1. Loan Sizing/Eligible Debt Handbook Chapter 3

2. Topics Covered  Loan sizing benchmarks per Section 232 Program  Eligible mortgage costs included in 232 Mortgage  Eligible debt relating to loan sizing  Use of HUD form 92264a-ORCF in sizing calculations

3. Debt Service Coverage Ratio  Minimum DSC = 1.45  223(f)  232 NC/SR/BR  241a  Minimum DSC = 1.11  223(a)(7)  223(d)  232(i)  DSC calculation includes MIP.

4. Loan-to-Value Benchmarks Type of Unit New/Existing UnitsBorrower Type Max. Loan to Value* SNF/ILUBothFor Profit80% SNF/ILUBothNon-Profit85% ALFNewFor Profit75% ALFNewNon-Profit80% ALFExistingFor Profit80% ALFExistingNon-Profit85%

5. Eligible Mortgageable Costs Existing indebtedness Interest on existing debt Prepayment penalty

6. Eligible Costs Eligible Costs (continued) 223(a)(7) Only:  Interest Rate Premium:  May be used to defray prepayment penalty  Unused portion intended for prepayment penalty deposits to R4R  No portion to Borrower

7. Eligible Costs Eligible Costs (continued)  Initial deposit to the R4R  Existing R4R to transfer  Repair costs (i.e., critical, non-critical and Borrower proposed)  Third-party reports (i.e., Appraisal, Phase I, and PCNA)

8. Eligible Costs Eligible Costs (continued)  Financial/placement Fee  Lender legal, included in Financing Fee limit  Borrower legal  Title & recording  Survey  HUD fees (i.e., application fee, inspection fee, initial MIP)

9. Eligible Costs Eligible Costs (continued)  Discounts  Bond financing  Broker fees  Additional other fees (reasonable & necessary)

10. Additional Eligible Costs: NC/SR/BR/241a  Land purchase  Construction contract items  General requirements  Builder’s overhead  Builder’s profit  Bond premium  Contractor’s other fees  Architect’s fees

11. Additional Eligible Costs: NC/SR/BR/241a Additional Eligible Costs: NC/SR/BR/241a (continued) Carrying costs during construction period:  Interest  Taxes  Insurance

12. Additional Eligible Costs: NC/SR/BR/241a Additional Eligible Costs: NC/SR/BR/241a (continued)  a&e/cost reports/market study (including updates)  Borrower’s Cost Certification Audit Fee  Major movable equipment  Marketing  Pre-opening management fees  Other fees

13. Eligible Debt in Loan Sizing Changes to Eligible Debt Policy:  No more “5-Year Rule”  HUD reserves the right to request debt investigation  No longer allows debt incurred or advances made to cover operating deficits  10% threshold for defeasance or yield maintenance penalties  New “REIT Rule” – 2-year look back

14. Eligible Debt in Loan Sizing Eligible Debt in Loan Sizing (continued)  Must not have been created with an identity-of- interest (IOI) between a Borrower and the proposed FHA lender  Must not exceed existing project debt except for HUD allowed financing expenses  Must not include operator’s debt  May include fully documented HUD eligible and recent capital expenditures or structural repairs

15. Loan Sizing – Eligible Debt Decision Tree

16. Categories of Eligible Debt  Outstanding mortgage(s)  Other recorded indebtedness  Unrecorded debt  Reserves held by current lender. Property-related collateral eligible if:  Loan meets eligible debt & debt seasoning requirements  Release provisions clear & pre-defined at time of original loan  Escrow is released before application to HUD

17. Categories of Eligible Debt Categories of Eligible Debt (continued) Other Eligible Costs – Examples:  Reasonable, non-delinquent accrued interest to a non-IOI party  Reasonable prepayment penalties on the existing mortgage  Recording, release, and re-conveyance fees  Documentation or processing fees

18. Debt Seasoning  Used to ensure that the mortgage debt does not circumvent the program’s prohibition against cash out refinancing.  ORCF requires a 2-year seasoning period if debt cannot be considered immediately Eligible Debt.  The 2-year time period is needed to build a cash flow history to support the value.

19. Debt Investigation Required when: Creation of the debt involved an IOI lender Current loan was created less than 2 years ago Circumstances indicate previous financing included non- standard collateral or was not created in an arms-length transaction Current loan involved alternate financing structures Current lender held escrows or compensating balances will be released back to the Borrower Any other non-traditional debt or atypical obligations/ interests/agreements

20. Alternate Financing Structures Bridge Loans:  Subject to debt seasoning, IOI lenders, and review of recent indebtedness  Does not need to season for 2 years if equal to the out- standing principal amount of the previous loan and no equity cash out

21. Alternate Financing Structures Alternate Financing Structures (continued) Portfolio Indebtedness (Pooled Debt): Typically, both HUD and the Current Lender require that the FHA Lender obtain a partial release from the Current Lender to “pull” the project seeking HUD financing out of the existing pooled credit facility.

22. Alternate Financing Structures Alternate Financing Structures (continued) Portfolio Indebtedness (Pooled Debt): (continued) If partial release information is not available:  Investigate debt & submit documentation connecting project to outstanding indebtedness  Allocate debt using an ORCF-approved method, demonstrating a direct relationship to the existing indebtedness

23. Alternate Financing Structures Alternate Financing Structures (continued) Allocation:  Based on value for all the projects covered by the existing debt is preferred.  Other options: based on number of beds, number of units, percentage of revenue, or percentage of overall NOI.

24. Alternate Financing Structures Alternate Financing Structures (continued) Two-Year Look Back for REITs: May be treated as a special instance of a purchase transaction when:  Purchase price only includes HUD-eligible costs;  Arms-length transaction;  Sales transaction was completed at market value (ORCF-approved); and  Documentation of organizational structures clearly indicates no IOI among individuals involved on both sides of the transaction.

25. Loan Sizing 92264a-ORCF HB SectionLoan Type 3.4New Construction 3.5Substantial Rehab 3.6Blended Rate 3.7Section 241(a) 3.8Section 223(F) 3.9Section 223(a)(7) 3.10Section 223(d) 3.11Section 232(i)

26. The All New The All New Maximum Insurable Loan Calculation (MILC) Form HUD-92264a-ORCF

27. 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)

28. Question & Answers