Office of Residential Care Facilities

Midwest Lenders Conference – October 2015

Section 232 LEAN Update

Tim Gruenes Director, Asset Management & Lender Relations

Production StatisticsFY 2015 Preliminary

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Commitments Issued

232 New Constr/Sub-Rehab/Blended Rate/241a 34

223f Refinance/Purchase New FHA Loan 212

223a7 Refinance Existing FHA Loan 52

223d Operating Loss Loan 0

TOTAL 298

Total $ of Firm Commitments Issued: $2,832,104,227Loan Modifications (IRR) Completed

Interest Rate Reductions 254

Processing Times – Key Drivers

• 223f Underwriting – Average 55 days– Ranges from 17 to 90 days– Slows down process

• Environmental issues (i.e., missing Phase 2 or SHPO consultations)

• Sloppy submissions with errors, lacking clear explanations• Missing waivers

– Expedites• Passed Decision Circuit – no appraisal review needed• Concisely and coherently summarized information

– Versus “data dump”

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Processing Times – Key Drivers

• 223f Closings – Average 45 Calendar Days– Ranges from 45 to 90– Slows down process

• Dispute and/or resolution of special condition requirements• Completion of critical repairs• Major change requests (OMB documents)• Wait for prepayment penalty to go down

– Expeditious process• Good quality packages• Good teamwork and communication amongst Lender,

Lender Counsel, HUD Attorney, HUD Closer

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New Construction Issues

Experienced Owner & Operator/Management Agent Similar facilities (in size & type) Knowledge of local requirements and market Successful documented rent-up & operation

Equity: 20-30% of Total Project Cost Cash equity is preferable Escrows/Letter of Credit are acceptable Land may be included in equity calculation, but is subject

to scrutiny since value may not be realized if claim during construction & lease-up, for example

New Construction Issues (continued)

Financial Capacity: Principals must demonstrate ability to support

project throughout the construction period (unanticipated change orders) and loan term

We are looking for capacity beyond just cash available to close

Project Strengths & Weaknesses: Lender Narrative to present coherent and persuasive

analysis that is consistent with application exhibits

New Construction Issues (continued)

Lease-up Risk Mitigation: Initial Operating Deficit (use template)• Prelease only allowed for very strong markets and/or

replacement facilities; Lender to demonstrate with waiting lists or other documentation• Absorption should be conservative

Short-Term Debt Service Reserve Escrow• 6 to 12 months of P+I+MIP held until average of 12

months of underwritten DSC• Lender to propose a Debt Service Reserve Escrow

New Construction Issues (continued)

Comparables: Market comparables used must be comparable

(example: size, payor mix, age, services provided)

Comparability of comparables should be discussed in the Lender Narrative

For example, Medicaid Waiver Assisted Living must be addressed even if proposal does not include Medicaid residents when comparables do have Medicaid residents

New Construction Issues (continued)

Operating Expenses: Must be conservatively underwritten

For existing projects adding units, there may be some economies of scale, but these must be quantified by the lender and documented with comparables

Lender Narrative should not stress high quality of care and have lower per resident day expenses than comparables

New Construction Issues (continued)

Other topics discussed before but worth repeating: Include all construction tabs on the 92264A—

provide detail in the comments section of the land tab (e.g., date and other circumstances of last arms-length land purchase)

Market discussion should include analysis of competition—not just a repeat of the appraisal discussion of comparables

New Construction Issues (continued)

Estimated costs (replacement cost calculation) for taxes, MIP, insurance, should be estimated on a per diem basis

Construction deals require conservative underwriting; these are not the deals where you want to stretch to make the numbers work

Reasons for Rejection Market/demand

Lack of experience with type andcomplexity

Financial capacity

Aggressive expense underwriting

Aggressive capitalization rates

Waivers that cannot be approved (e.g., Regulatory), submit to LEANThinking first

Environmental issues (i.e., site unacceptable)

Production Update – Decision Circuits

• There are now 3 versions of the Decision Circuit (DC)– 223f– New Construction– 241a/Sub-rehab

