1. Lender Underwriter Training Continental Breakfast Sponsored by: M&T Realty Capital Corporation

2. Lender Underwriter Training HUD Office of Healthcare Programs Section 232 Program September 13 – 15, 2011

3. Wednesday, September 14, 2011 8:00 a.m.

4. Accounts Receivable Financing

5. Attachment Perfection Priority Termination Koren McKenzie-John Attorney-Advisor HUD Miami Field Office 305-520-5105 Koren.McKenzie-John@HUD.gov

6. Security Interests in AR Collateral Governed by Article 9 of the Uniform Commercial Code (UCC): Lender is “Secured Party” and Borrower is “Debtor” Article 9 amended in 2001 & enacted in all 50 states with few non-conforming provisions peculiar to each state: Expanded and added collateral categories Debtor’s signature no longer required on Financing Statement; security agreements signed by Borrower authorizes Secured Party to file UCC Financing Statement.

7. UCC Basics: Attachment “Attachment” is term used to describe moment at which security interest becomes enforceable against Debtor. Attachment of Collateral occurs when: Value has been given Debtor has rights in collateral; and either: Debtor signs security agreement granting security interest to Secured Party or Secured Party has possession of collateral by agreement of debtor or Secured Party has “control” of collateral if collateral is investment property, deposit account, electronic chattel paper, or a letter-of-credit right.

8. UCC Basics: Perfection An attached security interest is not perfected, except in limited cases where security interest is automatically perfected upon attachment. A perfected security interest has lien priority over an attached security interest that has not been perfected (e.g. security agreement executed without filing of financing statement). A perfected security interest has lien priority over a creditor who is trying to obtain a lien on collateral through the judicial process, including trustee in bankruptcy

9. UCC Basics: Methods of Perfection An attached security interest can be perfected in three ways: Proper filing of financing statement in the state where the borrower is organized; or Taking possession or control of collateral, depending on the category of collateral; or Where perfection automatic upon attachment of certain collateral (e.g. patient’s assignment of healthcare insurance receivables to health service provider).

10. AR Lender’s Collateral Primary Collateral: Healthcare Insurance Receivables (Gov’t & Non-Gov’t) AND “Deposit Accounts” Other Collateral like accounts, books, cash or letters of credit, private pay, etc.

11. Lessee Security Agreement & AR Loan Agreement (Attachment) Grants security interests in AR Collateral AR Collateral description must contain specific reference to “deposit account” (defined in UCC § 9- 102(29)), a separate collateral category that is distinct from health-care-insurance receivables. The terms “account” and “general intangible” are not sufficient to describe a “deposit account.” The term “account” includes health-care-insurance receivables, but does not include deposit accounts. UCC § 9-102(2) Security interest in healthcare insurance receivables is not a security interest in deposit account as original collateral. Different methods of perfection for each.

12. Intercreditor Agreement & Rider Intercreditor Agreement Agreement between AR Lender & FHA Lender that distinguishes FHA Lender’s Collateral from AR Lender’s Collateral. Check for consistent description of AR Collateral pledged in AR Loan & Security Agreement & AR Priority in Intercreditor Agreement Rider to Intercreditor provides for cross- collateralization and cross-default of insured facilities on AR Loan.

13. Perfection of AR Collateral Healthcare Insurance Receivables: AR Borrower’s security interest in health-care-insurance receivables is automatically perfected on attachment, i.e. when an individual assigns to the AR Borrower the right to payment under an insurance policy for health-care goods or services provided. UCC § 9-309 AR Lender’s security interest in AR Borrower’s health-care insurance receivables and most other personal property is perfected by the filing of UCC-1 Financing Statement in AR Borrower’s state of organization. UCC-1 Financing Statement does not perfect a security interest in a “deposit account” as original collateral although it perfects security interest in health-care insurance receivables.

14. Perfection of AR Collateral Deposit Accounts Security Interest in Deposit Account can only be perfected by “control.” UCC § 9-312(1), UCC § 9-314. The filing of UCC-1 Financing Statement is ineffective to perfect security interest in deposit account. Perfection of Security Interest in Deposit Account containing gov’t receivables is prohibited by Medicare Anti-Assignment statute. (42 U.S.C. 1395g(c)). Can perfect security interest in Deposit Account containing non-government receivables.

