Attachment_4_-_Exhibit_B-232_223f_Underwriter_Punch_List.pdf

Exhibit B – 232/223f Underwriter Punch List

Page 1 of 47 Revised 9/28/2018 SG/RC

Note: An updated copy of the Punchlist should be maintained in the 00_HUD-UW folder on SharePoint as completed.

Section A: General Underwriting/Program Eligibility

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Step Activity Key Point Key Question(s) A1 Verify CMS sprinkler compliance on SNFs

Source Document(s) http://www.medicare.gov/nursinghomeco mpare/?bhcp=1

Immediately upon receiving the assignment for any nursing home purchase/refinance loan application check the CMS website to see if the facility is in compliance with the CMS sprinkler regulation. If the facility is not in compliance, immediately:

Notify your WLM.

Do not proceed further into the underwriting review until notified in writing from your WLM.

Check the CMS website for compliance (do not rely on the

PCNA):

1. Enter the Location (Zip Code or City, State, or State), click on the “Search” button.

2. From the drop down menu called “Select a Database” select “Nursing Home Compare – About the Nursing Home” and click on the “Continue” button.

3. Check the box next the appropriate facility name.

4. Click on the green “Compare Now” button at the top of the page.

5. The “Results” page will load. Scroll down on the

“General Information” tab to the “Automatic Sprinkler Systems: in All Required Areas” field. The field will indicate Yes, No, or Partial.

No SNF beds, Move On;

CMS website shows facility as Fully Sprinklered (Automatic Sprinkler Systems field is “Yes”), Move On;

CMS website does NOT list facility as Fully Sprinklered (Automatic Sprinkler Systems field is “No” or “Partial”):

UW Comments

A2 Check Medicare.gov website (SNF’s)

Source Document(s) http://www.cms.gov/CertificationandCom plianc/Downloads/SFFList.pdf http://www.medicare.gov/NHCompare/In clude/DataSection/Questions/ProximitySe arch.asp?bhcp=1

Confirming whether project is on SFF list. Facilities on the SFF list will be denoted with this icon on the Nursing Home Compare site:

Special Focus Facilities (SFF) are nursing homes that have a history of persistent poor quality of care. These nursing homes have been selected for more frequent inspections and monitoring. To learn more, visit the CMS Certification & Compliance website.

Facilities that are rated as 1-star Overall and 1-star for Health are at high risk of being put on the SFF list, and may represent a significant risk to the FHA insurance fund. The survey history should be examined for any significant deficiencies, and the Lender questioned about any additional administrative requirements or costs associated with the low ratings. (For

No SNF beds, Move On;

On list:

Yes. Contact WLM to discuss rejection before continuing review.

No. Move on.

Does the facility have a 1-Star Overall AND 1-Star Health Rating?

Yes. Contact Lender for any additional information on CMS requirements before continuing review.

No. Move on.

Check CMS website for most recent facility survey and confirm that the application includes evidence of closure/compliance with any issues that were noted.

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Step Activity Key Point Key Question(s) example, there may be penalties associated with the low rating, or CMS could require additional 3rd party surveys that would be an additional expense to the facility.) The Lender should also provide information on the areas for improvement CMS is having the Borrower focus on & improve.

Yes. Application materials include most recent survey and evidence of closure/compliance with any issues that were noted.

No. Contact lender

Are there any CMS notices posted in the 00-UW?

Yes. Application materials include evidence of closure/compliance with any issues that were noted.

No. Follow up with the lender immediately for evidence of closure/compliance

UW Comments

A3 Initiate Review Process.

Source Document(s)

UW_Assign_email

Verify Lender and Lender Underwriter Lean 232 approval status: Click on Approved Lender List (This is an internal website only, and should not be shared or discussed with any external clients.)

ORM_Review_Req_template ORCF-ORM_Review_Protocol-Draft

UW receives email from WLM with 223f Project assignment

Underwriter should review the SharePoint electronic copy. Hard copy applications are no longer required.

Note: Any loans greater than $25M require an ORCF Appraisal Reviewer site visit, if a Reviewer has not yet been assigned & a site visit scheduled, contact Wayne Harris immediately.

Completed technical reviews will be posted to the 00_HUD_UW SharePoint folder. Review Status and Reviewer information is available on the project’s SharePoint, Appraiser Entry tab.

Confirm the following:

Lean approved Lender?

Lean approved Lender Underwriter?

U/W Assignment email sent to Lender

Yes, move on; No, contact WLM

Loan > $25M, ORM Review Required; Reviewer Requested

UW Comments

A4 Review Lender Narrative and Begin Loan Committee Memo

Source Document(s)

Lender Narrative (1-2, 9002-ORCF)

Portfolio Numbers

Reading the Lender’s Narrative will give you an overall understanding of the project.

Existing projects are eligible for insurance under 223f. The project must not require substantial rehabilitation and three years must have elapsed from the date of completion of construction or substantial rehabilitation of the project, or from the beginning of occupancy, whichever is later, to the date of application for insurance (queue submission date).

Note: Projects proposing construction outside of the existing footprint are eligible under 232/223f. The project is considered Substantial Rehabilitation and not eligible under 223f if:

1. The hard costs of repairs, replacements, and improvements (not including major movable equipment)

Yes. There are potential compliance issues/red flags.

Make notes of issues/flags in “comment” section.

No. There are no potential issues/red flags identified at this time in review.

Was an addition completed on the project in the last three years?

No, Move On.

Yes, The addition was not larger than the original project in size and number of beds. Move On.

