1. FHA Office of Residential Care Facilities
Section 232 – Underwriting Highlights, Insurance, Closings, New Construction

2. Underwriting Highlights
Queue updates, Closings & Timing

3. Firm Commitments Issued as of 4/25/2014

4. Firm Applications in Review as of 2/19/2014

5. Firm Application Queue Numbers as of 4/25/2014

6. ORCF Underwriting Contract
Current Contract Underwriter Assignments
Total in Firm Review
219
Contract Underwriters
ORCF Underwriter
178 41
82%
18%
223(f) = 170
(a)(7) = 8

7. Applications Received FY 14 to 3/21/14
Type of Application
FY 11
FY 12
FY 13
FY 14
223f
347
458
456
187
223(a)(7)
302
221
399 23
Other 59 35 34 14
Total
708
714
889
224

8. Firm Commitments Issued FY 14 to 4/25/14
Type of Application
FY 11
FY 12
FY 13
FY 14
223f
231
404
250
239
223(a)(7)
210
354
522 40
Other 32 25 34 19
Total
473
783
806
298
Production is picking up: 39 Firm Commitments issued in the past 2 weeks

9. Insurance Changes
Proposed changes were vetted with MBA and large FHA servicing lenders along with FNMA
New Requirements:
90 % of Estimated Replacement Cost.
Loss of Business Income
Windstorm coverage
Expanded flood insurance coverage if facility is located in flood zone

10. Decision Circuit Tool for setting the scope of the appraisal review.
All applications are looked at by an ORCF appraiser.
The scope of review is on a spectrum depending on risk factors.

11. Flags - Continued NOI trending down for 3 years.
Recent NOI at half of concluded rate.
Private Pay or Medicare census higher than proven history.
Medicaid census lower than history.
Occupancy lower than 75%
Change in potential resident days
Recent purchases

12. Green Flags (tend to offset red flags)
DSCR over 2.00
LTV under 80%
(LTV evaluated under two Scenarios)
As underwritten
Using most recent NOI and Avg Market Cap rate.

13. Special Consideration
Loans over $25 million
History doesn’t match Operating Statement.
Purchase within 3 years.
Loans over $25 million – Will trigger a full appraisal review and a site inspection.
History doesn’t match Operating Statement – We have been seeing some adjustments to the NOI we are not comfortable with, such as adjusting administration or management costs. The historical summary should represent reality. Sometimes adjustment are needed to explain conclusions. The most straightforward way to present those adjustments is on a separate table. An appraisal review can be avoided if an explanation is included in the LN.
Purchase within 3 years. – We rarely see enough analysis of a purchase in the appraisal or LN.
What were income expectations of the buyer?
What was the cap rate?
How was it marketed?
Reconcile the purchase price with the appraised value!

14. ORCF Loan Committee For 223f main concerns and example mitigation:
Valuing/sizing the loan using prospective NOI
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

15. Continued ORCF Loan Committee
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 comparable
Aggressive metrics used in loan sizing

16. Underwriting Highlights
What is going well
New Process for Reviews – changes
Expediting Processing & Reviews
Expediting Processing & Reviews:
We will be going out with a 4128 Environmental guidance checklist soon. It includes guidance on each of the 4128 checklist review items for lenders to use in assembling applications. It is not a required exhibit, but we would encourage lenders use it to try and minimize any delays for back and forth for HUD to be able to finalize the 4128 review.

17. Underwriting Highlights
Valuation Issues & Concerns
Prospective or Aggressive NOI conclusions
NOI Conclusion not yet Achieved
Fluctuating NOI History
Declining NOI trend
Aggressive Expense Ratio
Aggressive Cap Rate

18. New Construction
New Construction Remains Highest Risk: 52% of Projects on Priority Watch List
vs.
24% of Portfolio are/were NC

19. Proposed New Construction
SUPPLY
Competition – existing and proposed (pipeline)
Market position within PMA
Saturation rates
Reasonable capture rates

20. Replacement Facilities
SUPPLY
Proximity
Same demographics
Same services – adding or deleting
How many current residents will transfer

21. New Construction Supply
CON’s and Moratoriums
CON (Certificate Of Need)
Moratoriums on adding new beds
State need calculations
Only transfer within county

22. New Construction Supply
Transitional Rehab Facilities
Hospital discharges to rehab
ALOS (Average Length of Stay)
Hospital incentives
Rehab purpose (cardio, stroke, hip, orthopedic, etc.)

23. New Construction Demand
Demand determinants for Assisted Living
Age
Household Income
Home Value
Income Qualification
Living Status
Acuity, Mobility and Care Limitations
Memory Care Adjustments

24. New Construction Demand
Demand determinants for Skilled Nursing
Age
Acuity
Income Qualification
Mobility
Demand for Transitional Rehabilitation

25. Expediting Section 232 Closings

26. Closing Team Updates
ORCF’s Closing Team is keeping the “conveyor belt” of closing moving!
FY 2013 had 766 closings, compared to 706 in FY 2012, 415 in FY 2011, and 309 in FY 2010
Fiscal year to date volume much lower, mostly due to 223a7 volume dropping off.

27. How do I get a HUD Closer assigned?
For a HUD Closer assignment (and any other closing related issues, including extensions) when the HUD Attorney closing package is mailed.
Average turnaround time for closer assignment right now: 1-2 business days
ORCF has 11 full time Closers and 3 contract Closers (most pictured below at our January 2014 Closing Kaizen)

28. Partnership & Collaboration
Closing Docs
Closing Table
Partnership & Collaboration
Please Remember:
Complete, clean, and accurate closing packages get reviewed and closed quicker
All special conditions must be met and properly documented prior to closing
Use the Special Conditions Matrix!
Responsiveness to HUD Closer and HUD Attorney and fast turnaround is KEY
Send in your packages, we’re ready!