Overview Role and expectations of Lender underwriter Application submission requirements Application components Underwriting highlights ORCF Loan Committee Closing process Contractor process ID: 932200
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Slide1
Underwriting & Application Expectations
Slide2Overview
Role and expectations of Lender underwriter
Application submission requirements
Application components
Underwriting highlights
ORCF Loan Committee
Closing process
Contractor process
Lender Performance
Slide3Role & Expectations of the Lender Underwriter
Slide4Role of Lender Underwriter
E
yes & ears for 232—providing initial due diligence for the loan application
Ensures the accuracy of all
reports, forms, and application
exhibits
Provides a recommendation of
approval to HUD, including appropriate risk mitigation
Slide5Role of the Lender Underwriter (continued)
Respond to questions from the HUD Underwriter and/or other staff
Site Visit
For existing
facilities, UW makes a site visit to
assess facility
operations
For construction programs, reviews the site location as it relates to services and comparables
Slide6Section 232 Approved Lenders
Must be
an approved Section 232
Lender underwriter to submit
an
application
Works with potential borrowers to explain
the process from submission to underwriting to closing.
Slide7Application Submission Requirements
Slide8Application Requirements
Submit
an electronic version of the entire
application as well as one hard copy
Lender-generated forms…
acceptable as long as it
represents OMB-approvedform (i.e., form details, content, order, etc.)
Slide9Application Requirements (continued)
Application checklists for all of the Section 232 programs are located on the Section 232 program website.
All
exhibits on each application checklist are required, as applicable
.
Review all exhibits
to assure
complete and accurate submission.
Slide10Slide11Slide12Application Submission Instructions
Requesting an FHA Number:
Submit
Form HUD-941-ORCF, Lender’s FHA Number Request Section to
232_fha_requests@hud.gov
Once FHA
number is assigned, lender may submit the Electronic Submission of the Firm Application
Slide13Submission of the Electronic Application
Submit
the following documentation
to:
Mike
Luke
U.S.
Dept. of HUD920 Second Avenue SouthSuite 1300Minneapolis, MN 55402
Form HUD-90022-ORCF, Certification for Submission of Electronic Firm
Application
Application f
ee
Electronic
copy
of the full
Application
Slide14Common Ownership
Please
make sure to accurately and completely fill out the common ownership section
of Form HUD-90022-ORCF
Ensures
proper naming and tracking of
related projects
Slide15Submission of the Electronic Application
Use
no more than 40 characters when naming files
Please use only letters, numbers and
underscores, when
naming
files
Avoid using special characters as
part of the name:
\
/ : * ?
"
< > | # { } % ~ &
Slide16Organization of Media
Section
223(f):
01_UW
02_Third_Party_Reports
03_Borrower
04_Borrower_Principal
05_Operator06_Operator_Parent07_Management_Agent08_Real Estate09_Operations10_PLI11_Additional Funding Sources12_Accounts_Receivable13_Master_Lease
Slide17Submission of the Electronic Application
Ensure
that all electronic documents are
less than
50 megabytes (MB)
in
size
Separate extremely large documents into smaller sections of 50 MB or less Avoid adding the assigned FHA number in the file name,
as it adds characters
Slide18Submission of the Electronic Application (continued)
Avoid using
spaces in file names
Use
either an underline _ or dash –
as
an acceptable alternative.
For example: Instead of “Tab 01-Lender Narrative 171-22000” {
39 characters
}
Using a shorter naming convention
“
01-LndrNarr”
{
only
11
characters
}
What Happens Next?
Once the entire electronic copy is received the application
is
placed in the
queue.
An ORCF UW is assigned when capacity is available.
The
lender should retain the hard copies of the application until the ORCF UW requests it.
Slide20Direct-to-Firm Application Process
Entire Firm Application is submitted at one time for ORCF review
ORCF issues a Firm Commitment or a Rejection Letter
HUD retains the
A
pplication Fee in either result
Applies to 223(f), 241(a), 223(a)(7), 223(d) and 232(i)
programs
New Construction, Substantial Rehabilitation & Blended Rate projects may use this process
Slide21Two-Stage Application Process
Lender submits
Initial Submission
exhibits for
review
by HUD
ORCF issues either Firm Commitment or Rejection Letter
Application Fee is paid at Initial Submission, but 50% is refunded if rejected at Initial Submission
Applies
to New Construction, Substantial Rehabilitation, & Blended Rate
programs ONLY.