Yes, but the addition was larger than the original project in size and/or number of beds, project is not eligible under 223f, contact Lender.

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Step Activity Key Point Key Question(s) exceeds 15% of the project’s value after completion of all repairs, replacements, and improvements. OR

2. Two or more major building components are being substantially replaced.

Confirm project meets 3 Year Rule – timing is based on queue submission date.

Yes, Move on.

No, project is not eligible under 223f, contact Lender.

Confirm that repairs are less than 15% of as completed value (not including major movable equipment)/less than two or more major building components are being substantially replaced.

Yes, move on No, include in lender’s review comments.

UW Comments

Determine if Debt Seasoning Exception is proposed

Determine if the application proposes using the debt seasoning exception set out in the HB:

Debt is < 2 years old;

NOI is stabilized, with no significant change in operations proposed or in the past 3 years;

No debt seasoning exception proposed. Move on.

A5 Illinois Projects HUD has experienced large claims on projects located in Illinois, particularly on projects with Medicaid.

WLM Review:

The WLM will review the following:

Conduct an internet search for any negative information on the project and participants

Contact Asset Management to assure that the participants have been responsible and confirm that there are no flag or compliance issues.

Confirm that the applicants are familiar with the State Specific Medicaid Reimbursement process and Medicaid Personnel

Look for any CMS penalties against the operators for overcharges or similar.

If the project is part of a Corporate Credit Review, the WLM will conduct a limited review.

Project is not located in Iliniois, Move On;

100% Private Pay Census, Move On;

Project is located in Illinois with Medicaid Census complete the following:

If the loan amount is > $20M a site visit is required; confirm that a site visit was conducted

Site visit was conducted, Move On.

N/A, Loan Amount is < $20M, a site visit is not required, Move On.

Confirm that a Full Appraisal Review Must be Completed (The Decision Circuit cannot be “passed”), Move On.

Confirm that Chantay Betts completed a comparative analysis of the project.

WLM review completed

A6 Open ORCF State Risk Monitoring Tool and complete required Steps.

The State Risk Monitoring Tool flags projects that potentially have elevated risk related to the reimbursement and requlatory environment impacting Medicaid and residential care settings. The three main areas of concern, which manifest in one or more areas of state risk are: Funding, Eligibility and

100% Private Pay Census, Move On;

Projects Located in Connecticut:

Complete Steps 1-7 using the “HUD UW Inputs” tab. Then, proceed to the “Connecticut” tab, complete

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Step Activity Key Point Key Question(s) When prompted by the tool, determine if the firm application addresses the risk or elicit a response and/or mitigation, as appropriate.

Source Document(s)

State Risk Monitoring Tool

State Risk Guidance

State Risk Monitoring Summary Grid

(INTERNAL)

Lender Narrative (1-2, 9002-ORCF):

Executive Summary, Risk Factors, Appraisal, Income Capitalization Approach, Census Mix, Expenses, Historical Revenue Summary, Borrower, Operator, Lease Payment Analysis

Sample Lender Responses

Email Blast, May 31, 2012

Email Blast, September 23, 2015

Email Blast, February 29, 2016

Email Blast, June 28, 2017 (includes updated Summary Grid – for external use)

Medicaid HCBS Rule Statewide Transition Plans Tracking Chart

Underwriter Training – State Risk Monitoring Tool

Compliance & Threats to Occupancy. The State Risk Monitoring Summary Grid has the specific criteria informing state risk triggers.

the additional steps required. HUD UW should use the “Save as” option to save a copy of the tool to the project’s 00 HUD UW Folder and forward a copy to LeanThinking@hud.gov for further Review. Move on.

All Other Projects:

Does red bolded language at the top of the “HUD UW Inputs” tab prompt you to proceed to the “HUD UW Action Items” tab?

No, use the “Save as” option to save a copy of the tool to the project’s 00 HUD UW Folder and Move on.

Yes, continue to the “HUD UW Action Items” tab and review Row 9.

Did the lender provide information that satisfies the prompt that appears in Row 9, or does the Lender provide risk mitigation described in Row 9 that adequately addresses the risk (If unsure, UWs should contact Leanthinking@hud.gov)

No, Contact Lean Thinking at Leanthinking@hud.gov.

Await further instructions and/or concurrence from WLM or Lean Thinking.

Yes, Lender has adequately addressed ORCF’s concerns. Use the “Save as” option to save a copy of the tool to the project’s 00 HUD UW Folder. Include discussion of Key Points analysis and the mitigation steps agreed upon, if applicable, in LCM. Move on.

UW Comments

Page 5 of 47 Revised 9/28/2018 SG/RC

Step Activity Key Point Key Question(s) A7 Verify compliance with Florida’s emergency rule for generators

Source Document(s)

Emergency Action on Generators

SNF Rule:

https://www.ahca.myflorida.com/Executive/Co mmunications/index.shtml

ALF Rule:

http://www.mcknightsseniorliving.com/news/flor ida-governor-gives-assisted-living-communities- 60-days-to-get-generators/article/689315/

The Governor of Florida has imposed an emergency rule (here) that requires all assisted living facilities and skilled nursing facilities to have generators with enough fuel to sustain operations and comfortable temperatures for at least 96 hours after a power outage.

If a facility is not already in compliance, we will either hold off doing the loan or require it to be a critical repair…unless the facility has plans, specs, permit approval, contractor in hand and the work will be finished prior to November 15th.

Contact WLM if the facility is not currently in compliance.

Excerpt from rule: (This is from the governor’s rule in

Florida. Note it covers the criteria of what the backup generator and extra fuel needs to cover.)

