstrate need for frail elderly proposed Size of Units 81

82. Independent Living Units Must offer same services to all residents Not required to license ILUs, but other units must be licensed If combining SNF/IC/B&C units with ILU’s, 12 month debt service reserve is required (doesn’t apply to ALFs with ILUs) Consider option of 231/221D4 and 232 as separate mortgages

83. Using Hypothetical Estimates HUD Loan Committee views hypothetical estimates of future occupancy or operations as very risky in this tough economy Appraisal Standard Work has been updated 83

84. If you fail parts of Section A of Punchlist… 4128 Environmental Field Review Appraisal Review Waivers that cannot be approved 2530 Previous Participation Credit Risks that can’t be mitigated 84

85. If you fail parts of Section A of Punchlist… Facility License Experience (Mortgagor, Operator, Management Agent) Commercial Space Zoning PLI Claims History 85

86. Deficiency and Rejection reasons for New Construction Independent Living Unit issues Market studies not reflecting current conditions (See 12/11/09 Email Blast) Need for stronger Initial Operating Deficit Strong Justification/Mitigation for risks noted in Narrative 86

87. Deficiency and Rejection reasons for New Construction NOI too optimistic, from: Income estimate not reflecting market comparables’ payor mix or rent levels Expense estimate not reflecting the true (demonstrated) costs of operating the project 87

88. Q & A

89. BREAK

90. New Construction Updates

91. NO FURTHER PRE-APPLICATION SUBMISSIONS WILL BE ACCEPTED. For New Construction projects, applications may still be submitted direct to firm. We are working on a process whereby we can provide more timely and higher quality feedback for new construction projects.

92. Current Pre-App Process not Working Difficult to give positive response with only a market study in today’s economic conditions. Most new construction projects to move forward will need to be: Conservatively underwritten Conservative assumptions in Initial Operating Deficit Strong experienced developer with large equity in the deal

93. Plan to handle 54 Pre-App in Queue Separate team created to process the in order of submission in the queue. Mike Glasgow is the underwriter. Sue Barton and Al Mackinder are the market study reviewers. Team will e-mail the lender when their project is ready to be reviewed.

94. In Lieu of Pre-Apps Option 1: Full Option 2: Staged Full Firm Application (unchanged from current option) Initial Submission Final Submission

95. Staged Application Basics Initial FHA Application Fee Market Study / Appraisal / Environmental Qualify Mortgagor, Operator, Management Limited Plans Final Architectural / Cost Reviews Qualify Contractor / Architect(s) Final Plans / Specs Final Construction Costs

96. Initial Submission FHA Application Fee – 0.3% of mortgage If HUD elects NOT to continue with the loan, ½ of the application fee can be refunded. If HUD issues a commitment, the Lender has 10 business days to decline the commitment and request a refund of ½ of the application fee. Market Study / Appraisal / Environmental Complete review and approval of Market and Value Environmental review starts immediately Same expiration time frames

97. Initial Submission Mortgage Sized on Fair Market Value and Debt Service Qualify Mortgagor / Operator / Management Agent Full submission of exhibits (just like direct to firm) Full HUD review Final Submission permits for modifications Limited Plans Minimum submission similar to MAP Pre-App Changes to plans after initial submission that affect value will require an appraisal update at Final Submission

98. Initial Submission Other Submission Exhibits Site Control Certificate of Need (if applicable) Title Search & Pro Forma Land Title Survey Budgets Stabilized Operations Initial Lease-Up Development Costs Affirmative Fair Housing Marketing Plan Additional Facility Information Early Commencement of Construction Exhibits (if applicable)

99. HUD Review of Initial Submission Issue Commitment Approve Market Approve Value Approve Mortgagor Approve Operator / Management Agent Approve Environmental

100. Commitment Term: 120 days with one 120 day extension Extension request must demonstrate forward progress on development Extension requires updated appraisal and market study with final submission Extension may require additional conditions as well Re-opening fees and rules apply after extension period New Conditions: Submission of complete plans and specs HUD approval of General Contractor / Architect(s) HUD review and approval of Final Exhibit Submission HUD review and approval of any 3 rd Party Updates (as needed) Mortgage Re-calculated with all applicable criteria Lender has 10 business days to reject commitment

