Webinar Thursday, October 16, :00 PM ET

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1 Webinar Thursday, October 16, :00 PM ET Presented By: Anthony Luzzi, President Andrew J. Patykula, Senior Vice President Sims Mortgage Funding, Inc.

2 Webinar Objectives: To introduce HUD s major mortgage insurance programs for skilled nursing, assisted living and elderly housing to AJAS members. To provide an overview of each program s key eligibility requirements, underwriting guidelines and fee structures To determine how AJAS members could benefit from these programs. To summarize new developments at HUD (multi-family reorganization and Lean program for healthcare). 2

3 Sims Mortgage Funding at a Glance Subsidiary of HJ Sims dedicated to providing FHA-insured loan financing for healthcare, senior housing, multifamily and hospital projects. We are active in all of FHA s programs, from market-rate and affordable rental housing to skilled nursing and assisted living to hospitals. We have closed loans for new construction, expansions, renovations, acquisitions, and refinancings. We also have provided consulting and financial advisory services to clients with FHA-insured loans already in place that have enabled them to reposition existing projects efficiently and cost-effectively. Our success is largely based on providing hands-on service and offering a level of expertise and stability that few companies can match. Our senior staff averages 25 years of experience in FHA s programs and they have been recognized by national trade organizations as industry leaders. Further, we are a cohesive team whose average tenure with the Sims organization exceeds 20 years. The result is verysatisfied customers: over last three plus years, repeat clients have averaged 80% of our total of $500 million in loans closed. 3

4 What Are the General Features of HUD-Insured Loans? Fixed rates of interest determined based on current market conditions at time of loan funding. Sole purpose borrowing entity; non-recourse loan. Long terms: typically 35 year maximum on acquisition/ refinancing loans and 40 year maximum on new construction/ substantial rehabilitation loans. High loan-to-value (LTV) or loan-to-cost (LTC). Full amortization throughout entire term: no balloon payment. Loan is typically pre-payable at borrower s option after as short as a 1 to 2 year lockout period. Loan can be assumed by new owner upon the sale of a project pursuant to a Transfer of Physical Assets (TPA) process. Limitations on distribution of Surplus Cash in certain programs. 4

5 Major Insurance Programs: Section 232/223(f) Section 223(f)/202 Section 232 5

6 FHA SECTION 232/223(f) Lean Processing Loans to acquire or refinance Skilled Nursing, Assisted Living and Specialized Use Facilities. PROGRAM FEATURES All project types generally are underwritten at an 80% loan-to-value ratio (LTV) and a 1.45 X debt service coverage (DSC). Loan is pre-payable, assumable and non-recourse; maximum term is 35 years with full amortization. Cost of repairs, improvements and an initial deposit to a reserve for replacement fund based on a fifteen year projection are financeable; however, the cost of repairs and improvements may not exceed 15% of the project s value after repairs are completed or involve replacement of two or more major building components. Projects whose costs exceed these levels may qualify under Section 232 as substantial rehabilitation transactions. Projects must be at least three years old prior to filing an application and must not have been substantially rehabilitated within that period. Project debt incurred within two years of the filing of an application must be analyzed to determine program eligibility; project debt that is more than two years old does not require additional analysis. Facilities must comply with the State s eligibility requirements concerning licensure. 6

7 FHA SECTION 232/223(f) Lean Processing Cont. FEES 0.30% Application Fee to FHA 1.00% Mortgage Insurance Premium Up Front at Closing $30 per unit Inspection Fee 2.00% Maximum Financing (Origination) Fee 1.50% Maximum Placement Fee 2.00% Costs of Issuance for Tax-Exempt Bond Transactions An annual 0.65% Mortgage Insurance Premium (.45% for Tax Credit Transactions) is paid to FHA as part of the monthly mortgage payment requirements. Fees are required for market studies, environmental reports, appraisals, and project capital needs assessments (PCNA). The costs of these reports are financeable. ESCROWS Escrows required for property insurance, real estate taxes, and FHA mortgage insurance premium. Replacement reserve escrow for on-going replacement of depreciable items is required for the term of the loan. The amount of the annual deposit will be revised after 10 years based on a capital needs assessment. An escrow equal to 120% of the cost of repairs is required. Approximately 100% is funded from loan proceeds; the Borrower funds the remaining 20%, which is released upon completion of repairs. A debt service reserve may be required if the Project has not reached its targeted underwriting occupancy at time of loan approval. 7

8 FHA SECTION 223(f)/202 Multifamily Accelerated Processing (MAP) Loans to recapitalize Section 202 Elderly Housing Projects PROGRAM FEATURES Provides Section 202 projects with capital for repairs, renovations and enhanced programs. Maximum loan to value (LTV) is 90%; maximum term is 35 years with full amortization. Loan is pre-payable, assumable and non-recourse. Requires a 1.11 X debt service coverage based on a maximum of 95% occupancy. Underwriting based on Section 8 Housing Assistance Payment (HAP) Contract rents even if higher than market rents. HUD will extend HAP Contract for 20 years. The cost of repairs and initial deposit to a reserve fund for building/equipment replacement can be included in the financing. The cost of rehabilitation must not exceed the greater of a) 15% of the project s replacement cost or b) $6,500 per unit adjusted by a high cost percentage based on geographic location; or, c) involve the replacement of at least 2 major building components. Projects whose costs exceed these limits may qualify under the Section 221(d)(4) substantial rehabilitation program. Loan can include a Developer Fee equal to 15% of acceptable development costs. 8

