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>>> GOOD MORNING AGAIN. YOU DON'T SEE MY NAME ON HERE.
I WANTED TO GO ON IN FRONT V PAUL BECAUSE I WANTED TO MAKE
A FEW COMMENTS ABOUT THE PRE-APPLICATION PROCESS.
YOU CAN'T IMAGINE HOW HARD THESE GUYS HAVE BEEN WORKING
TO IMPROVE THE PRE-APPLICATION PROCESS.
COUPLE WEEKS AGO WE HAD A CONTINUATION OF OUR LEAN
STREAMLINING. SOME OF YOU PARTICIPATED IN
THAT, AND WE REALLY APPRECIATE YOUR HELP THERE.
WE'RE TRYING TO GET TO DOWN TO THE CORE ISSUES, TRYING TO
MAKE IT AS EASY FOR YOU, THE CLIENTS, THE HOSPITAL, AS WE
POSSIBLY CAN. SO THAT'S ONE THING.
THE SECOND THING IS, IF WE BACK UP IN TIME, ONE OF THE
REASONS THAT WE STARTED THE PRE-APPLICATION PROCESS WAS TO
BE HELPFUL TO YOU GUYS AND TO BE HELPFUL TO THE HOSPITAL.
WE THOUGHT, AS WAS BEING POINTED OUT, THAT IF WE CAN
HIT THE KEY ISSUES RIGHT AT THE FRONT END TO SEE IF THEY
QUALIFY, EVEN IF THE HOSPITAL QUALIFIES, IT WILL SAVE A LOT
OF TIME. AND ACTUALLY, IT HAS DONE
THAT. I WOULD LIKE TO POINT OUT THAT
THIS IS A COURTESY. IT'S A COURTESY.
THERE'S NO FEES, YOU KNOW THAT.
THERE'S NO FEES. THESE GUYS SPEND A LOT OF TIME
GOING THROUGH THE -- ALL THE PAPERS THAT ARE SUBMITTED,
TRYING TO COME DOWN TO IDENTIFYING KEY ISSUES, SO
FORTH AND SO ON. BUT THEY DO THAT AS A COURTESY
TO SHOW THAT IT SAVES THE HOSPITALS MONEY, SAVES YOU
TIME AND ENERGY. THE OTHER THING I WANTED TO
MENTION WAS I ALWAYS THINK IT'S GOOD TO GET TOGETHER
EYEBALL TO EYEBALL. SO WE MEET AND GREET, AS PAUL
SAID, WE GET TO KNOW EACH OTHER A LITTLE BIT BETTER.
THE HOSPITAL FOLKS SEE THAT WE DON'T HAVE GREEN EYE SHADES
AND THICK GLASSES AND THINGS LIKE THAT.
WE'RE REAL HUMAN BEINGS. WE ARE TRYING TO MAKE THE
DEALS WORK. WE WILL HAVE SUGGESTIONS HOW
TO MAKE IT WORK. WE WILL BE HONEST AND SAY THE
THINGS THAT, YOU KNOW, WE'RE HAVING A TOUGH TIME WITH.
BUT EYEBALL TO EYEBALL, GETS DOWN TO THE QUESTION ABOUT
VENUE. FIVE YEARS AGO WE SAID WE HAVE
THIS NEW TECHNIQUE NOW, WE CAN NOW DO LIKE WE'RE DOING RIGHT
NOW, WEBINARS, BUT WE CAN DO SO-CALLED WEBINARS WITH THE
HOSPITALS WHO ARE OUT IN CALIFORNIA.
THEY DON'T HAVE TO FLY IN HERE.
THAT'S STILL ON THE TABLE. IT'S AN OPTIONAL THING THAT
CAN BE DONE. WE CAN DO CONFERENCE CALLS.
