Basics of Section 232 Loans - PowerPoint Presentation

1. Basics of Section 232 Loans

2. General Guidelines-Apply to all Types of 232Single Asset Mortgagor/BorrowerNon-Recourse: Property = SecurityInterest Rate: between Mortgagee/MortgagorLoans Must Fully Amortize: No Balloons2

3. General Guidelines-Apply to all Types of 232 (continued)Projects with Services for the Frail Elderly Nursing Homes/Intermediate Care FacilitiesBoard and Care HomesAssisted Living FacilitiesIndependent Living up to 25% of unitsCan be combination of the aboveExperience of ParticipantsParticipants must demonstrate that they are experienced in operating the type of facility insured.3

4. General Guidelines-Apply to all Types of 232 (continued)Regulatory Agreement HUD/Mortgagor: Regulatory Agreement for Multifamily Projects If Lease, HUD/Leasee: Regulatory Agreement Nursing Homes 4

5. General Guidelines…Replacement Reserves Required:New Const/Sub. Rehab: formula basedExisting Construction: Based upon Property Capital Needs Assessment (PCNA)Initial Deposit: typically required (unless brand new)Annual Deposit requirementNew PCNA required every 10 years5

6. General Guidelines…Our Insurance does not mandate any income restrictions on tenants – there may be restrictions brought on by other sources (e.g. tax credits, TIF)Ineligible facilities:Those with founders fees, life care fees, etc.Those not meeting program intent: hospitals, clinics, diagnostic/treatment centers, halfway houses.Those not providing continuous protective oversight or minimum assistance required.Independent Living only up to 25% of units (30% with waiver)6

7. General Guidelines…Unless FHA Insured Loan is a Second Mortgage, the FHA Insured Loan must be in first position. Mortgage must be on real estate held:In fee simple, orUnder a lease:99+ years, which is renewable or Maturity date of FHA Mortgage + 10 years.7

8. General Guidelines…Professional Liability Insurance is required – Notice 04-15 has details If owner/affiliate emerged from bankruptcy in past five years, not eligible.Licensing: regulated by State, city or political subdivision. Exception: Board and Care (own rules – Keys Amendment) and Independent Units8

9. Accounts Receivable FinancingHousing Notice 08-09Review by:OHP Underwriter A/R PunchlistOGC Closing Attorney A/R Punchlist9

10. Deposit Account Control Agreement (DACA)Newly established for Lean TransactionsRequired on all new loans (new to portfolio and refinances)Protects HUD’s interest in Operator’s cash flow in case of Operator defaultGives FHA Lender and Asset Management ability to direct funds to mortgage payment/Operator expenses while seeking Operator turnaround or replacement 10

11. Portfolios

12. Portfolio ReviewsRequired on Mid/Large Size Portfolios:Review of Portfolio as a whole prior to submittal of individual Firm Applications for UW review.Mortgagee Letter in process (also deals with Master Lease requirements)12

13. Master LeasesRisk Mitigation for HUD on portfolios“Cherry Picking” Problem: Default on one HUD facility owned/operated by individuals whose affiliates own/operate other HUD facilities.Generally required if 3 or more facilities under common ownership submitted in 18 month window.13

14. Types of Section 232 Loans

15. Loan Types and FY 2012 Volume*:Section 223(a)(7): 52% of TotalSection 232/223(f): 45% of TotalSection 232 New Construction: 2% of TotalSection 232 Substantial Rehabilitation: 1 LoanSection 241(a): 1% of TotalSection 232 Blended Rate: 1 LoanSection 223(d): No Loans since FY 2011Section 232(i): 1 Loan* Based upon Firm Commitments issued15

16. Section 223(a)(7)Refinance of FHA-Insured Projects OnlyAny Section of the Act is eligibleTerm = Remaining Term of Existing Mortgage; May be Increased by 12 Years if Inures to Benefit of FHA Insurance FundNew PCNA only required if requesting term extension or if 10 years since latest PCNA.Can be combined with TPA16

17. Section 223(a)(7), Continued10 year payback benchmark (savings must cover costs of transaction in 10 years or less)Loan limited to original principal amountNo cash out – loan limited to loan payoff plus costs of transaction.Minimum DSCR of 1.11 Debt Service Coverage (1.05 Non Profits)17

18. Section 232/223(f)Purchase or RefinanceMax. Term = Lesser of 35 years or ¾ of Remaining Economic Life Project Must be > 3 Years Old: Additions smaller in size and units ok @ <3 years Critical repairs completed before endorsement; all others may be escrowed at 120%NOI used in UW generally in accordance with historical operations.18

