LEAN 232 Pipeline as of March 20th, 2009

FHA LEAN Update - Deals in progress and closed by FHA to Date
posted by Kendall Realty Advisors

FHA # Requests – Purchase/Refinance – 221

FHA # Requests – New Construction – 49

FHA # Requests – Section 223(a)(7) - 1

FHA # Requests – Section 241(a) – 2

FHA # Requests – Sub-Rehab – 3

FHA # Requests – Section 223(d) – 2

Applications In (not closed) – Purchase/Refinance – 40 shortly)

Applications In (not closed) – New Construction – 6

Applications In – Section 223(a)(7) – 1

Firm Commitments Issued – 29

Applications CLOSED –Purchase/Refinance – 14

Applications CLOSED – New Construction – 1 (5 pre-apps completed)

The “Sample Closing Documents (including AR Financing)” link has been broken into two links - “Accounts Receivable Financing Documents” and “Sample Closing Documents”.

The most current closing checklist has been added to each loan type under “Lender Tools – Construction and Closing”.

We are in the process of uploading legal closing punchlists for all of the loan types. These punchlists will be posted under “HUD Legal Counsel Tools” (for Original Section 232/223f) or under “HUD Tools – Construction and Closing” (for the other tabs).

The link for the Intergovernmental Review that is listed in the endnotes on the Firm Application checklists under New Construction, Substantial Rehabilitation, and Section 232/241(a) has been revised. This changed with the new Administration.

As a result of our Beta Test on our first Early Commencement, we have added to and revised the documents that now appear under “Early Commencement of Construction” and “Lender Tools”.

LEAN PIPELINE AND CLOSINGS

LEAN 232 Pipeline as of March 6th, 2009
FHA # Requests – Purchase/Refinance – 208
FHA # Requests – New Construction – 41
FHA # Requests – Section 223(a)(7) - 1
FHA # Requests – Section 241(a) – 1
FHA # Requests – Sub-Rehab – 2
FHA # Requests – Section 223(d) – 2
Applications In – Purchase/Refinance –40 (with 18 more scheduled to come in shortly) Applications In – New Construction – 7
Applications In – Section 223(a)(7) – 1 Firm Commitments Issued – 18 Applications CLOSED –Purchase/Refinance – 9 Applications CLOSED –
New Construction – 1 closed - (4 pre-apps completed)

FHA 221D4 or FHA Section 221(d)(4) Loans

The top apartment lending program available today is the FHA 221D4 program.

90% loan to cost

1.11 to 1 debt service coverage

40 years plus construction loan term

Non-recourse

Assumable

Check out the best lending program available today the FHA 221D4 new construction apartments.

Revised Guidance for Underwriting of LEAN 232 Loans for Assisted Living Projects:

Given the difficult economic and fiscal environment nationally, the Department is requesting that HUD approved Mortgagees exercise caution in underwriting loans under the LEAN Section 232 programs for new construction and refinance transactions for assisted living facilities. For all Assisted Living Project LEAN mortgage insurance applications under Section 223(f), Section 232 new construction and substantial rehabilitation, and Section 241(a), HUD will require justification/mitigation if the underwritten debt service coverage ratio (“DSCR”) is less than 1.45. Moreover, as was previously discussed with various lenders in June of 2008, for all LEAN mortgage insurance applications involving new construction of Assisted Living units, HUD will require justification/mitigation if the underwritten loan to value is greater than 75%.

The Department would consider, for example, a mitigating factor to be the inclusion of less expensive independent living units in the project or the presence of facility residents that are being provided with state or federal rental assistance subsidies. The Department’s review of mitigating factors will focus on any project specific attributes that result in limiting project market risk or in reducing project financial risk. The Department will be reasonable and flexible in determining where justifiable circumstances or mitigating factors exist.

Additional Guidance on the Use of Project Capitalization Rates:

The Department would like to provide general guidance regarding the usage of capitalization rates for Assisted Living projects. HUD believes that the capitalization rate should be a true reflection of conditions in the marketplace and the specific risks associated with a project. The Department is particularly concerned with the use (in some cases) of an approximate “risk free” capitalization rate for Assisted Living projects. The Department is not mandating a minimum capitalization rate. However, HUD may require justification/mitigation on Assisted Living projects if the capitalization rate used by the appraiser appears not to fully account for specific project and market related risks. This capitalization rate issue should be fully discussed in the Lender Narrative of the LEAN Application.