(a) The acquisition of a sufficient generator or sufficient generators to ensure that current licensees of nursing homes will be equipped to ensure ambient temperatures will be maintained at 80 degrees or less for a period of a minimum of ninety-six (96) hours in the event of the loss of electrical power.

(b) The acquisition and safe maintenance of sufficient fuel to ensure that in an emergency situation the generators can function to maintain ambient temperatures at 80 degrees or less for a period of a minimum of ninety-six (96) hours in the event of the loss of electrical power.

(c) The acquisition of services necessary to install, maintain, and test the equipment and its functions to ensure the safe and sufficient operation of the generator system installed in the nursing home

Not a Florida property, Move On;

Facility confirms it is currently compliance with the requirements of the emergency rule, Move On;

Facility is not currently in compliance with the requirements of the emergency rule, Contact WLM and Environmental Reviewer;

Review and Notify Environmental Reviewer of proposed Changes to Tanks: Confirm whether there will be any changes to underground storage tanks, aboveground storage tanks, or installation of underground fuel lines. (e.g.

tank to be added, modified, removed, etc.) and notify the environmental reviewer to assure that the environmental review correctly addresses any tanks Move On;

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Step Activity Key Point Key Question(s) A8 Conduct “Hello Call” with Lender UW offers to hold a “Hello Call” with the Lean Approved Lender

UW. (UW Trainee may attend the call, but the Lean Approved UW must be on the call as the lead lender representative.)

This call is an introduction to all parties. It is an opportuntity for Lender to provide overview of deal and identify key factors pertinent to the ORCF UW, including any timing issues.

Note: The ORCF UW is not required to provide any expectations on timing of review and presentation to Loan Committee during the call.

Lender requested Hello Call Date Conducted:

Lender did not request Hello Call

UW Comments

A9 Determine if the Key Points are applicable to application

Source Document(s)

AR-Punchlist, A-R_Terms_Memo

Waivers List on SharePoint:

http://hudsharepoint.hud.gov/sites/IHCF/DE VL/Lists/Waivers/AllItems.aspx

HUD-2-ORCF

OGC Request Email Generator

OGC_LEGAL_REVIEW_CONTACTS

Related_FHA-Insured_Project_223f_ Punchlist_Worksheet

A/R Financing Master Lease Waivers Single Asset Entity Non-Profit Prepayment of current FHA Mortgage

Upfront Legal Reviews: The HUD Underwriter MAY request an OGC review in situations where help is needed drafting uncommon special conditions, when there is a waiver that hasn’t been previously approved or when there is a legal issue that could impact a Loan Committee decision.

Note: PLI Waivers should be sent to a PLI analyst for review and approval.

Bathroom waivers: the lender must include a request outlining the information noted in the Bathroom Waiver Guidance.

(Requests are to be sent to Operations (Vance Morris).)

Note: If there are other FHA-Insured Facilities, it should be disclosed in the Lender Narrative. Reviews and approvals of A/R financing, master lease, and other related items may have already been completed.

Note: The mortgaged property must be the only asset of the borrower; however the borrower entity is permitted to operate the project. ORCF may approve, in limited circumstance, a non-single asset borrower entity such as a Public Housing Authority (PHA), but this does not include scenarios such as owning other rental or condo units/properties that are not eligible under the Section 232 mortgage insurance program.

Check if applicable:

A/R financing, complete ORCF Accounts

Receivable Punch List.

Waivers requested, Review Waivers list on SharePoint

& begin HUD-2 review process Non-Profit transaction Prepayment of current FHA Mortgage, confirm

Form HUD-9807 has been approved. If not, add a Special Condition to require the HUD-9807 prior to closing.

Upfront Legal Review Requested

Is the borrower a single asset entity?

Yes, Move On.

No, Review next question:

Is the borrower a government entity (PHA or similar)?

Yes, Waiver of the 4232.1, Section II, Production, Chapter 2.5.B is required, contact WLM for approval

No, contact Lender, non-SAE not permitted

A10 PLACEHOLDER PENDING LENDER NOTIFICATION

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Step Activity Key Point Key Question(s) Review Citizenship of Borrower Principals

A11 Identify Purchase Transaction

Source Document(s)

223f purchase transactions have different requirements than refinancings.

Note: A purchase is defined as an actual or proposed acquisition after the date the original application was accepted in the queue. If there is an identity of interest between the buyer and seller, then the transaction is to be treated as a refinance.

Is this a purchase Purchase Transaction?

No, move on Yes, complete the following questions:

Does the purchase price in the agreement match the lender’s figure in the Transaction Costs section of the lender narrative?

No, Contact Lender Yes, Move On

Has the purchase agreement expired or will it expire before a firm commitment can be issued? (If yes, contact lender.)

No, Move On Yes, Contact Lender

Has the lender provided evidence the purchased facility will have a positive working capital (current assets minus current liabilities) at the date of purchase? Note: This may not be a significant issue if Accounts Receivable financing is proposed.

No, Contact Lender Yes, Move On

Has the current operating income dropped below the underwritten level?

No, Move On Yes, Contact Lender and request a stabilization escrow

Are any repairs included in the purchase price?

No, Move on Yes, Contact lender to revise loan amount. These are not allowable

Were existing facility reserve for replacement funds included in the purchase price?

No, Move On Yes, Contact Lender to revise loan amount. These are not allowable and should be deducted from the price.

Is a non-identity of interest operator purchasing the facility and including the costs of debt-financed improvements in the purchase price?

No, Move On Yes, Contact Lender to revise loan amount. These are not allowable and should be deducted from the price.

