Underwriting & Application Expectations - PowerPoint Presentation

Slide1

Underwriting & Application Expectations

Slide2

Overview

Role and expectations of Lender underwriter

Application submission requirements

Application components

Underwriting highlights

ORCF Loan Committee

Closing process

Contractor process

Lender Performance

Slide3

Role & Expectations of the Lender Underwriter

Slide4

Role 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

Slide5

Role 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

Slide6

Section 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.

Slide7

Application Submission Requirements

Slide8

Application 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.)

Slide9

Application 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.

Slide10

Slide11

Slide12

Application 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

Slide13

Submission 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

Slide14

Common 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

Slide15

Submission 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:

\

/ : * ?

"

< > | # { } % ~ & 

Slide16

Organization 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

Slide17

Submission 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

Slide18

Submission 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

}

Slide19

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.

Slide20

Direct-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

Slide21

Two-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.

Slide22

Two-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

Slide23

Deficiencies

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

Slide24

LEANThinking@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

Slide25

Application Components

Slide26

Lender 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

Slide27

Lender 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.

Slide28

Lender 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!

Slide29

Maximum 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)!

Slide30

Application 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

Slide31

Special 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.

Slide32

Application 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!

Slide33

Application 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!

Slide34

Underwriting Highlights

223(f) Refinance

Slide35

Underwriting 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

Slide36

Underwritten 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

Slide37

Use 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

Slide38

Unacceptable Example

Slide39

Acceptable Example

Slide40

Debt 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

Slide41

Underwriting HighlightsNew Construction Programs

Slide42

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 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

Slide43

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

Slide44

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

Slide45

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 NarrativeFor example, Medicaid Waiver Assisted Living must be addressed even if proposal does not include Medicaid residents when

comparables

do have Medicaid residents

Slide46

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

Slide47

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)

Slide48

ORCF Loan Committee

Slide49

ORCF 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)

Slide50

ORCF 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

Slide51

ORCF 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

Slide52

Closing Process

Slide53

Closing 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!

Slide54

Closing 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

Slide55

Contractor Process

Slide56

Contractor 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

Slide57

Lender Performance in Underwriting

Slide58

Lender Performance Key Metrics

Math calculations

Quality control

Responsiveness

Due diligence

Program/legal issues

3

rd

party review of reports

Slide59

FY 14 Lender Performance Issues

(337 deals)

as of June 12, 2014

Slide60

Lender Performance Issues in Underwriting

Slide61

FY 14 Lender Performance Issues in Underwriting (continued)

Slide62

Lender 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)

Slide63

LENDER 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

Slide64

Lender 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

Slide65

Lender Performance

ORCF/Section 232 works in conjunction with:

FHA Lender Approval and Recertification

Lender Qualifications and Monitoring

Ginnie

Mae

Slide66

Questions?