The Department believes that, in most but not all economic environments, the following debt service constant formula (Debt Service Constant + FHA MIP) multiplied by 1.25 would reflect reasonable guidance for the “minimum” capitalization rate for a proposed project. HUD would expect that the market realities of each project would dictate the capitalization rate to be used, which may be higher than the minimum formula. HUD does not wish to impose requirements for determining the capitalization rate and will defer to the USPAP appraisal standards to provide the definitive guidance on this issue. The Department’s guidance on capitalization rates is not mandatory and the Department understands that this guidance may not be as helpful as a guide when market and economic conditions are either highly optimistic or overly conservative and/or when the interest rate environment reflects unusually low or high project interest rates.

Example for calculating Cap Rate: 7% fixed interest rate plus the MIP of 50 basis points. {.0746+.50bp MIP=.0796*1.25=.0995 or 9.95%}. In this example, the minimum capitalization rate “guidance” is 9.95.

The revised guidance relative to the debt service coverage ratio, loan to value, and capitalization rates for assisted living projects shall apply to any future application for mortgage insurance where an FHA Project Number is issued after February 6, 2009. Alternatively, if the FHA number has not been issued but a project appraisal is underway, FHA will accept the lower DSCR of 1.3 for refinancing and 1.35 for new construction if an appraisal engagement letter was executed prior to February 6, 2009, and if appraisals using the lower DSCRs are finalized and provided to HUD prior to April 6, 2009. On projects that do not meet this revised guidance (where the FHA Project Number was issued on or prior to February 6, 2009) the Lender should provide a notification in the Check Transmittal Letter and Lender Narrative of the mortgage insurance application that provides for the discussion of the appraisal lender modifications.

Please note that the previous guidance on loan to value and debt service coverage on Section 232/223(f)’s for Skilled Nursing and Independent Living Facilities have not been revised.

· Underwriting of “Payee Mix” on LEAN Section 232 Loans

A. If the project being underwritten is an existing project (with no new construction of Skilled Nursing Facility (SNF) beds proposed and/or no substantial rehabilitation of SNF beds whereby the payee mix differs from the project’s payee mix history), the existing MAP Guide language will be applied:

The income estimate should be based on the percentage of Medicaid/Medicare beds shown on the last 3 years of financial statements.

B. If the project being underwritten proposes new construction of SNF beds or substantial rehabilitation of SNF beds whereby a payee mix than differs from the project’s payee mix history, the following three requirements will apply:

1. The percentage of Medicare beds (of the total SNF beds in the project) used in the underwriting must not exceed 10% or the average percentage demonstrated in the market, defined as the average of no less than 5 competing facilities in the primary and secondary market.

2. The percentage of Private Pay beds used in the underwriting must not exceed the average percentage demonstrated in the market, defined as the average of no less than 5 competing facilities in the primary and secondary market.

3. The combined percentage of Medicare and Private Pay beds (of the total SNF beds in the project) underwritten must not exceed 30%.

Waivers to the above will be reviewed on a case by case basis. Waiver requests should be submitted as early in the mortgage insurance application process as possible, however HUD will not officially approve of a waiver prior to the submission of either a Pre-Application or Firm Application for mortgage insurance. We recommend that waiver requests include the following at a minimum:

ü A comprehensive discussion of the operator experience with Medicare patients and what factors will be employed by the operator to insure that the business objectives will be successful.

ü Stress tests that clearly demonstrate what impact reduced payee mix levels/percentages would have on the operator’s capability to meet required project lease and/or mortgage payments.

ü The market analyst must interview all area hospitals or referring entities and discuss any issues that would facilitate or hinder their recommendation to refer Medicare patients from hospitals to nursing homes providing specialized services.

ü The Lender should provide information on any legal issues and any additional information that may be required to justify the waiver.

Apartment Loan

Kendall Realty Advisors is now offering a full range of apartment loans. New Construction, Refinance, Seven, Ten, Thirty, Thirty Five and Forty Year Loans depending on program.