N/A

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Step Activity Key Point Key Question(s) If the value exceeds the purchase price (less seller financing) did both the lender narrative and appraisal justify the difference? (If no, contact lender—explanation should be credible data supporting “distressed sale” circumstance.

No, Contact Lender—explanation should be credible with data supporting “distressed sale” circumstance

Yes, Move On N/A

Is any seller financing proposed in the form of a HUD approved promissory note?

No, Contact Lender Yes, Move On N/A

Does the amount of seller financing plus the mortgage amount exceed 92.5% of the HUD approved value? (If yes, contact lender.)

No, Move On Yes, Contact Lender N/A

Is state regulatory approval needed for license transfer?

No, but lender provided explanation No, Contact Lender if no information was provided Yes, Move On

Does the lender have a plan for the buyer to gain access to the property to complete critical repairs prior to closing?

No, Contact Lender, If this is not feasible contact WLM for alternate plan to complete critical repairs—they should have the 20% additional escrow if they cannot be completed prior to closing.)

Yes, Move On N/A

If purchaser is a non-profit entity, is there a broker to the transaction with an identity of interest with the non-profit purchaser?

No, Move On Yes, Contact lender, broker fees are not allowable and should be deducted from the price.

N/A

If the purchaser is a non-profit entity, if the non-profit claims a tax exemption (or abatement) has been obtained as part of the transaction has evidence been provided that

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Step Activity Key Point Key Question(s) the tax exemption (or abatement) runs with the real estate and not the sponsorship or ownership? (If no, contact lender.)

No, Contact Lender to obtain such an arrangement or have them re-underwriter will full property tax expenses

Yes, Move On N/A

UW Comments

A12 Process all required Previous Participation documents.

Source Document(s)

Previous Participation Review Memo

Housing Notice H16-15

Previous Participation submitted for all applicable participants.

(APPS/Consolidated Certs)

If processing of the Previous Participation submittal was completed by someone else prior to UW receiving project, the approved Previous Participation will be posted to SharePoint under the “00 HUD UW Docs” folder under the project.

If a Master Lease is required, a previous participation review will be required of the Master Tenant (this review may be completed after Firm Commitment is issued).

Does the Borrower have any identities of interest with the lender?

Yes, they are ineligible for the program. Contact WLM.

No, move on

Indicate Previous Participation reviews are completed for required entities:

Yes, post Review Memo to 00-UW folder, Move On No, contact Lender

Firm Commitment cannot be issued if the Previous Participation Review is not completed.

UW Comments

A13 Review current license(s)

Source Document(s)

Lender Narrative (Exhibit: 1-2: Program Eligibility Licensing/Certificate of Need/Keys Amendment)

Licenses (Exhibit: 8-2)

232 Eligibility Definition 12_USC_1715w- 232_Statute

232 Frail Elderly (62+) Definition 42_USC_8011-define_frail_elderly-pg6532

The correct entity is the one with direct oversight of patient care.

The number of beds on the facility license must be equal to or higher than the number of beds in operation.

For ALFs only, confirm that resident population will meet the statutory 62+ frail elderly requirement. (Note: There is no age requirement on other bed types.)

B&C Units: It is the responsibility of the lender to ensure compliance in the application submission with both the Keys Amendment (via our website) and the State’s eligibility requirements, via their own research.

Unlicensed units should be fully described in lender narrative. If there are Independent Living Units, it should be clear how many were included in underwriting analysis and the basis for that determination.

Contact the lender if the application doesn’t demonstrate the following:

License is current and covers required number of beds.

License is issued to:

Borrower Operator Management Agent Facility or Other (describe in LCM)

Assisted Living Facility meets 62+ frail elderly requirement

Does Lender Narrative indicate Board & Care units?

No B&C units, move on.

If Yes, confirm all of the following (post documentation showing that the project qualifies for Board & Care to the Loan Committee folder on sharepoint):

Yes, The State has certified compliance with the Keys Amendment for the calendar year of application submission (per our website, here).

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Step Activity Key Point Key Question(s) Keys Amendment annual compliance

Special Use Facilities: September 1, 2011, January 06, 2012

CAUTION ON SPECIAL USE FACILITIES:

Special Use Facilities are facilities that serve a particular tenant population (e.g., behavioral health care facilities, drug/ alcohol rehab, psychiatric hospitals, eating disorder facilities, hospice, etc.).

Risk factors the lender should address, include without limitation:

1. The long-term viability of funding sources for this client group;

2. The facility’s ability to maintain stabilized occupancy over the long term, and/or the ability to fill the beds occupied by residents with methadone addiction, should the funding source cease; this analysis should include a demonstration that a market exists for increasing reliance on a more “traditional” SNF resident;

3. The extent of the successful experience of the operator in dealing with the contemplated population;

4. How the principals of this facility address the higher risk associated with the targeted population (e.g. higher Professional Liability Insurance, etc.); and

5. The facility’s capacity to continue servicing the debt in the event that market/provider payment changes dictate that alternative/modified uses of the subject portion of the facility be pursued.

Yes, The lender has provided evidence that this project is regulated by the state, pursuant to the Keys Amendment.

Yes, The project meets the Board and Care Requirements in the Section 232 Handbook, Section II, Chapter 2.2.D.3 through 2.2.D.8.

No, the project doesn’t meet the above three items, Contact Lender and Discuss with WLM

Does Lender Narrative indicate Independent Living units?

No Independent Living Units, move on.

Yes, under 25% threshold move on.

Yes, over 25%, contact Lender.

Is the facility considered a Special Use Facility?