WE'RE WILLING TO DO IT. SO DON'T FEEL AN OBLIGATION TO
COME OUT TO SHAKE HANDS WITH
US. TELL YOUR CLIENTS IF THEY
REALLY WANT TO, THEY CAN WORK THINGS OUT WITH THIS GROUP AND
WE'LL MAKE ARRANGEMENTS AND DO IT LONG DISTANCE, IF THAT'S
HELPFUL. BECAUSE NOW IT IS EXPENSIVE TO
FLY, TO STAY OVERNIGHT, IT'S EXPENSIVE IN TERMS OF TIME, SO
IT IS AN OPTIONAL THING I JUST WANTED TO POINT OUT TO YOU.
PAUL? >> THANKS.
SO WE ARE GOING TO TURN NOW TO OUR PROGRAM WHERE WE ARE GOING
TO DISCUSS A LITTLE BIT ABOUT THE ELIGIBILITY REQUIREMENTS
OF THE PROGRAM FOR 242 AND 223(F).
YOU KNOW, THERE ARE DEFINITELY A NUMBER OF BASIC REGULATORY
REQUIREMENTS THAT THE PROGRAM REQUIRES HOSPITALS TO MEET IN
ORDER TO QUALIFY. ALONG WITH SOME REQUIREMENTS
THAT APPLY TO NEW CONSTRUCTION OR MAJOR RENOVATIONS AT
HOSPITALS, OR FOR THE REFINANCING OF EXISTING DEBT.
SOME DEBT CAN BE INCLUDED; OTHERS CANNOT.
ALL OF THE REQUIREMENTS THAT WE HAVE, YOU KNOW, THEY ARE
COMPLEX, IT MIGHT APPEAR A LITTLE DAUNTING AT FIRST, BUT
A LOT OF IT JUST COMES DOWN TO COMMON SENSE ON ALL OF OUR
PARTS TO SAY, OKAY, WHAT MAKES SENSE TO INCLUDE AND WHAT
DOESN'T. I THINK ONCE WE HAVE A
PRESENTATION SUCH AS THIS, AND GIVE PAULA CHANCE TO EXPLAIN
IT TO YOU -- PAUL A CHANCE TO EXPLAIN IT TO YOU, AS WELL AS
HAVE YOU LOOK INTO OUR HANDBOOK AND OUR GUIDELINES,
IT WILL BEGIN TO REALLY MAKE SENSE TO YOU.
AGAIN, AS A LENDER, IT SEEMS A BIT DAUNTING AT FIRST, BUT,
AGAIN, I THINK PAUL WILL WALK YOU THROUGH SOME OF THESE.
IT WILL MAKE MORE SENSE TO YOU.
PAUL, IF YOU WOULD, PLEASE. THANK YOU.
>> OKAY, THANK YOU, JEFF THANK YOU, GEOFF.
SO THIS SECTION OF THE PRESENTATION IS ON ELIGIBILITY
REQUIREMENTS, AND FOR THE MOST PART, AGAIN, AS WITH PROCESS
242 ELIGIBILITY REQUIREMENTS ARE SIMILAR TO WHAT WE HAVE IN
THE 223(F) PROGRAM. SO I'LL START WITH A BASIC
OVERVIEW. BASICS OF THE PROGRAM, GET
INTO STATUTORY REQUIREMENTS. THERE ARE A FEW OF THOSE,
KELLY TOUCHED ON THEM THIS MORNING, AND REGULATORY
REQUIREMENTS, AND THE REGULATION IS WHERE YOU'LL SEE
THE PRIMARY DIFFERENCES IN THE TWO PROGRAMS, 242.16 IS THE
REGULATORY REFERENCE, IF YOU'RE INTERESTED.
THERE'S A FEW VERY INTERESTING PIECES IN THERE.
SO FIRST PROGRAM BASICS, AND WE TOUCHED ON SOME OF THESE
THIS MORNING. USES OF LOANS, YOU KNOW,
ANYWHERE FROM CONSTRUCTION, 100% CONSTRUCTION TO 100%
REFIE, SUBJECT TO WHAT KELLY TALKED ABOUT THIS MORNING WITH
THE DEFINITIONS OF CAPITAL DEBT, HARD COSTS AND SOFT
COSTS, ET CETERA. FHA INSURES 99% OF THE LOAN
AMOUNT. 25-YEAR TERM MAXIMUM.