Slide22Two-Stage Application Process (continued)
If Initial application results in a Firm, Lender
has 120 days to submit Final
Submission
ORCF reviews Final Submission and issues an Amended & Restated Firm
Commitment
Lender moves toward
closing
Slide23Deficiencies
ORCF UW advises lender of any defects or deficiencies
Lender has 10 business days (or other brief time period) to correct deficiencies
Other applications pulled for review while the application is on hold awaiting lender revision take precedence over the hold application
If not cured, ORCF UW will take project to Loan Committee as is
Slide24LEANThinking@hud.gov
Waivers that impact feasibility of a project
Environmental Concerns
Unusual Site Conditions
Flood Hazards or Wetlands
State Historic Preservation Office (SHPO)/U.S. Fish & Wildlife Reviews where HUD involvement is required
Davis-Bacon
applicability
questions
Other questions you have while assembling the application
Slide25Application Components
Slide26Lender Narrative
Purpose:
To summarize the Lender’s analysis as it relates to each of the exhibits in the application.
Must be consistent with other exhibits
Please check the math
Strengths and risks should be fully analyzed here and mitigation of risk should be provided
Slide27Lender Narrative (continued)
Keep formatting and font the same.
Include the information the tables
request. If the table asks for “per resident day” please do not use “monthly” data.
Sources & Uses statement should be a copy of the 92264a-ORCF S&U.
Slide28Lender Narrative (continued)
Proofread your Lender Narrative before you submit!
If something is not applicable, explain why (Please don’t make us guess!)
The
better the Lender Narrative, the faster the ORCF review!
Slide29Maximum Insurable Loan Calculation 92264a-ORCF
Replaces both Form 92264-HCF & Form 92264a
Provides a standardized Sources & Uses
Includes a chart that shows which
criteria apply to which programs
Includes specific tabs for the
Construction Programs
Fancy new acronym (MILC)!
Slide30Application Exhibits
Firm Commitment Templates:
Updated to incorporate frequently used Special Conditions into the body of the document
Special Conditions:
Must clearly explain what is required for satisfaction and when
Slide31Special Condition Example
Not so great:
The Management Agreement must be executed.
What we are looking for:
Prior to initial endorsement the Management Agreement must be executed.
Slide32Application Exhibits
Consolidated Certifications:
Lender
should review to assure that these are fully
completed
Previous Participation Section is NOT currently required
Fully explain legal actions, bankruptcies, etc., in an attachment to the Certification and in the Lender Narrative
When completed correctly and in its entirety, our UWs can review quickly!
Slide33Application Exhibits (continued)
Include copies of any email guidance from
LEANThinking
or other HUD staff regarding your project.
Other exhibits will be discussed throughout the training, but if you have questions, please ask!
Slide34Underwriting Highlights
223(f) Refinance
Slide35Underwriting Highlights
Valuation Issues & Concerns:
Aggressive NOI conclusions
NOI Conclusion not yet Achieved
Fluctuating NOI History
Declining NOI trend
Aggressive Expense Ratio
Aggressive Cap Rate
35
Slide36Underwritten Net Operating Income
Make sure UW NOI is less than or equal to T12
Problems occur when underwritten NOI is optimistic compared to recent performance
Loan Committee does not like:
UW NOI > T12
a
nd recent year-end figures
When annualized NOI is used to support UW NOI Big delta between NOI for value and NOI for DSCR
Normalized NOI for any expense items other than management fee, replacement reserves, and property taxes
Slide37Use of Aggressive NOI in Underwriting
Combination of:
Risk to HUD
Reduce Mortgage
Debt Service Reserve - to be held for 12 consecutive months at underwritten NOI
Reserve amount equal to 6-12 months of debt service
Accept As-Is
Do Not Approve
Defer to Let Season and Prove Out
Appropriate Mitigation
Slide38Unacceptable Example
Slide39Acceptable Example
Slide40Debt Service Coverage
1.45 DSC is a bare
minimum benchmark
Typically, we see an
average of 1.80 DSC for
ALFs and 2.50 DSC for
SNFs
Slide41Underwriting HighlightsNew Construction Programs
Slide42New 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 CostCash 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