No, move on Yes, and facility is determined eligible, discuss risk factors and conclusions in LCM.

Yes, but facility determined not eligible, or risk factors not addressed, contact Lender.

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Step Activity Key Point Key Question(s) A14 Determine whether to move forward with full application review or stop with early rejection.

Source Document(s)

Sample Email to Lender for Issue Resolution

Issue Resolution Template

Issue Resolution Protocol

Modified_Early_Rejection_LCM

For examples of reject letters to lenders, go to 223 F Projects and filter on rejected project status or you can find some examples here.

Deficiency_Protocol_and_Holds_and_UW_Ti ming_Goals

If a rejection is recommended at this stage, discuss with WLM and lender. The lender has the option to withdraw the application at this point.

Note: An early rejection requires a presentation to Issue Resolution.

If full application review is recommended, Move on.

OR

Rejection recommended at this stage, review with WLM and draft modified LCM for presenting to Issue Resolution.

If yes, also notify Technical Reviewers after Issue Resolution decision.

UW Comments

Section B: Financial Operations & Appraisal Review

Step Activity Key Point Key Question(s) B1 Review ORCF Appraisal Review/Decision Circuit

Source Document(s)

Appraisal Report (Exhibit: 2-1)

ORCF Decision Circuit/Appraisal Review Worksheet (00_HUD_UW folder in SharePoint)

Lender Narrative, (1-2, Appraisal)

Ground Leases: 4232.1, Ch. 5.4.; Lender Narrative, Transaction Overview Key Questions; 92070-ORCF: Lease Addendum

A Decision Circuit worksheet is completed by ORCF Appraisers to determine if further review is necessary. If further review is necessary, an Appraisal Review Worksheet will be completed by an ORCF Appraiser.

Departures from the appraisal are allowed in the Lender’s conclusion as long as they are supported. Lenders can make adjustments decreasing value from the conclusions in the appraisal with justification. Lenders may not, however, adjust value upward. If you have concerns about their justification, talk to WLM and/or ORCF Appraiser.

Has the review appraiser commented on all Decision Circuit red and yellow Flags?

Yes, move on No, ask the review appraiser to address the flags.

Do the value conclusions in the third-party Appraisal & ORCF Appraisal Review agree with the lender narrative?

Yes, move on No, include in lender’s review comments

Are there Action Items recommended by the ORCF Appraisal Reviewer?

No, move on Yes, Review and Assess Recommendation.

If UW does not concur, explain the non-concurrence in LC Memo and Move On.

If UW concurs with ORCF Appraiser, include in lender review comments.

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Step Activity Key Point Key Question(s) FIRREA.USPAP.RE.Value.Increases Note: Ground leases are valued differently than land owned in fee simple. ORCF Appraiser should confirm that valuation and related mortgage amount are correct. If there is a ground lease, a special condition should be noted that Form-92070- ORCF is required for closing.

Tax Abatement: Underwritten expenses should include all real estate taxes without abatements or incentives, except when allowed by 4232.1, Rev 1, Section II Production, Chapter 5.5.

NOI for Value must use full market rate real estate taxes—as opposed to PILOT or abated taxes—to reflect a value for a typical owner or operator that may not benefit from an abatement.

However, NOI used for Debt Coverage can be calculated using the subject facility’s 12pecific tax expense (when exempt).

Note that the ORCF appraiser is not to review updated financials unless requested by Underwriter for a significant concern.

Discuss with WLM or GTM as needed.

UW Comments

B2 Check Appraisal Review/Decision Circuit for Remaining Economic Life.

Source Document(s)

Lender Narrative (Exhibit: 1-2: Appraisal – Remaining Economic Life)

Appraisal (Exhibit: 2-1)

PCNA (Exhibit: 2-3)

Appraisal Review when over $25M loan amount

Loan term is the lesser of 75% times the remaining economic life or 35 years maximum. If calculation for remaining economic life is less than 47 years, a shorter loan term is needed.

Items to take into account: Actual age of property, typical life and effective age, renovations and dates

For example, typical life is 55 years;

actual age is 30 years;

effective age is 15 years;

Then remaining economic life is 40 years (55 years -15 years) and the loan term is limited to 30 years

Note: The Appraisal determines a Remaining Economic Life, as opposed to the PCNA’s Remaining Useful Life of the building and its components. Generally, the Appraisal’s Remaining Economic Life is used because it captures the facility’s ability to continue to generate income.

Factors to consider and discuss as needed in LCM:

Older building with limited repairs noted in PCNA; is it because facility has been well-maintained to be better than its age, or do the limited repairs dictate a shorter term?

If questions remain on loan term, consider the project’s financial performance for last 3 years as well as market indication in the appraisal report. What is age, condition, Has justification been given for the determination of the subject’s remaining economic life, and do you agree with the conclusion?

Yes, move on No, include in lender review comments

Acceptable response, move on Unacceptable response, consult with ORCF

Appraiser

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Step Activity Key Point Key Question(s) occupancy relative to competitors? Are there ward beds (outdated facility)? Is overall market demand strong, and/or are there barriers to entry such as CoN, moratorium on new beds, densely developed area with little land for development, etc.). Also, look at pictures in appraisal as well as PCNA to get an idea of the building condition.

Mitigants:

Reduce the loan term;

Require a shorter PCNA review term other than 10 years.

B3 Review payor mix for changing trends & relative position in market.

Source Document(s)

Lender Narrative (1-2, Appraisal; Income Capitalization Approach; Historical Revenue section).

