FHA Office of Residential Care Facilities

Section 232 – Underwriting Highlights, Insurance, Closings, New

Construction

Underwriting HighlightsQueue updates, Closings & Timing

Firm Commitments Issued as of 4/25/2014

232 NC $166.1

f $1,848

(a)(7) $260.7

Firm Commitments Issued

$ in millions TOTAL298 for $2,275M

40 14

239

Firm Applications in Reviewas of 2/19/2014

232 NC $151.8

223(f) $1,558.3

(a)(7) $103.9

In Underwriting

TOTAL219 for $1,814M

$ in millions

1415

190

Firm Application Queue Numbersas of 4/25/2014

232 NC

223(f) .

(a)(7)

In Firm Queue

TOTAL 13

0

4

9

ORCF Underwriting Contract

Total in Firm Review

219

Contract Underwriters ORCF Underwri

ter

178 41 82% 18%

223(f) = 170

(a)(7) = 8

Current Contract Underwriter Assignments

Applications ReceivedFY 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

Firm Commitments IssuedFY 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

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

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.

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 daysRecent purchases

Green Flags (tend to offset red flags)

DSCR over 2.00LTV under 80%

• (LTV evaluated under two Scenarios)1. As underwritten2. Using most recent NOI and Avg Market Cap rate.

Special Consideration

Loans over $25 million History doesn’t match Operating Statement. Purchase within 3 years.

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

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

Underwriting Highlights

What is going well New Process for Reviews – changesExpediting Processing & Reviews

Underwriting Highlights

Valuation Issues & ConcernsProspective or Aggressive NOI conclusionsNOI Conclusion not yet AchievedFluctuating NOI HistoryDeclining NOI trendAggressive Expense RatioAggressive Cap Rate

New Construction

Proposed New Construction

SUPPLY Competition – existing and proposed

(pipeline) Market position within PMA Saturation rates Reasonable capture rates

Replacement Facilities

SUPPLY Proximity Same demographics Same services – adding or deleting How many current residents will

transfer

New Construction Supply

CON’s and Moratoriums

CON (Certificate Of Need) Moratoriums on adding new beds State need calculations Only transfer within county

New Construction Supply

Transitional Rehab Facilities

Hospital discharges to rehab ALOS (Average Length of Stay) Hospital incentives Rehab purpose (cardio, stroke, hip,

orthopedic, etc.)

New Construction Demand

Demand determinants for Assisted LivingAgeHousehold IncomeHome ValueIncome QualificationLiving StatusAcuity, Mobility and Care LimitationsMemory Care Adjustments

New Construction Demand

Demand determinants for Skilled Nursing

AgeAcuityIncome QualificationMobilityDemand for Transitional Rehabilitation

Closings

Expediting Section 232 Closings

Closing TeamUpdates

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.

How do I get a HUD Closer assigned? For a HUD Closer assignment (and any other closing related

issues, including extensions) email ORCFCloser@hud.gov 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)

Partnership & CollaborationPlease 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

Closing Docs Closing Table