15. Deposit Acct (non-Gov’t) Three Methods of Perfecting Security Interest in non- gov’t Deposit Account, UCC § 9-104(a): 1. Secured Party (AR Lender) is bank with which deposit account is maintained; 2. Deposit Account Control Agreement: debtor, AR Lender and bank have agreed that bank will comply with instructions originated by secured party directing disposition of funds in the deposit account without further consent by the debtor. 3. Secured Party (AR Lender) becomes bank’s customer with respect to the deposit account.

16. Deposit Account (Gov’t) Parties can enter into Deposit Account Instructions & Services Agreement (DAISA) that contains gov’t receivables, but it cannot be perfected by “control.” Instructions from Secured Party directing disposition of funds in gov’t deposit account must be revocable. If instructions are revocable or Secured Party’s instructions are conditioned upon further consent of debtor, then SP does not have “control” under UCC § 9-104(a)(2). Language that confers no control complies with Medicare anti-assignment statute.

17. Deposit Accounts: Jurisdiction Bank’s Jurisdiction for Deposit Accounts State law governing perfection & priority of security interests in deposit accounts is the “bank’s jurisdiction.” (UCC § 9-304 ). Parties to deposit account control agreement (DACA) can select one jurisdiction to govern perfection and priority in deposit account and a different governing law for other purposes. The Bank’s jurisdiction selected by parties is effective even if jurisdiction has no relationship to parties or transaction.

18. Termination of Existing (non-FHA) Security Interests in AR Collateral No cross-collaterization: AR Collateral already pledged on non-FHA facility AR line cannot be pledged on FHA-insured facility’s AR line, but the FHA-AR line can be cross-defaulted non-FHA-AR line. Terminate Existing Lender’s Security Interest in AR Borrower’s Collateral by requesting that existing lender does two things: File UCC-3 Termination Statement terminating security interest in health care insurance receivables & other personal property. Send written statement to existing depositary bank releasing it from obligations to comply with instructions.

19. Terminating Security Interests in Existing AR Lines with Multiple Borrowers Amend existing non-FHA AR Loan Agreement & Deposit Account Control Agreement removing or withdrawing FHA Operator/Borrower from AR Line w/Multiple non-FHA Borrowers Request that existing AR Lender file a UCC-3 Termination Statement naming FHA Operator/Borrower as Debtor with reference to File # of Initial UCC-1 Financing Statement

20. Lessons Learned Obtain early approval of novel & complex AR structures from both program and legal to avoid delays Use two separate deposit account control agreements: one for gov’t receivables and one for non-gov’t receivables. Avoid combining gov’t receivables and non-gov’t receivables into one deposit account covered by one deposit account control agreement. Commingling receivables into one account raises both Medicare anti- assignment issues and ability to trace proceeds from gov’t and non-gov’t receivables.

21. Lessons Learned Do not include non-FHA disbursement agents or non- FHA operators on FHA-AR line. For multiple AR Borrowers, carefully check AR Loan Document for paragraphs listing AR Borrowers as parties, signature lines for AR Borrowers, and exhibits listing AR Borrowers and match names with FHA Operators. Terminate security interests and contractual relationship of FHA Operator/AR Borrower on existing non-FHA AR line. No last minute changes to AR documents, especially the Intercreditor and Rider to Intercreditor.

22. Lessons Learned Hire legal counsel with extensive UCC and AR Financing experience. Be prepared to have operator’s legal counsel specifically opine on legality of novel AR structures or lockbox arrangements. For example: “Based on our review of the AR Loan Documents, including the Lockbox Account Agreements (first and second lien), and cash flow distribution charts at Exhibit “B”, the Lockbox Account and Consolidation Account arrangement does not violate the Medicare anti- assignment statute (42 U.S.C. 1395g(c)).”