19. 232/223(f), Continued No equity take out allowedOn Purchase, mortgage limited to 85% (90% for N/P) of the total acquisition cost (with closing costs). Mortgage limited to 80% of Value (85% for N/P)Minimum 1.45 debt service coverage ratio (including MIP)19

20. LTV’s on Non-ProfitsNot-for-Profit Owners and Operators: To achieve the more liberal LTV benchmark, must demonstrate:A successful operating track record Significant project operating and management experienceA solid financial track record20

21. Section 232 NC and Sub. Rehab.Max. Term = Lesser of 40 years or ¾ of Remaining Economic LifeMust comply with Davis Bacon Wage RatesAnalysis of anticipated Initial Operating Deficit – not mortgagablePossible debt service reserve (if applicable released only after meets UW DSCR)Generally looking for 20-30% equity21

22. 232 NC and Sub. Rehab. Loan SizingSizing Based Upon Lesser of:Minimum Debt Service Coverage Ratio with MIP 1.45 90% of Replacement Cost (95% for N/P)75-80% of Value (80-85% for Non-profit)Sub. Rehab. also has a test of Existing Value plus a portion of rehabilitation cost22

23. Substantial Rehab vs. 223(f)221(d)(3)/(d)(4) and 232Following 3.10 B. of MAP GuideSub. Rehab if meets either 1 or 2 below: 1. Hard cost of rehab. exceeds 15% of after rehab value 2. 2 + major bldg. components substantially replaced (additions not counted)223(f) if doesn’t meet Sub. Rehab tests 23

24. Section 241(a) Supplemental Loans2nd Mortgage on Existing FHA-Insured LoanFor Financing Improvements/Additions Max. Term = Remaining term on 1st MortgageIf 1st Mortgage required Davis Bacon, Section 241a also will requireValue of work must = or exceed cost24

25. Section 232 Blended RateExisting construction with a new construction addition.Davis Bacon wage applyMaximum term is a blended term (existing and new construction).Maximum LTV is a blended rate (existing and new construction).Minimum DSCR with MIP of 1.4525

26. Section 223(d)Operating Loss LoansSecond Mortgage on projects with an FHA Insured new construction loan that experienced losses that were covered by participants.Cover operating losses that occur during any 24 month period within 10 yrs. of completionProperty must have reached sustaining occupancy and minimum DSCR of 1.45 appliesAudit performed on losses26

27. Section 223(i)Fire Safety Equipment LoansSecond Mortgage on projects with an FHA Insured First MortgageGenerally covers sprinkler updates to meet the upcoming CMS sprinkler requirements27

28. Insurance Upon Completion vs. Insured Advances

29. Insurance Upon Completion1 Closing (Initial/Final Endorsement)Non-Critical Repairs done out of escrow within 12 months of closing.Rarely used option on New Construction, Substantial Rehabilitation – see next slide29

30. Insurance Upon Completion, ContinuedNew Construction, Substantial Rehabilitation:Project underwritten and Firm Commitment issuedProject constructed without FHA Insured ProceedsHUD inspects and Davis Bacon complianceAfter construction complete and cost certified, project closes.30

31. Insured AdvancesOption on only NC, Sub. Rehab, and 241a2 Closings (Initial & Final Endorsement)See next slide for description of this process.31

32. Insured Advances, ProcessUnderwritten and Firm Commitment IssuedProject Initially Endorsed Project constructed with payouts from FHA Insured loan proceeds upon HUD inspectionProject completed and cost certifiedProject Finally EndorsedRelease of Initial Operating Deficit and Debt Service Reserve (if applicable) upon lease up.32

33. Section 232 Fees:Application Fee: One time fee payable upon receipt of application30 basis points on all loan typesOn Section 223a7’s, 50% of this fee refunded after closingMortgage Insurance Premium:Payable each year there is an FHA insured Mortgage.Generally ranges from 55 basis points to 77 basis points of outstanding mortgage amount - depending upon the program (projects with LIHTC have lower MIP’s also).

34. Section 232 Fees:Inspection Fees:One time fee payable at closing on certain loan typesNew Construction = 50 Basis Points of Loan AmountSection 223f: $30 per bed or 1% of cost of repairs (depending upon the amount of repairs).Transfer of Physical Assets Application Fee:$.50 per $1,000 of Original Mortgage Amount