Rates for FHA 223(f) including MIP under 6.5%.

FHA 221(d) new construction under 7.5%

Ten Year Loans, Seven Year Loans under 6.35%

Fixed Rates, Non-Recourse 30 to 40 year amortization depending on program.

FHA 232 LEAN and Apartment Lending

FHA Apartment Loan Program going strong rates for GNMA 35 year 223(f) 232(f) GNMA still under 6%.

The FHA 232 LEAN program has closed at least 5 or 6 loans. The process is much faster but the new appraisal rules have reduced the loan amounts from pre-lean levels. The program still offers the best loan to values for owners not looking to cash out, and wanting to lock into long term debt, with 75% to 80% loan to values. The FHA 232 Lean New Construction is preparing for new loan applications under process with the lenders.

The underwriting guidelines are due out in March with the new debt service coverages and loan to value recomendations. Under LEAN the loan will based on the lenders recomendation of loan sizing after reviewing all information the on the transaction, the sponsor and the management.

The loans will be processed faster, and deals that are not over-leveraged, poorly managed, and that have strong sponsors will be funded.

Scott and Chuck Kendall have been financing FHA Healthcare and Multifamily loans since 1985.

Hud Texas News:

Estate Villas of Krum


On December 19th, the Ft. Worth Program Center closed an insured 221(d)4 new construction mortgage for the Estate Villas of Krum, a 140 unit to-be-built property located in Krum, TX.

Krum Estate Villas, Ltd., the borrower, is a for-profit partnership sponsored by Mr. Byron Ballas. While this was the sponsor’s first FHA-insured project, the development team featured a solid mix of both FHA and non-FHA multifamily experience.

The property is located near two new schools and several new subdivisions. Although growing, the immediate area is still fairly rural and “underserved” in terms of multifamily housing. Estate Villas of Krum will help satisfy some of this area’s demand for affordable apartment housing.

The $12,997,400 mortgage was closed at a 6.76% interest rate.

Financing Nursing Homes And Assisted Living Facilities with the new LEAN Program

Many owners of nursing homes and assisted living projects have long preferred traditional bank lenders. However, the significant losses from the subprime meltdown—more than $500 Billion—have changed the rules and the ability of traditional lenders to finance loans. Most analysts project additional losses in the near future along with significant losses in automobile loans and credit card loans, which means conditions will become worse before they get better.

These losses force banks and financial institutions to seek capital to supplement their depleted base. Without a sufficient base, banks and financial institutions are unable to make new loans. Despite the infusion of cash from the Treasury, credit has not loosened. The projected size of current and future losses bring into question whether banks and financial institutions have the ability to raise the necessary additional capital and whether or not they will be making many loans in the near future.
The first type of loans that banks will cease making will be loans to nursing home and assisted living providers. Health care is a specialized market, and the number of banks willing or able to make these loans will diminish and the lending terms may become far more onerous. When Letters of Credit come due, banks will not have the ability to renew them.

Therefore, traditional, conventional financing in the near future is all but gone for practical purposes. Fortunately, FHA is rolling out their new LEAN program just as traditional bank and financial company financing is becoming more difficult. FHA recently reengineered its lending program for nursing homes and assisted living facilities by transferring the responsibility to the Office of Insured Health Care Facilities. This transfer has resulted in “THE LEAN PROGRAM,” FHA’s new way of doing business.
This new program addresses the most frequent complaints FHA lenders and facility owners have had with traditional FHA processing: the lengthy processing time, the inconsistent answers, and an inability to complete transactions in a consistently reasonable time frame. The new program promises the ability to close a transaction within thirty days of the day the lender files its application for mortgage insurance.
FHA now not only has a program that is—and always will be—available, offers fantastic terms, but also has the ability to deliver the financing with a rapid turn around, without the previous FHA headaches.

We have over 45 years experience dealing with FHA, and can help you through every step of the way. Each development is unique, of course, and we can help you determine your specific needs and determine the best way to achieve your objectives.


Please call or email us at your earliest convenience.

Very truly yours,

Charles E. Kendall
President
Kendall Realty Advisors