OCCASIONALLY THERE ARE REQUESTS FOR SHORTER TERMS
WITH THE CONSTRUCTION PROJECTS GENERALLY THEY ARE 25 YEARS.
I THINK WE'VE HAD A COUPLE IN THE LAST TWO YEARS, DEALS THAT
INCLUDED A LARGE REFINANCING COMPONENT, THAT ACTUALLY HAVE
SHORTER TERMS. SO THAT OPTION IS THERE FOR
HOSPITALS. MAYBE SOME ARE A LITTLE MORE
CONSERVATIVE THAN OTHERS AND WANT TO KEEP THE TERM SHORT
RATHER THAN STRETCHING OUT THE DEBT.
THAT'S UP TO THE HOSPITAL. ADVISE YOUR HOSPITALS AS SUCH.
IT IS SOMETHING THAT COULD BE A GOOD THING FOR SOME OF THE
FOLKS OUT THERE. FIXED ANNUAL PREMIUMS, WE'RE
TALKING ABOUT THE MORTGAGE INSURANCE PREMIUM.
THERE ARE OTHER FEES ASSOCIATED WITH, YOU KNOW,
INITIATING AN APPLICATION, BUT ONGOING FIXED MORTGAGE
INSURANCE PREMIUMS VARY BETWEEN .55% AND 7 OBEY SIS
POINTS OF THE RE -- 70 BASIS POINTS OF THE REMAINING
MORTGAGE. THAT'S DEPENDING ON THE
PROGRAMS. THE RE-FI PROGRAMS ARE
GENERALLY ON THE LOW END OF THAT, 242 AND 241 ON THE
HIGHER END. GETTING INTO THE STATUTORY
REQUIREMENTS, WE TOUCHED ON A COUPLE OF THESE EARLIER.
THEY INCLUDE SOME OF THE FOLLOWING:
THE LOAN-TO-VALUE REQUIREMENT, I'M SURE MOST FOLKS ARE
FAMILIAR WITH THIS. THE MAXIMUM LOAN-TO-VALUE IS
98%. THE LOAN-TO-VALUE CALCULATION
IS LISTED HERE. IT MIGHT MAKE A LITTLE MORE
SENSE WHEN JB GOES OVER THE 2013, THESE ARE LINE ITEMS IN
THE 2013, TOTAL ESTIMATED REPLACEMENT COST IS OUR
ESTIMATE OF THE VALUE OF THE PROJECT THAT INCLUDES, YOU
KNOW, NET PROPERTY PLANT AND EQUIPMENT THAT'S GOING TO BE
USED AS COLLATERAL FOR THE MORTGAGE, AS WELL AS THE HARD
COSTS AND SOFT COSTS ASSOCIATED WITH THE PROJECT.
AND ANOTHER THING THAT WE'LL BE GOING OVER IN THE PANEL,
THERE ARE SOME -- EVEN THOUGH IT IS A STATUTORY REQUIREMENT,
THERE ARE SOME ACCOMMODATIONS HERE, IF THE TRUE VALUE OF THE
HOSPITAL'S PROPERTY PLAN AND EQUIPMENT ISN'T ENOUGH TO GET
IT DOWN TO 90% LOAN-TO-VALUE, WE DO ALLOW IN CERTAIN
CIRCUMSTANCES AN APPRAISAL TO BE USED TO, YOU KNOW, SAY WHAT
THE TRUE VALUE IS, SO THAT COULD BE USED FOR
LOAN-TO-VALUE PURPOSES, AND THAT'S GOING TO BE A PANEL
DISCUSSION ITEM AS WELL AFTER THIS SESSION.