101. Final Submission Updated Underwriting Architectural Review Cost Review Contractor Exhibits Architectural Exhibits Final Plans / Specs AIA B181(s) Certifications HUD-2328 Major Movable Schedule Construction Schedule Soil Report State Licensing Additional Funding Source documentation PLI exhibits Property Insurance Requirements / Schedule Zoning/Code Compliance Utility Assurance Other Misc. Exhibits Updates of Initial Submission Commitment Amendment Draft Closing Documents

102. HUD Review of Final Submission Close Approve General Contractor Approve Architect, Drawings, Specs Approve Professional Liability Insurance Approve Updated Underwriting FHEO / Labor Relations Approval Approve Closing Documents

103. Early Commencement of Construction Early Commencement of Construction Checklist, including: Memo Form HUD-92415, and Rider Permits Construction Contract, and Rider Specifications, Division 1 Environmental Documents Procedures for requesting Early Commencement approval.

104. Tips and Observations: PreConstruction Conference & Construction Phase Lender and the PreConstruction Conference Prior to the PreConstruction Conference The PreConstruction Conference After the PreConstruction Conference Construction Phase HUD Inspections Communication

105. Questions & Answers

106. Portfolio Transactions A New and Rapidly Expanding Business for FHA

107. What is a Portfolio? Notice H 03-01 and LEAN Processing Define Small, Medium & Large Portfolios. Small--Up to ten projects within any 18 month period and Combined estimated mortgage amounts up to $75,000,000. Medium --Eleven To Forty-nine Projects within any 18 Month Period and Combined Estimated Mortgage Amounts Equal to or in Excess of $75,000,100 up to $250,000,000. Large--Fifty or More Projects within any 18 Month Period; or Combined Estimated Mortgage Amounts in Excess of $250,000,000.

108. Current Portfolio Policy Medium and Large Portfolios Require Rating Agency Reviews. OIHCF is Permitting CPA Reviews if the Rating Agency is Unable to Provide a Product Rating Agencies are Currently in Turmoil OIHCF Needs Consolidated Financial Information to Understand the Condition of the Principals with the Greatest Risk to the Transaction Some Portfolios are Requiring FHA to Look at Individual Project Valuations

109. Portfolio Notice Will be Revised Portfolios are Complex and Varied REITs are Large Portfolios Consisting of Small and Medium Portfolios Portfolio Policy Must Deal with Many Complexities Lenders Need to Understand our Limitations and Exercise Patience Lenders Also Need to Have Reasonable Expectations Over Promising Clients can Cause Negotiations to be Problematic

110. Portfolio Demand Is Overwhelming HUGE demand for processing Currently 700 Projects Either Approved or in HHQ Processing Totaling over $4.0 B Commercial Mortgage Backed Securities (“CMBS”) Refinancing is One Driver from Large Portfolios OIHCF Resources are Inadequate FHA Senior Management is Aware & Concerned about the Number of Projects & the Size of the CONCENTATION RISK

111. Portfolio Processing Issues Portfolio Refinancings are Complicated & Time consuming. OGC Legal Staff and OIHCF Staff are Overwhelmed Lender Inexperience & Improper Deal Structuring Create Unnecessary Delays & Confusion Existing Debt Instruments are a Complicating Factor Operator Leases & Corporate Debt Issues are Challenging and Sometimes Unworkable. Master Leases with FHA and Non-FHA Projects are Prohibited but Unavoidable in some Portfolios

112. OIHCF Expectations of Lenders Lenders Need Wide Ranging Corporate Finance Experience Some Lenders are Overpromising Clients How Much FHA would be Willing to Provide in New Mortgage Insurance OIHCF is Seeing Project Appraised Values that are Unrealistic, Too High and Unsupportable to Justify Mortgage Insurance Requests Lenders Need to be More Aggressive in Managing Portfolio Risk Issues! Valuing of FHA & NON FHA Projects in a Purchase Transaction is Becoming a Serious Problem!

113. Portfolio Operator Risks If the Operator is NOT on Board with FHA requirements, the Portfolio should not be submitted to HUD. Operators must meet HUD requirements for PLI, AR, DACA, etc. We Have Experience with Operators that are Restricted by Existing Bank Lending Arrangements that are in Conflict with FHA Requirements Some Operators Feel They should not Give UP Current Contractual Advantages to the Benefit of the Owner Without Compensation—This is not a FHA Issue. This issue is between the Owner and Operator.