9 FHA SECTION 223(f)/202 Multifamily Accelerated Processing (MAP) Cont. FEES 0.30% Application Fee to FHA 1.00% Mortgage Insurance Premium Up Front at Closing Inspection Fee - $30 per unit when repairs exceed $100,000 but are less than $3,000 per unit; the greater of $30 per unit or 1% of the cost of repairs when the repairs are greater than $3,000 per unit; or, $1,500 when the repairs are less than $100, % Maximum Financing (Origination) Fee 1.50% Maximum Placement Fee 2.00% Costs of Issuance for Tax-Exempt Bond Transactions An annual 0.45% Mortgage Insurance Premium is paid to FHA as part of the monthly mortgage payment requirements. Additional fees will be required for third party appraisals, environmental reports and project capital needs assessments (PCNA). The costs of these reports can be paid from existing reserve for replacement funds subject to HUD approval. ESCROWS Escrows required for property insurance, real estate taxes, and FHA mortgage insurance premium. Replacement reserve escrow for on-going replacement of depreciable items is required for the term of the loan. Projects must obtain a new PCNA every 10 years, with the reserve for replacement deposit adjusted based on the results of the PCNA. Repair escrow equal to 110% of the cost of repairs is required at closing. Approximately 100% is funded from loan proceeds; the Borrower is required to fund the remaining 10%, which is released upon completion of repairs. The Developer Fee can be used for these purposes. 9

10 FHA SECTION Lean Processing Loans to construct or substantially rehabilitate Skilled Nursing, Assisted Living and Specialized Use Facilities PROGRAM FEATURES Combines construction and permanent financing into a single transaction approved at the same time. Skilled nursing facilities generally are underwritten at an 80% loan-to-value ratio (LTV) and a 1.45 X debt service coverage (DSC); assisted living transactions generally use a 75% LTV and 1.45 X DSC. Loan is pre-payable, assumable, and non-recourse; maximum term is 40 years with full amortization. Projects must comply with the State s eligibility requirements for licensure and operating standards. Construction and rehabilitation costs are subject to Davis-Bacon Prevailing Wage Requirements. Up to 25% of a Project s total bed count can be for unlicensed, independent living. 10

11 FHA SECTION Lean Processing Cont. FEES 0.30% Application Fee to FHA 0.77% Mortgage Insurance Premium (.45% for low income housing tax-credit deals) 0.50% Inspection Fee 2.00% Maximum Financing (Origination) Fee 1.50% Maximum Placement Fee 2.00% Costs of Issuance for Tax-Exempt Bond Transactions An annual 0.77% Mortgage Insurance Premium (.45% for Tax Credit Transactions) is paid to FHA as part of the monthly mortgage payment requirements. Additional fees are required for third party market studies, environmental reports, appraisals, architectural reviews and cost reports. The costs of these reports are financeable. ESCROWS Escrows required for property insurance, real estate taxes, and FHA mortgage insurance premium. Replacement reserve escrow for on-going replacement of depreciable items is required for the term of the loan. The amount of the annual deposit will be revised after 10 years based on a project capital needs assessment (PCNA). An operating deficit escrow and in some cases a debt service reserve escrow will be required by FHA. This escrow must be funded by the borrower at closing with cash or a letter of credit. A Working Capital deposit equal to 2% of the mortgage and escrow for Minor Movable Equipment of $450 per bed is required at closing. These deposits must be funded by the borrower at closing with cash or letters of credit. 11

12 What are Allowable Uses of Loan Proceeds Under New HUD Notice 13-17? Increase the availability or provision of supportive services, which may include the financing of service coordinators and congregate services. Rehabilitate, modernize, or retrofit project structures, common areas, or individual dwelling units. Construct an addition or other facility in the project, including assisted living facilities, or, upon the approval of HUD, facilities located in the community where the sponsor operates the project. Payment to the Project Owner or Sponsor of a Developer Fee. Cover the payment of transaction costs related to LIHTC s or other secondary financing Rent reductions of unassisted tenants residing in the project. 12

13 What is the Sequence of Events? Sponsor s (with assistance of consultant or banker) self-determination that a prepayment is beneficial; factors to evaluate: 1. Physical condition of project and level of aging of residents. 2. Level of reserve for replacements and residual receipts accts. 3. Interest rate on Section 202 Direct Loan. 4. What could be done to make project better to residents or to the community the project serves? Preliminary meeting with HUD Production and Asset Management teams to discuss prepayment plan and prospective underwriting. Tenant notification with 30-day review and comment period. Submission of formal request to prepay Direct Loan. Development of refinancing using HUD Section 223(f)/202 loan program. Receipt of HUD approval to prepay Direct Loan and issue Firm Commitment for Mortgage-Insurance. 13

14 Recent Developments: Lean Processing Update Multifamily Reorganization 14