ALSO STATUTORY REQUIREMENTS, FIRST LIEN OF COURSE, ON REAL
ESTATE. ALSO PART OF COLLATERAL IS,
YOU KNOW, EQUIPMENT, ACCOUNTS RECEIVABLE, PERSONALTY, ET
CETERA. OUR STATUTE SAYS, OR AT LEAST
THE PREAMBLE SAID THAT SECTION 242 WAS DESIGNED FOR URGENTLY
NEEDED HOSPITALS AND, YOU KNOW, THIS HAS BEEN SUBJECT OF
A LOT OF DISCUSSION INTERNALLY AND ALSO IN THE INDUSTRY
WITHIN THE REGULATION WE DISCUSS HOW HUD IS
INTERPRETING THIS. AND ALSO IN THE APPLICANT'S
GUIDE, WE SPELL IT OUT A LITTLE MORE HOW WE ARE
INTERPRETING THIS. ESSENTIALLY WE DO A MARKET
NEED REVIEW FOR EACH DEAL THAT COMES IN.
IT REQUIRES THAT THE LENDER FILL OUT WHAT WE CALL AN AM
CAN'T DAT CAN A REQUEST -- APPLICANT DATA REQUEST.
AN EXCEL SPREAD SHEET LOCATED ON OUR WEBSITE.
WITH THE PRELIMINARY REVIEW, THE HOSPITAL FILLS THAT OUT,
YOU KNOW, I DON'T THINK IT TAKES A WHOLE LOT OF TIME TO
FILL OUT. IT'S MOSTLY INFORMATION ABOUT
THE PROJECT AT THE HOSPITAL BREAK DOWN THEIR PATIENT DAYS
FOR THE MOST RECENT FISCAL YEAR INTO DIFFERENT
CATEGORIES, ONE OF WHICH IS BREAKING IT DOWN BY ZIP CODE,
AND THE PURPOSE OF THIS IS THAT, SO THAT HUD CAN
UNDERSTAND WHAT THE HOSPITAL SERVICE AREA IS, YOU KNOW, THE
LENDERS ARE ASKED TO LIST WHAT THE COMPETITORS ARE, AND WHERE
THOSE ARE LOCATED IN THIS EXCEL SPREAD SHEET THEY SEND
TO US AND HUD TAKES THAT INFORMATION, USES SOME OF OUR
INTERNAL MODELS TO DETERMINE ESSENTIALLY, IN A NUTSHELL,
WHETHER THE AREA IS OVER DEBTED OR NOT.
AND IF HUD DETERMINES THAT THE AREA IS ALREADY VERY MUCH
ADEQUATELY SERVED, IT COULD PUT -- IT COULD POTENTIALLY
PUT THE PROJECT, AS FAR AS HUD IS CONCERNED, IN QUESTION.
THIS SOUNDS A LITTLE BIT SCARY, I THINK, AND THERE'S
BEEN, LIKE I SAID, A LOT OF DISCUSSION WITH THE LENDING
COMMUNITY ABOUT HOW HUD INTERPRETS THIS MODEL THAT WE
USE, AND, YOU KNOW, WHY WE EVEN DO THIS IN THE FIRST
PLACE, BUT, YOU KNOW, THE FACT OF THE MATTER IS, AND I SAID
THIS A COUPLE TIMES DURING THE LEAN SESSIONS WE'VE BEEN
HAVING RECENTLY. HUD, WE DON'T -- IT IS VERY
RARE THAT WE TURN DOWN A DEAL FOR AN EXISTING HOSPITAL FOR
MARKET NEED REASONS. VERY RARE.
I CAN ONLY THINK OF ONE SINCE I'VE BEEN HERE, AND THAT'S TEN
YEARS. SO IT'S VERY RARE.
THE DEALS THAT IT USUALLY HANGS UP WHERE WE HAVE A
PROBLEM WITH MARKET NEED ARE THE STARTUP FACILITIES.