23. Guarantees Guarantor Events as Events of Default Under A/R Credit Facilities Typical Provisions in A/R Credit Agreements: Any guarantor defaults in its performance/compliance with any term in any A/R loan document that is not cured within an applicable grace period Any representation/warranty given by a guarantor is not accurate when made The failure of a guarantor to pay its debts over a certain material threshold when due if such failure causes an acceleration of such other debt as against the guarantor

24. Guarantees Guarantor Events as Events of Default Under A/R Credit Facilities Typical Provisions in A/R Credit Agreements (cont’d): Bankruptcy of a guarantor (voluntary or involuntary) Large judgments against a guarantor that are not stayed within a short period A guarantor’s inability to conduct its business in the manner conducted at closing Institution of criminal proceedings against a guarantor Anything that results in a material adverse effect on the guarantor

25. Guarantees Guarantor Events as Events of Default Under A/R Credit Facilities Guarantors are most often either a parent entity of the A/R borrower or individual owners of the A/R borrower By monitoring such adverse events of a guarantor, an A/R lender can act as a “first responder” for the HUD mortgagee and can detect problems within the A/R borrower group before a HUD mortgagee will detect them

26. Guarantees Guarantor Events as Events of Default Under A/R Credit Facilities In this way an A/R lender can use a guarantor event of default to cut off distributions to the guarantor while maintaining the integrity of the A/R credit facility itself and ensuring that rent and other current operating costs are paid as and when due Without such an ability, both HUD mortgagee and A/R lender are forced to wait until the guarantor’s adverse event causes the A/R borrower’s financial condition to deteriorate to the point of being unsalvageable

27. Case Study – Coordinating Multiple Mortgagees to Close A/R Lines of Credit Total Revolving Credit Facility: $16,500,000 Total Lines of Credit: 4 (3 HUD; 1 Non-HUD) Total A/R Borrowers: 32 Total Mortgagees: 8 (6 HUD; 2 Bridge Lenders) 2 REITs involved Timeline of Closing: Submitted to HUD April 8, 2011; Approved May 26, 2011; Closed May 31, 2011

28. Case Study – Coordinating Multiple Mortgagees to Close A/R Lines of Credit How it got done: Pre-meeting with HUD Central outlining the transactions OGC and OHP assigned team leaders to work on all lines of credit with all mortgagees One HUD mortgagee took the lead developing the lender’s narrative and coordinated with all 6 mortgagees’ underwriters to review and approve the deal

29. Case Study – Coordinating Multiple Mortgagees to Close A/R Lines of Credit How it got done: Approved form of lender’s narrative used for all 3 HUD lines of credit One set of loan documents submitted to OGC for review and approval; duplicated for each line of credit Weekly status calls with all stakeholders kept the transaction moving to close in less than 60 days

30. NEW AR DOCUMENTS Revised Intercreditor Agreement and Rider to Intercreditor in Appendix to OHP Guidebook Provides More Detail on Underwriter Review In Meantime, Use AR Documents on hud.gov and Notice 08-09

31. NEW AR DOCUMENTS AR Financing Documents, and all documents for LEAN Closings, as well as revised Section 232 Regulations, to be published for notice and comment rulemaking.

32. PRE-FIRM SUBMISSION To Pass OGC Completeness Check Submit: Cash Flow Chart AR Loan Note AR Loan Agmt + amendments Operator Sec. Agmt –FHA Lender Operator Sec. Agmt- AR Lender

33. PRE-FIRM SUBMISSION UCC-1 Filing Statements UCC Searches Guaranty/Pledge/ Ancillary Agreements Intercreditor Rider to Intercreditor AR Lender Lockbox Agreement (s) or Control Agreement(s)

34. PRE-FIRM SUBMISSION Certifies that all AR Documents submitted with application will be executed at closing without changes. In lieu of Certification, can submit executed copies of AR Documents. AR FINANCING CERTIFICATION For Medium/Large Portfolios From All Signatories to AR Documents in order to enter Queue

35. LENDER NARRATIVE Term: Note provisions that may extend amount borrowed, debt service coverage, adding B’ors Fees: Loan, Consultant, Extension Administration: Agent (one of B’or) will administer disbursements Payment of Rent: Tenant rent account or directly from AR Lender Deposit Accts: Chart, Narrative & AR Documents match

36. CASH FLOW CHART AR LENDER AR LENDER LOCK BOX FHA MORTGAGOR FHA MORTGAGOR OPERATOR A OPERATOR A OPERATOR B OPERATOR B OPERATOR C OPERATOR C MEDICAID & MEDICARE MEDICAID & MEDICARE OPERATOR PRINCIPALS OPERATORS ACCOUNT OPERATORS ACCOUNT SALARIES FOOD SERVICE FOOD SERVICE UTILITIES MAINTENANCE LIABILITY INS. LIABILITY INS.