• Posted on the OHP website drafting table at http://portal.hud.gov/hudportal/HUD?src=/federal_housing_administration/healthcare_facilities/residential_care/ORCF_Policy_Drafts– Updated regularly as errors and improvements are pointed out to us– Due to frequent updates, not a good idea to do a lot of automation or incorporation

into your organization’s workbooks, as the DCs will change– Has not gone through Paper Reduction Act (PRA) process yet, but will once we work

out all the bumps

• Lenders are encouraged to fill out the form during this Beta Test period– Speeds up the OHP appraisal review process– You will see all the flags that we see, saving a significant amount of time

Section 232/241(a) Update

• HUD has provided GNMA data on pending 241a’s• Where legal description of land is not being

altered, borrowers have gotten GNMA limited preliminary approval subject to lender cert of:– No collateral modification, and– No cross-default provisions

• Where legal description is altered, GNMA has required:– Amendment of REMIC Trust Agreement, and– Tax opinion (requiring considerable time/expense)

Section 232/241(a) Update

• ORCF is still accepting 241a applications and processing.

• If Firm Commitment issued, a special condition is added to address GNMA.

• Lender follow-up on GNMA aspects on deal-by-deal basis.

State Regulatory and Funding Risk

• 9/23/15 Email Blast• Addresses:– Home and Community Based Services• 2014 CMS Final Rule – part of ACA• Potential to affect projects with Medicaid Waiver.

– State Funding delays and reductions–Olmstead/Money Follows Person• Initiative to move tenants to less institutionalized

homes.

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SECTION 232 CLAIMS AND DEFAULTS

Section 232 Claims

• Claims rate on 232’s has remained low:– Fiscal Year 2014 claims rate .06%:

• 2 claims and 1 PPC

– No full claims Fiscal Year 2015 – 1 PPC• Recent Claims:– Operator:

• #1 Cause: • Fraud or poor (financial/quality of care)

– Olmstead: See next two slides– Market

Recent Experience - Olmstead

• 9 of 16 claims since 2012: – High % or entirely Mentally Ill (MI) or

Developmentally Disabled (DD) population – 7 of these 9 claims were in Texas – 1 in Illinois (2014)– 1 in Indiana (2014)

• 1 additional facility (in Ohio) now empty but hasn’t claimed yet

Recent Experience – Olmstead, cont.

• Challenges– In each of these situations, wholesale moving of

individuals. – The most recent projects targeted for State actions, have

had a combination of MI/DD population and poor quality of care.

– Actions vary from state to state (for example):• State regulators in one State are unreceptive to attempts by the

Lender and Borrower to discuss preserving the license and re-opening the facility with a new operator

• Large size and rural location of some facilities close by the State hinder the ability to find possible buyers or alternative uses

Market - New Construction/SR

– 50+% of Projects on Priority Watch Listvs.

– 24% of Portfolio are/were NC/SR

Average Monthly Default* Data

* Default = 60+ days delinquent

Fiscal Year UPB in Default (60+ days)

Default Rate

2012 $302 Million 1.65%

2013 $285 Million 1.45%

2014 $326 Million 1.51%

2015 $384 Million 1.63%

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232 Asset Management Hot Topics

• Quality of Care• HUD Office of Inspector General (OIG) Audits

of Section 232 projects• Process Re-engineering and Specialization• Quarterly Operator Financials

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Asset Mgmt Process Re-engineering and Specialization

• New Unit Lease-Up: specialization complete; only until stabilized occupancy

• R4R Releases & Non-Critical Repair Escrow:– Draft Revised Handbook language & docs– Lender Delegation – using current HB language– See recent email blasts for details

• Change in Participant (TPA, Operator, Management Agent): Beta test now complete; Revised sample docs to HUD.GOV soon.

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Quarterly Operator Financials

• Required for project FY’s commencing on or after 12/2/2014.– Data entered into portal by lender

• For most projects, 2 quarters worth of data entered.

• Currently, portal calculates 5 ratios - we are verifying/analyzing this data

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Quarterly Operator Financials

• ORCF’s website will soon have a comprehensive document addressing portal (including follow-up on results):– http://portal.hud.gov/hudportal/HUD?src=/

federal_housing_administration/healthcare_facilities/residential_care/Operator_Financial_Stmt

• Questions: hhcp@hud.gov

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THANK YOUOffice of Healthcare Programs

1-877-HLTH-FHA

www.hud.gov/healthcare

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