HUD-Insured Financing Under Section 232 of the National Housing Act

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1 HUD-Insured Financing Under Section 232 of the National Housing Act James Levine Shareholder Baker Donelson John McGehee Associate Baker Donelson

2 Brief history of Section 232 Became part of National Housing Act in 1959 Intended to further the development of skilled nursing, intermediate care, board and care homes and assisted living facilities LEAN Program was developed in 2009 to expedite processing 2

3 Key features of HUD financing HUD Guaranty through approved lenders New construction, substantial rehabilitation or refinancing Loan-to-Value: 80% (for profit) and 85% (nonprofit); lower for new construction. Loan amounts Term: Typically 30 to 35 years Interest rates: Low fixed rate Collateral: All assets of borrower and certain assets of operator Nonrecourse Assignable Long lead time to close Simultaneous AR financing permitted Master Lease for portfolios Compliance with Davis-Bacon Act for construction wages 3

4 Owners, operators and legal structure Borrower: Single asset single purpose entity Operator: Single asset entity without HUD waiver Previous participation clearance No bankruptcy of owner or operator within last five years Operating Lease Master Lease 4

5 Certain refinancing conditions Equity takeout not allowed Seasoning requirements 5

6 Key loan documents Completely new loan documents implemented and effective as of July 12, 2013 Regulatory Agreements Borrower and Operator Security Instrument/Mortgage/Deed of Trust Healthcare Facility Note Security Agreement Operator HUD Lease Addendum Control agreements - DACA and DAISA Debt Service Reserve may be required 6

7 Top substantive changes under new loan documents Distributions For profit borrowers are no longer limited to twice yearly distributions. Operator distributions are not allowed if it has negative working capital. Bad Boy Act Key Principal Liability - Regulatory Agreement requires the listing of certain key principals who will be liable for certain bad-boy acts. No Change to Permits - No project permits or approvals, no matter how insignificant, can be changed or altered without HUD approval. HUD has sole discretion if it believes permits are at substantial and imminent risk of being terminated. Litigation litigation must be disclosed and settlements in excess of $100,000 requires HUD approval 7

8 HUD Consent Amendments - HUD approval is required for any amendment to a contract that materially increases the obligations of the borrower. All contractual obligations must be disclosed to HUD. Recourse The Note provides that it becomes recourse to the borrower under certain conditions. Security Interests - Third Party Operators must pledge their assets to their Landlord/Borrower s loan. AR Limits - Limitation to what AR lenders can recover as collateral and time period their collateral retains priority in the new Intercreditor Agreement. 8

9 Mechanics of processing and closing 1. Application is assembled and sent to HUD electronically. (All loans are processed under the Office of Healthcare Programs staff.) 2. Wait in queue until the project reaches the top 3. When application reaches the top of the queue, paper copies of application documents are submitted to the HUD underwriter and the HUD attorney 4. HUD issues a firm commitment after making sure that any outstanding issues in application are addressed 5. Legal closing package is assembled and sent to HUD attorney and closing coordinator 6. HUD attorney and closing coordinator provide comments to legal closing package and will not set a closing date until all issues are addressed 7. Closing in-person or by mail 9

10 Portfolios HUD has some different processing rules for portfolios Small Portfolios: Up to 10 projects within any 18-month period and combined mortgage amounts up to $75 million Medium Portfolios: 11 to 49 projects within any 18-month period and combined mortgage amounts up to $250 million Large Portfolios: 50 or more projects within any 18-month period or combined mortgage amounts in excess of $250 million Master Lease required for portfolios with 3 or more projects OR more than $15 million 10

11 Accounts receivable financing HUD has recognized need for AR financing for facilities with governmental receivables AR Lender must sign HUD's Intercreditor Agreement and comply with other regulations promulgated in HUD's housing notice on AR financing 11

12 Liability insurance requirements Basic requirements: $1 million (single occurrence), $3 million (aggregate) Underwriter must have a rating of B++ or better from A.M. Best Company and captives must have a rating Self insurance is acceptable with a rated front Six-year loss history is required with application HUD will waive requirements if insurance is not attainable at commercially accepted rates 12