37. BE SURE TO CHECK REVISED LEGAL PUNCHLISTS For 223(f) & 223(a)(7)- updated list of documents collected & standards of review In order to get Firm Commitment quickly, use previously approved AR documents. We expect negotiated changes brought to OHP for approval upfront.

38. QUESTIONS?

39. Wednesday, September 14, 2011 8:45 a.m.

40. Master Lease Transactions

41. Master Lease – Basic Definition In the context of an OHP transaction, a Master Lease is a type of operating lease that covers the operations of all projects in a single portfolio with a common owner/operator organizational structure.

42. Master Lease Structure Mortgagee Mortgagor AMortgagor B Mortgagor C Master Tenant Sublessee ASublessee BSublessee C

43. Master Lease Rationale The Master Lease mitigates against mortgage defaults by implementing a “strength in numbers” approach to asset management.

44. Base Rent and Reallocation Base Rent = the aggregate amount of money needed each month to service the debt and cover all other expenses associated with all mortgaged properties. The power of reallocation - the landlord (and, by extension, HUD and the HUD-insured lender) can manipulate each project’s contribution to the base rent, so long as the base rent itself remains the same.

45. Cross-Default Provisions Every OHP-approved Master Lease will contain a standard cross-default provision, under which a default under any of the subleases will result in defaults under all subleases. Cross-default provisions protect the portfolio against the risk of the Master Tenant “cherry picking” the profitable facilities in bankruptcy, leaving FHA with the troubled projects, and/or the payment of an insurance claim.

46. Subordination Agreements Subordination Agreements, unlike Master Leases, include all key players as signatories (Mortgagee, Landlord, Master Tenant, Subtenant). Two types: standard Subordination Agreements and Subordination, Nondisturbance and Attornment Agreements (SNDAs) SNDAs permitted only when the owner and operator are not related parties.

47. Practice Tips Incorporate the “HUD Compliant and/or Suggested Master Lease Provisions” Be mindful of state laws regarding long-term leases Be economical with language

48. TRUE OR FALSE A Facility with Weaker Performance Will Be Acceptable to HUD if Placed under a Master Lease with More Profitable Facilities

49. FALSE! Each Individual Loan within the Master Lease must meet all LEAN underwriting standards on its own merit. Portfolios Under a Master Lease : OHP Does Not Pool the Assets of All Facilities on the Master Lease for Underwriting of a Single Mortgage Loan Covering Multiple Facilities.

50. RISK MITIGATION Prevent a Mortgagor from defaulting on one FHA- insured loan without risking its interest in its other facilities financed with FHA-insured loans. Give tools to Owner and Lender to remediate defaults. Require very careful and continuous monitoring of surveys, reports, financials. Only Lenders willing to perform additional servicing responsibilities should undertake a master lease.

51. TERM OF MASTER LEASE Typical Lease Term is 10 Years, plus 2 Renewals Mortgage is 35+ years to Maturity Master Lease Must Be Renewed Throughout Mortgage Term Until Prepayment or Maturity Release from Master Lease Not Automatic (See Section 12 of SubAgmt/SNDA)

52. MASTER LEASE RIDER Sublessee Cross- Default Guaranty Security Agreement Events of Default Remedies of Owner Sublessee Requirements Management Agreements

53. TIPS AND TRAPS Operator Should Be a Special Purpose Entity Does not engage in business unrelated to FHA-financed facility Only assets are those of FHA-financed facility

54. TIPS AND TRAPS Master Tenant should have access to the operating funds, and be an active participant to comply with master lease requirements in Sub. Agmt/SNDA

55. TIPS AND TRAPS Furniture, Fixtures and Equipment Must Be Property of the Mortgagor Exception: HUD and Lender Approved Leases for Equipment

56. TIPS AND TRAPS Use LEAN Sample Documents Redline name and state law changes Put substantive changes in Lender Narrative with request to waive and justification HUD Comfort Letter No longer automatic Request and provide justification in Lender Narrative Decision to Issue made in Loan Committee

57. TIPS AND TRAPS Owner and Operator Organizational Structures must Match Exactly Only One FHA Lender per Master Lease Slight Variation in Ownership Structure May Be Accepted with Mitigation [This is Rare].

