Southeast Mortgagee Advisory Council12th Annual Meeting and Conference

Closing Process and Closing DocumentsThursday, May 30, 2013

1

Mark EidsonJan Weiss HaberKathleen Burtschi

Harrison SmithKate Murray

TIPS AND TRICKS: TITLE & SURVEY

ORCF TITLE & SURVEY CHECKLIST Legal description verbatim, if not verbatim but

describes same property should be Ok. Note difference between record and survey calls. Slip Sheets identifying Exception Documents/Use

Sharpie to number each one. Non-Benign items on ORCF checklist must be

covered, others are recommendations for HUD to consider. (No added risk to HUD, not life safety issue)

Send scanned copies of title and survey to OHP closing coordinator.

2

TIPS AND TRICKS HUD REVIEW

• HUD Form Document - Changes to forms redlined.• Management Agreement - Add HUD Provisions• If License to New Operator Pending – Need letter

from State Agency that New Operator under review OR

• A leaseback to Old Operator, with a temporary management agreement to transition to New Operator.

• Organizational Documents: Place sticky note on HUD provisions.

3

TIPS AND TRICKS: HUD REVIEW • AR Financing - Send UCC searches on

Operator with AR financing documents submitted with Application.

• Mortgagor Term – Must be perpetual or as long as term of the loan.

• Operator Term – Must be at least as long as term of the lease.

• Sprinklers required by 8/13/2013 per CMS - Any Application for a 223(f) on a skilled-nursing facility must be fully sprinklered and listed as such on CMS website.

4

TIPS AND TRICKS: HUD REVIEW

Legal Opinion Use HUD form with few if any changes, or find

another Counsel that is comfortable with form; Don’t erase text from form; Use redline/strikethrough so HUD counsel can tell

what changed, and give rationale for change if change is not just names/addresses of parties

Zoning Letter Want local municipality to give letter; not due

diligence firm If can’t get from locality, obtain zoning

endorsement to title policy

5

TIPS AND TRICKS: HUD REVIEW

Commercial Leases• If large commercial tenant, advise them early of

HUD requirements (HUD Form SNDA)

Section 223(A)(7)s• Vet any big issues through HUD (Ex. flood plain)

because HUD most likely will issue Firm.• HUD general rule to is bring facilities in

compliance with current HUD requirements (AR financing, DACA/DAISA)

6

TIPS AND TRICKS: ISSUANCE OF FIRM

Loan Committee Biggest Issues Causing Delay

Poor Quality Control of Packages Responsiveness of Lender (not legal)

Title/Survey Review Done on (f) and some (a)(7s) if OGC asks Gives Checklist on what needs revising or

explaining

7

TIPS AND TRICKS: ISSUANCE OF FIRM

After Firm – Must Submit Draft Closing Package (a)(7): 7 business days or risk going back

to closing queue (f): 15 business days or back in queueSubmit draft package, then ask for closing date, inform HUD of special closing requirements (prepayment step down)

8

TIPS AND TRICKS: ISSUANCE OF FIRM

Uniform and Complete Checklist on top and tab all documents in

checklist order Use Bold and Strikethrough unless

document offers alternative provisions Ask HUD counsel what documents they

want redlines of

9

Evidence of Special Conditions• Special Conditions Matrix

Place in each draft package. Note evidence to satisfy condition or what is

proposed to satisfy.

Critical Repairs• Color photos, label the pictures with depicted repair and attach invoice.

Closing Statement/Cost Certification• Rough preliminary numbers are better than none and acknowledgement of what’s coming (don’t just ignore the item).

10

TIPS AND TRICKS: ISSUANCE OF FIRM

Non-Critical Repairs If some are done, give photo/invoice and

revise list of what’s remaining. Have Firm amended to reflect items to be

repaired post-closing.

Rate LockSome OGC offices won’t review draft package until after rate lock.

11

TIPS AND TRICKS: ISSUANCE OF FIRM

TIPS AND TRICKS: CLOSING

Common Special Conditions Fidelity (Crime/Dishonesty)/Prop/PLI –

Provide insurance accords Sprinkler System – all SNF’s must be

sprinklered per CMS by 8/13/2103 Legal Punchlist comments Title and Survey Review Minimum Lease Payments – must

have 1.05 coverage

12

Critical Repairs• Many and high dollar value – often Lender will

already have discussed this with Borrower and Borrower has completed repairs before Firm.