Slide43New 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
Slide44New 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
Slide45New 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 NarrativeFor example, Medicaid Waiver Assisted Living must be addressed even if proposal does not include Medicaid residents when
comparables
do have Medicaid residents
Slide46New 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
Reasons for Rejection
Market/demand
Lack of experience with type and
complexity
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)
Slide48ORCF Loan Committee
Slide49ORCF Loan Committee
ORCF UW completes application review, confers with WLM, and makes a recommendation of approval or rejection to Loan Committee
Loan Committee reviews and will either approve or reject
Loan Committees are Tuesday/Wednesday/Thursday
ORCF UWs must have LC Documents posted at least 48 hours in advance (longer for New Construction programs)
Slide50ORCF Loan Committee: Inside Scoop
223f:
Main concerns and examples of mitigation:
Valuing/sizing the loan using Net Operating Income (NOI) that is optimistic compared to historical
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
50
Slide51ORCF Loan Committee: Inside Scoop (continued)
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
comparables
Aggressive metrics used in loan sizing
51
Slide52Closing Process
Slide53Closing Process
Once a Firm Commitment is issued, an OGC attorney will be assigned (if not previously assigned)
Lender sends Closing Documents to OGC Attorney and emails
ORCFCloser@hud.gov
for a Closer Assignment
OGC and Closer work with lender to schedule closing date and assure documents meet HUD requirements
Closing occurs
Everyone celebrates a job well done!
Slide54Closing Process (continued)
Amendments to Firm Commitment should be consolidated into as few as possible
Extension Requests go to
ORCFCloser@hud.gov
Closing Session will go into more detail
Slide55Contractor Process
Slide56Contractor Process
Contract UW and Contract Closer are your main point of contact
GTMs
should be copied
on
all correspondence
GTMs
do not get into details on UW side until review of the LC package, unless
Contractor
or
Lender raises questions/concerns
Slide57Lender Performance in Underwriting
Slide58Lender Performance Key Metrics
Math calculations
Quality control
Responsiveness
Due diligence
Program/legal issues
3
rd
party review of reports
Slide59FY 14 Lender Performance Issues
(337 deals)
as of June 12, 2014
Slide60Lender Performance Issues in Underwriting
Slide61FY 14 Lender Performance Issues in Underwriting (continued)
Slide62Lender Performance
ORCF “Pet
Peeves”
Incomplete or weak Lender Narratives
UW NOI is optimistic compared to historical
Math errors in UW,
a
pplication fee,
Sources&Uses
Revisions to Standardized ORCF Forms
Missing documents, lack of consistency among exhibits
Lack of full due diligence (CMS Surveys, other FHA projects with affiliation to participants)
Slide63LENDER XYZ-
Detailed View
Total Deals
No Significant Issues
Significant Issues
Mathematical Calculations
Quality Control
Responsiveness
Due Diligence
Program/Legal
3rd Party Reports/Lender Assessment
LENDER NAME HERE
4
1
3
3
1
1
0
2
0
Issues Breakdown by Deal Type
223f
4
1
3
3
1
1
0
2
0
223a7
0
0
0
0
0
0
0
0
0
232NC/SR/BR
0
0
0
0
0
0
0
0
0
232i
0
0
0
0
0
0
0
0
0
241a
0
0
0
0
0
0
0
0
0
Lender UW Performance
Sample Lender Profile - Example
Slide64Lender UW Performance
ORCF Comments
223f
FHA number
here
Ultimate Senior Care
Math, QC, Responsiveness
Lender resistant to reductions in value and loan amount from risk perspective, significantly delayed deal
223f
FHA number
here
Retirement
City
Math, Program
2530 Problems-Lender failed to assist Borrower despite HUD requests resulting in borrower continually seeking OHP guidance. LC: Lender needs to fully describe significant drops in NOI as part of key data.
223f
FHA number
here
Shady Pines Campus of Care
Math, Program
LC: Prospective UW data that did not demonstrate support of requested mortgage; failure to explain significant historical drops in NOI;UW further marginal due to request below standard 1.45
Slide65Lender Performance
ORCF/Section 232 works in conjunction with:
FHA Lender Approval and Recertification
Lender Qualifications and Monitoring
Ginnie
Mae
Slide66Questions?