58. QUESTIONS AND ANSWERS

59. Wednesday, September 14, 2011 9:15 a.m.

60. Lender Underwriter Training Morning Break Sponsored by: Voyrs, Sater, Seymour and Pease LLP

61. Wednesday, September 14, 2011 10:30 a.m.

62. Office of Healthcare Programs Section 223 (a)(7) Updates

63. Staff Realignment A7 underwriting in 8 separate OHP branches Asset Management Staff 3 Branches Turnaround Team (focus on Troubled Projects) Production Staff 4 Branches Contractor Staff 11 Underwriters 25-100 A7s

67. Term Extensions

68. Transaction Repayment Period A7s must have transaction repayment periods of less than 10 years.

69. Lender Fees Fees to Include Application Closing Permanent Placement GNMA Processing

70. Sprinklers and PCNAs CMS: Nursing homes must fully equip their facilities with automatic sprinkler systems by Aug. 13, 2013

71. Changes to Lender Narrative

75. OHP requires fidelity bond coverage of at least two months’ gross potential income.

76. Changes to Lender Narrative

77. Questions & Answers

78. Wednesday, September 14, 2011 11:45 a.m.

79. Fire Safety Equipment Loan Program

80. Statutory and Regulatory Authority Section 232(i) is authorized under the National Housing Act (12 U.S.C. 1715 w) as amended; Section 203(i) Public Law 93-204 24 CFR Part 232 Subpart C – Eligibility Requirements- Supplemental Loans to Finance Purchase and Installation of Fire Safety Equipment

81. Purpose Loans for nursing homes, skilled nursing facilities and intermediate care to purchase and install fire safety equipment, primarily fire sprinkler systems. Ensure that nursing home have financing options to meet CMS regulation that requires all long term care facilities to be equipped with an automatic sprinkler systems by August 13, 2013

82. Underwriting Guidelines Mortgage Terms –vary based on the mortgage amount Mortgages $100,000 or greater. Maximum Term of Loan in the amount of $100,000 or greater: Coterminous with the maturity of the existing FHA mortgage (If applicable), 15 years or 100% of the remaining economic life of the property, whichever is less.

83. Underwriting Guidelines Mortgage Terms Mortgages below $100,000. Maximum Term of Loan in the amount of $100,000 or less: Coterminous with the maturity of the existing FHA mortgage (If applicable), 10 years or 75% of the remaining economic life of the property, whichever is less.

84. Underwriting Guidelines Loan Security 1st lien position. In proposals where the property is already encumbered by a first mortgage or deed of trust, HUD-FHA will accept a mortgage or deed of trust that is subordinate to the first lien. Debt service coverage Projects must meet the 1:45 coverage ratio.

85. Underwriting Guidelines Appraisal Requirements Not Required Physical Assessment of the Property (PCNA) For non FHA insured projects, the application is to include a PCNA. For FHA insured properties only submit a PCNA if one has not been completed for the facility in the last ten years. The PCNA should include an analysis of the reserve for replacement account, if applicable.

86. Underwriting Guidelines Repairs Any repair unrelated to fire safety equipment installation cannot be funded by mortgage proceeds. Critical repairs must be performed prior to endorsement of the mortgage. Non-critical repairs, including Borrower Proposed Repairs, approved by HUD may be completed after endorsement.

87. Lender Tools Application Checklists Distinct for Application Checklists FHA insured projects and non FHA insured projects. On OHP’s website. Lender Narratives Distinct Lender Narratives for FHA insured projects and non FHA insured projects. On OHP’s website.

88. Application Processing Processing times will vary based on OHP’s capacity. Projects with existing FHA insured mortgages have priority. Final application procedures will be communicated to lenders by an email Blast and an update to the OHP website.

89. Questions & Answers

90. Lender Underwriter Training Lunch – On Your Own Afternoon Sessions Begin at 1:30 p.m.