Repair Escrow for Non-Critical Repairs Take escrow of 120% 223(f) and 110%

223(a)(7) of amount of repairs Have 12 months to get them done

13

TIPS AND TRICKS: CLOSING

Number of Beds Noted on License and Regulatory Agreement

• License 140 beds, underwritten for the 105 beds in use, put both numbers in Operator Regulatory Agreement.

• If License or Insurance Policies are set to expire in less than a month before closing – need updated license as evidence that renewal is in process and will be granted.

223(f) Cost Certification - Need Payoff and Invoices• Doesn’t need to be duplicated in Closing

Statement attachment

14

TIPS AND TRICKS: CLOSING

KEY HUD LOAN DOCUMENTS

• Regulatory Agreements-Borrower and Operator

• Mortgage/Deed of Trust/Security Instrument

• Note• Security Agreement- Operator• Control Agreements- DACA and DAISA• HUD Lease Addendum

15

HUD’S NEW 232 DOCUMENTS•Became Final on 3/14/13 for Transactions with Firm Commitments Issued on or after April 9, 2013.

•Transition Rules:• HUD delayed the implementation

date to July 12, 2013• (a)(7) HUD will work with the Lender

to allow use of existing documents previously approved so long as terms and conditions remain the same.

16

LOAN DOCUMENTSTOP 10 SUBSTANTIVE

CHANGES

1. Distributions – For profit borrowers are no longer limited to twice yearly distributions. Operator distributions are not allowed if it has negative working capital.

2. Bad Boy Act – Key Principal Liability - The new Regulatory Agreement requires the listing of certain key principals who will be liable for certain “bad-boy” acts.

17

3. Nonprofit Borrower Reserve - Nonprofit Borrowers have to post long-term debt service reserve to have access to residual receipts (profit). This is true even if Nonprofit elects to follow more stringent underwriting requirements of for-profit borrowers.

4. No Change to Permits - No project permits or approvals, no matter how insignificant, can be changed or altered without HUD approval. Any violations thereof must be reported to HUD within 2 days. HUD sole discretion at making decisions regarding Operator’s facility if it believes permits are at “substantial and imminent risk of being terminated.” 18

LOAN DOCUMENTSTOP 10 SUBSTANTIVE

CHANGES

5. Litigation/Claims - Any litigation or claims against the

borrower/operator/principals/facility/project must be disclosed to HUD and no claim in excess of $100,000 can be settled without HUD consent.

6. 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.

19

LOAN DOCUMENTSTOP 10 SUBSTANTIVE

CHANGES

7. Consultants - HUD may require the borrower to hire a consultant if there is a Project Operating Deficiency.

8. Recourse - Section 8(b) of the note provides that it becomes recourse to the borrower under certain conditions.

9. Security Interests - Tenant/Operators cannot grant security interests to landlord/borrowers to secure rent payments in third party tenant situations. Third Party Operators must pledge their assets to their Landlord/Borrower’s loan.

10. AR Limits - Limitation to what AR lenders can recover as collateral and time period their collateral retains priority in the new Intercreditor Agreement.

20

LOAN DOCUMENTSTOP 10 SUBSTANTIVE

CHANGES

BONUS – MORE CHANGES IN HUD LOAN DOCUMENTS

Required Financial Statements of Operators:

Required of all operators (those in HUD inventory and new deals):

• Must be submitted quarterly and annually.• “Operator-certified”, not audited.

21

BONUS – MORE CHANGES IN HUD LOAN DOCUMENTS

Operator Must Notify HUD if it “Places Value of Security at Risk”

G Tag or higherG Tag unresolved for 2 or more surveysRepeat violationNotify Lender/HUD of conduct, scope, remedies and timelines.

22

BONUS – MORE CHANGES IN HUD LOAN DOCUMENTS

Healthcare Regulatory Agreement – Borrower Paragraph 38

1. Borrower entity already signing Regulatory Agreement, do not add Borrower to Paragraph 38.

2. Firm Commitment will state who signs this paragraph.• Usually principals of Mortgagor entity,

parent of Nonprofit Mortgagor.

23