114. Portfolio Concentration Risk Concerns Portfolios’ have Significant Concentration Risk, and Lenders need to provide offsets to that Risk by using Master Leases for both the Operating and Mortgagor Entities. If the Current Operator does not have a Master Lease arrangement, then the Capability of the Parent Mortgagor is Questionable & More Risky! FHA is Currently Reviewing the Limits of Risk for Specific Parties to a Portfolio Transaction. OIHCF Will Look into ALL Potential Risk Issues to Ascertain their Potential Impact on the Transaction both in the Short Term and the Long Term

115. Limitations on Concentration Risk Concentration Risk—Does FHA impose limits on the size of single owner and/or operator transactions? $250 MM--$500 MM--$750 MM-- $1.0 B. Should FHA have Additional Regulatory Requirements for Portfolio Projects? Additional Debt Restrictions on Owners and Operators—Higher Reporting Requirements? Should FHA Require Higher DSCR and Lower LTVs for Portfolios? Is FHA Taking on Corporate Solvency Risk?

116. FHA Senior Management Issues FHA Commissioner and Risk Manager Have Legitimate Concerns on Portfolios New Risk Management Measures will be Imposed The Commissioner & Risk Manager are Aware of the Portfolio Projects and will be Actively Involved in Reviewing Each Major Project The FHA Insurance Fund Is Weaker Due to the National Housing Crisis, and FHA Staff and the FHA Leadership is Intent on Reducing Risk and Rebuilding the FHA Insurance Fund LESS RISK IS THE NEW MANTRA

117. Portfolio Transactions (cont.) Kathleen Burtschi Senior Counsel HUD HQ-OGC Washington, DC

118. Size of Portfolio-Notice Housing 01-03 C.Small Portfolios. Up to ten projects within any 18 month period; and Combined estimated mortgage amounts up to $75,000,000.

119. Size of Portfolio-Notice H 01-03 B.Midsize Portfolios. Eleven to forty-nine projects within any 18 month period; and Combined estimated mortgage amounts equal to or in excess of $75,000,100 up to $250,000,000.

120. Size of Portfolio-Notice Housing 01-03 Portfolio must meet both tests to fall under Notice requirements. Example: 15 projects with total mortgage of $60M does not come to HQ under the Notice.

121. Special Considerations for REITs Quarterly Distribution of Surplus Cash instead of Semi-Annually Change to Mortgagor Reg. Agmt Document acquisition cost, and HUD recognizes 75% of cash payment as existing debt.

122. Portfolios – Legal Considerations During HQ review-notify issues that may need waivers AR financing restrictions Master Lease Document changes State licensing issues Ownership Structure

123. Portfolios-Working with OGC If facilities cross regions-notify HQ-OGC upfront to coordinate legal review AR review of portfolio of 32 SNFs HQ and Field OGC will work through unique issues to be applied for all closings

124. Portfolio Transactions (cont.) Jack Fenigstein Fenigstein and Kaufman

125. 1. Uniformity Need uniformity among multiple field counsel on document comments and requirements.

126. 2. Dealing with the unwilling Tenant 2.1: Concessions by Landlord 2.2: Flexibility with documentation to achieve ultimate desired result 2.3: Boot collateral

127. 3. Streamlining the closing process. 3.1: Pre-recording 3.2: Table Closing vs. Virtual Closing 3.3: Mortgagee counsel certification as to identical documents as previously presented to field counsel 3.4: Original documents vs. copies by fax and e-mail 3.5: Post-closing obligations

128. Final Thoughts The Significant Demand of Portfolios on OIHCF has Unknown Outcomes Lenders Need to be Aware of our Problems & Lower Expectations. Queue Processing Permits Portfolio Projects to be Processed Simultaneously. This is More Efficient for ALL. Portfolio Approval does not Guarantee Approval of the Mortgage Insurance Application OIHCF will NOT permit an After the Fact Increase in the Size of an Approved Portfolio if OIHCF has Concerns About the Projects or the Size of the Current Operator