Census History (Exhibit 9-7)

Updated_Financials_Table_Sample4Lenders , as necessary

Updated_Financials_Table_Template_Email

Payor Mix review not necessary on projects that are entirely Private Pay.

Lender Narrative should discuss any departures from historical reimbursements, mix, and trends.

For SNFs, review Medicare mix in particular, as the higher reimbursement rates have greater impact on NOI.

Is the concluded mix in line with historic levels and competitors?

Does the subject compete well in the market relative to unit mix, age, condition, and care reputation?

If an increased payor mix level is projected (especially higher income), is there adequate justification that the subject facility can capture more of this market?

Comparables should be facilities with a similar payor mix.

Alternatively, the third-party appraiser can review separate comparable facilities for SNF, AL, dementia care, and/or IL components of facilities with more than one level of resident care.

If project is steadily losing “higher income” payor source mix, this may be a concern. Generally, Medicare beds (and private pay beds) have higher rates (and profit margins) than Medicaid beds.

Discuss if an ALF is participating in a State Medicaid waiver program. If so, is it because they have had occupancy issues, Does the underwritten payor mix seem reasonable as compared to historic levels and competitor facilities, and has the lender adequately discussed it in the Narrative?

Yes, move on No, include in lender’s review comments

Page 14 of 47 Revised 9/28/2018 SG/RC

Step Activity Key Point Key Question(s) or there is weak market demand? Do the competitors participate, and how is participation viewed in the market?

B4 Illinois Projects Only:

Review Medicaid Rate

On Illinois projects, ORCF Underwriters must utilize the public data available on the state’s Website to verify the lender’s underwritten Medicaid rates and question any negative trends.

Illinois Projects Only:

N/A-NOT an Illinois Project, Move On

The subject project is located in Illinois: The lender’s underwritten Medicaid Rate has been verified at the following Website and there are NO negative trends.

The subject project is located in Illinois: The lender’s underwritten Medicaid Rate has been verified at the following Website and there ARE negative trends. Contact lender.

UW Comments

B5 Review subject’s historical occupancy for changes and compare to market comparables.

Source Document(s)

Lender Narrative (1-2, Appraisal; Income Capitalization Approach; Occupancy section).

Census History (Exhibit 9-7)

Rent Rolls, last 3 months (Exhibit 9-9)

Updated Financial Tables, as necessary

Decision Circuit Market Tab

The narrative should address any decline in occupancy or below average occupancy.

How does underwritten occupancy percentage compare to historical performance?

Look for any trends or fluctuations in occupancy for last three years—up, down, or stable.

How does subject property’s occupancy rate compare to competition? Does age, condition, unit mix appear to negatively impact the facility in comparison?

Comment on any difference between numbers of licensed versus operating beds.

ALFs may have a higher number of licensed beds to allow for dual occupancy in a unit. Most ALFs operate on single occupancy, but dual licensing could provide additional revenue from second occupant income. Dual occupancy may also be used if a facility participates in a Medicaid waiver program, operating shared units for the typically lower reimbursement amounts.

SNFs could be “banking” beds. In CoN States, or areas where obtaining new bed licensing is difficult, Does the underwritten occupancy seem reasonable as compared to historic levels and competitive facilities, and has the lender adequately discussed it in the Narrative?

Yes, move on

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Step Activity Key Point Key Question(s) operators may maintain licensed beds. Consider if the difference provides an operational benefit, i.e.:

operating more marketable semi-private rooms instead of multi-bed wards; operating more private rooms than semi-private rooms for more Medicare revenue, converting room space to therapy space.

However, if the lower number of operational beds seems to be an indication of declining market concerns (review occupancy trend and market narratives), have lender address.

Note: We should have a license for all the licensed beds, as they are pledged as security to the insured mortgage, and they could have value that could be applied to the mortgage principal balance if those bed licenses were sold.

Market Considerations:

What does the appraisal/ORCF appraisal review say about the overall future of the project’s market?

Discuss number of competitors/beds and the average occupancy rate in the PMA, as well as any new competitors entering the market.

Comment on any CoN, moratoria (on new construction, new units, etc.), other barriers to entry, or Medicaid waiver programs (for ALFs).

Discuss facility’s ability to compete in the market and to continue to capture market share at the underwritten level.

The underwriter should clearly understand which facilities are competitors and which are merely comparables that are not true competition to the subject. If that is not clear from the appraisal or the lender narrative, contact the lender for clarification.

Mitigants:

Consider reducing the underwritten occupancy % and loan amount;

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Step Activity Key Point Key Question(s)

If the percentage of occupancy underwritten is reasonable but the project has not performed an adequate amount of time at that level, require a debt service reserve escrow. (Note: Debt service escrow amounts include Principal, Interest, & MIP, and is not a mortgageable item.)

B6 Review Operating Expense Ratio (OER).

Source Document(s)

Lender Narrative (Exhibit: 1-2: Expense Analysis)

Review overall expense ratio percentages and expenses p.r.d.

(per resident day) against historic and comparables overall expense percentages; investigate wide differences. Appraisal and underwritten conclusions should not be at levels that property has not achieved before without strong supporting argument.

Note that the income comparables may be different than the expense comparables since local expense comparables are more difficult to obtain. Are there material issues that need to be addressed?

Do the underwritten operating expense ratio and expense p.r.d. seem reasonable as compared to historic levels & competitor facilities and has the lender adequately discussed it in the Narrative?

Yes, move on No, include in lender’s review comments

Are any significant devations explained?

Yes, move on No, include in lender’s review comments

UW Comments

B7 Review Cap Rate.

Value = NOI/Cap Rate

Source Document(s)

Lender Narrative (Exhibit: 1-2: Appraisal; Income Capitalization Approach; Expense Analysis)

As a measurement of risk the cap rate is increased when a higher risk is associated with the income stream.

In facilities with a combination of SNF, AL and IL beds/units, a weighted average cap rate should be used. It should be allocated based on underwritten NOI for that portion (not based on the number of beds).

Action:

As with value, assess impact of higher cap rate on underwriting. If applying a higher cap rate to the NOI still results in a loan within the LTV parameter, discuss in Comments, but no need to require adjustments from lender or appraiser.

If a higher cap rate would indicate a mortgage reduction, discuss the issue with WLM and/or ORCF appraiser to determine if the cap rate should be higher than what the lender and third-party appraiser have established based on risks of the project.

Mitigants:

Did the ORCF appraiser find the underwritten cap rate acceptable?

Yes, move on No, Review and Assess Action Items from ORCF

Appraiser.

If UW does not concur, explain the non-concurrence in LC Memo and Move On.

If UW concurs with ORCF Appraiser, include in lender review comments.

Did the lender underwrite using the third party appraiser’s concluded cap rate and is it generally in line with the comparables in the appraisal?

Yes, move on.

No, but lender provided sufficient justification.

No, add to Lender Review comments.

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Step Activity Key Point Key Question(s) Reduce mortgage amount and/or add a debt service reserve escrow

B8 Compare Underwritten Net Operating Income (NOI) to the subject’s historical NOI.

Source Document(s)

The 92264a-ORCF Criterion E lists the underwritten NOI.

Both historical and underwritten NOI are listed in the Lender Narrative (Appraisal;

Income Capitalization Approach; NOI section).

The NOI necessary to meet a 1.0 DSCR is listed in the Lender Narrative under Sensitivity Analysis.

T-12 Financial tables should be current within 90 days of the Loan Committee Memo.

In determining whether the subject’s mortgage amount is appropriately sized, NOI is a key component.

NOI should reflect the project’s EBITDAR (earnings before interest, taxes, depreciation, amortization and rent). NOI divided by proposed annual debt service (P + I + MIP) equals the DSCR. The DSCR helps estimate whether the project generates enough revenue to cover the debt payments. The higher the DSCR, the less HUD is concerned about a default.

Updated historical financials should be requested from the lender when data is more than 3 months old. Trailing 12 month financial updates are required, however, year-to-date annualized financials can be used for support, particularly when the year-to-date figures available is a small sample.

Review the NOI trend for the last 3 years. Is it stable, trending up, or trending down? As NOI is a crucial area of review, the lender must provide a very detailed explanation of what has occurred with the NOI.

Appraisal and underwritten NOI conclusions should not be at levels that the property has not achieved before without strong supporting argument(s).

Look for any material fluctuations (over 5% year to year) or negative trends in NOI.

Review subject monthly rents (ALFs) or p.r.d. (SNFs) as compared to historic and comparables’ amounts.

If updated financial tables indicate a material difference from the underwriting presented in the Lender Narrative, the Lender should provide an addendum discussing the change.

Note that Appraisal’s NOI conclusion can sometimes differ from the Lender’s underwritten NOI in terms of replacement reserve amounts, taxes, management fee, and/or when a non-profit is not operating at market norms.

The appraisal conclusion should generally be determined

Is the Underwritten NOI generally in line with the subject’s historical NOI?

Yes, move on.

No, If No, has it been justified? Add comment in LCM Yes, move on No, further review and explanation required from

Lender.

Is the underwritten and historical NOI substantially above the NOI necessary to meet a 1.0 DSCR?

Yes, move on No, include in lender’s review comments

Did the ORCF appraiser find the underwritten NOI acceptable?

Yes, move on No, Review and Assess Action Items from ORCF

Appraiser.

If UW does not concur, explain the non-concurrence in LC Memo and Move On.

If UW concurs with ORCF Appraiser, include in lender review comments.

Is the project a short turnaround?

Yes, Include turnaround examples in the LC Memo.

No, Move on.

In situations where there is a stark contrast in NOI over the 3+ year history, the HUD loan is taking out 100% of the purchase price within 2 years and the appraisal operating margin is higher than what has been achieved in the short time that they have operated the project, include turnaround examples in the LC Memo.

Note that the ORCF appraiser is not to review updated financials unless requested by Underwriter for a significant concern.

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Step Activity Key Point Key Question(s) based on market expenses, weighted by the subject’s historic expense levels, where the lender’s conclusion should be derived using facility specific expenses.

If a reduction to the NOI is made by ORCF, perform a test of LTV and NOI to determine if amounts are at or above the ORCF thresholds of 80% LTV and 1.45 DSC.

Also, compare underwritten and historical NOI to the NOI necessary to meet a 1.0 DSCR. The NOI necessary to meet a 1.0 DSCR is the lowest that NOI could fall to and still have the project be able to pay its bills. The greater the difference between the historical NOI and the NOI necessary to meet a 1.0 DSCR, the better.

Mitigants to prospective NOI:

Debt service reserve escrow;

Mortgage reduction if using more recent NOI figures would result in lower value, impacting LTV.

B9 Check for Supplemental Revenue – IGT, UPL, QASP, QIPP

Source Document(s)

Email Blasts 6/24/15, 6/27/12

IGT_UPL_chart

Some states utilize a financing mechanism allowing for a supplemental payment being made to non-state, government entity (e.g., county hospital) licensed skilled nursing facilities.

These supplemental payments rely not only on continued programmatic availability, but also on the continued viability of the particular operator/management agent relationship.

In order to minimize the risk associated with this financing mechanism:

Do not include the supplemental income stream for

DSCR.

The supplemental income stream is allowed in determination of value. Typically a much higher capitalization rate is applied to this portion of the revenue in concluding value.

Certain programs such as QASP and QIPP have finite time horizons and therefore a bifurcated mortgage may be necessary, with the loan amount attributable to that revenue having a shorter term than the overall mortgage.

Is there supplemental revenue?

No, Move On Yes, and the lender used the required risk mitigation guidance; include the IGT/UPL chart in the LCM and Move On.

Yes, but the lender DID NOT use the required risk mitigation guidance; include in lender’s review comments.

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Step Activity Key Point Key Question(s) B10 Check for Commercial Space

Source Document(s)

Lender Narrative (Exhibit: 1-2: Program Eligibility- Commercial Space/Income)

Commercial Space, if any, must not exceed either 20% of the total net area or 20% of effective gross income.

If yes to EITHER total net OR effective gross income, a waiver is required.

Is there Commercial space?

No commercial space, Move On Yes, area is 20% or less of total net area & income is less than 20% or less of the effective gross income, Move On.

UW Comments

B11 Review Balance Sheet to evaluate financial operating ability

Source Document(s)

Lender Narrative (Exhibit: 1-2) Key Questions Borrower/Operator

Operations – Financial Statements:

Accounts Payable, Schedule of Accounts Payable –(Exhibit 9-3.A.5.), Accounts Receivable, Schedule of Accounts Receivable –(Exhibit 9-3.A.1. & 2.)

Balance Sheet (Exhibit: 9-3.A.)

Income Statement (Exhibit: 9-3.B.)

Tenant Deposit Accounts funding. Balance Sheets (most recent) will include these as Assets with an offsetting Liability account for the tenant deposits. The asset account must be equal to or greater than the liability account. Tenant deposit accounts can include security, cleaning, key, and other deposits that can be refunded to the tenant.

Did the Lender Narrative review and analysis of the financial statements indicate any material concerns or weaknesses that need to be addressed?

If there is a Tenant Deposit account, is the account equal to or greater than the tenant liability account?

N/A Yes, move on No, contact lender to obtain satisfactory explanation and resolution.

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Step Activity Key Point Key Question(s) B12 Review Eligible Debt

Source Document(s)

Balance Sheets (Exhibits: 3-7.A. / 3-8.A. / 3- 9.A.)

Lender Narrative (Exhibit: 1-2 Mortgage Determinants – Transaction Costs – Existing Indebtedness – Q2 & 3 (See Program Guidance in Lender Narrative Template.)

Certification of Outstanding Obligations (Exhibit: 8-1A.1., 9445-ORCF)

Title Search (Exhibit: 8-3A)

Section 232 Handbook, 4232.1, Loan Sizing Chapter 3

232 Program Knowledgebase – Eligible Debt, Eligible Debt FAQs

Limited Debt Seasoning Powerpoint

Limited Debt Seasoning Sample Template

Compare Borrower’s most recent Balance Sheet to previous years balance sheets, reviewing for new debt in the Notes Payable, Long Term Liabilities sections.

Eligible Debt:

Outstanding mortgage(s) on the property that are at least two years old at the time that HUD begins processing the loan are considered eligible debt. For debt less than two years old, the lender must determine that there was no cash out to the borrower or its principals in order for the debt to be considered eligible debt. Identity of Interest debt must meet debt seasoning requirements. Bridge loans used for an eligible purpose do not need to meet the 2 year seasoning requirement.

Other debt can be other recorded debt such as mechanic’s or tax liens, unrecorded debt directly connected with the project (supported by documentation), costs associated with paying off eligible debt, or Operator debt tied directly to the project.

Debt recently placed (<2 years) against the project and not used for project purposes is only allowable if the application meets the debt seasoning exception requirements outlined in the HB.

Review 4232.1, Loan Sizing chapter, Existing Indebtedness section for more detail. Answers to FAQ’s are also available on HUD.GOV in the Knowledgebase.

If additional funds are needed to close the transaction and will not be funded by borrower cash (or pre-paid items), determine if a Surplus Cash Note (or Residual Receipts Note for non-profits) is required.

Has the lender adequately explained the debt to be included in the requested mortgage amount as being eligible? Documentation must be provided in the application and should not be a condition of the commitment.

Yes, move on.

No, include in lender’s review comments.

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Step Activity Key Point Key Question(s) B13 Review debt for cross-collateralizations and/or allocation method.

Source Document(s)

Lender’s Narrative (Exhibit: 1-2: Special Underwriting Considerations – Q2; AND Existing Indebtedness)

Section 232 Handbook, 4232.1, Loan Sizing Chapter 3

Certification of Outstanding Obligations (9445-ORCF), Payoff Statements, Copies of Notes (Exhibit: 8-1)

If debt is cross collateralized, debt must be allocated between each asset in a reasonable manner, examples include:

Exisiting debt allocated by project with a bank’s specified payoff/release amount/method identified in origingal note;

Valuation on all facilities (including non-FHA);

Per bed method;

Case by Case method;

See 4232.1, Loan Sizing chapter, Existing Indebtedness section regarding portfolio/pooled debt for more detail.

Lender Narrative should discuss the type of debt, total loan amount, number of facilities covered, and allocation approach, and should be noted in the LCM.

Is any of the existing debt cross-collateralized with other assets?

No, move on Yes

If yes:

Was debt allocated proportionally between each…