YOU KNOW, I THINK MOST PEOPLE WOULD AGREE THAT MOST
COMMUNITIES IN THE UNITED STATES DON'T HAVE, YOU KNOW, A
TERRIBLE, YOU KNOW, AREN'T -- DON'T HAVE, YOU KNOW,
ADEQUATE -- DON'T HAVE HOSPITALS NEARBY, OR AREN'T
ADEQUATELY SERVED. SO, YOU KNOW, WE DO -- WHILE
WE DO TAKE THIS VERY SERIOUSLY, AND WE DO SPEND A
LOT OF TIME ON THIS MODEL, AND THE HOSPITAL HAS TO SPEND A
LITTLE BIT OF TIME SUBMITTING THE INFORMATION, PREPARING AND
SUBMITTING THE INFORMATION TO US, THE FACT OF THE MATTER IS,
WE DON'T TURN A LOT OF EXISTING HOSPITALS DOWN FOR
THIS REQUIREMENT. SO, YOU KNOW, I THINK IT'S
VERY IMPORTANT THAT WE DO THIS, IT PROVIDES US WITH A
LOT OF INTERESTING INFORMATION, SO JUST
UNDERSTAND THAT THIS IS AN IMPORTANT PIECE OF THE
PRELIMINARY REVIEW PROCESSION, AND IT TIES BACK TO BOTH THE
REGULATION AND THE STATUTE, AND THAT'S PROBABLY THE
BIGGEST REASON WHY WE DO IT. PATIENT DAY REQUIREMENT IS THE
OTHER REQUIREMENT IN THE STATUTE.
PROGRAM IS DESIGNED FOR ACUTE CARE HOSPITALS AND THE
STATUTE, ALTHOUGH IT'S FAIRLY OLD AND DATED, IT DOES GIVE
GUIDANCE ON HOW WE DETERMINE WHETHER A HOSPITAL IS ACUTE
CARE OR NOT. ESSENTIALLY QUALIFYING
HOSPITALS HAVE AT LEAST 50% OF THE PATIENT DAYS ATTRIBUTABLE
TO ACUTE CARE, AND ACUTE CARE, OR RATHER NOT ACUTE CARE,
PATIENT DAYS INCLUDE SOME OF WHAT YOU WOULD EXPECT, SKILLED
NURSING, ACUTE REHAB, PSYCH, OTHER SERVICES.
THERE ARE SOME LISTED, SOME OTHER LISTED IN THE STA IT
TUT. -- STATUTE.
WHAT I NORMALLY TELL FOLKS IS THAT IF, SAY YOU HAVE A
CRITICAL ACCESS HOSPITAL THAT OPERATES A NURSING HOME,
SKILLED NURSING COMPONENT, USUALLY THAT IS WHAT HANGS UP
FACILITIES. THE AVERAGE HOSPITAL WILL MEET
THIS REQUIREMENT WITHOUT MUCH TROUBLE.
AND EVEN IF THEY DON'T, WE DO HAVE AN ADJUSTMENT, AN
ACCOMMODATION IN THE HANDBOOK WHICH CAN BE USED TO HELP
HOSPITALS MEET THIS, IN THE EVENT THEY ARE RIGHT ON THE
BORDERLINE WHEN YOU CALCULATE THE PATIENT DAY RULE.
WE CAN ADJUST BASED ON REVENUES, AND WHAT THIS DOES
IS TAKE INTO ACCOUNT THE FACT THAT THE HOSPITAL PROVIDES A
LOT OF ACUTE OUTPATIENT WORK, BUT SINCE THOSE AREN'T
REFLECTED IN PATIENT DAYS, IT IS A WAY TO HELP HOSPITALS
QUALIFY. AND EVERY ONCE IN A WHILE WE
GET ONE OF THOSE IN HOUSE. BUT LIKE I SAID, THERE IS A
VERY SPECIFIC CALCULATION, ADJUSTMENT THAT GUIDES YOU HOW
TO DO THAT. THAT'S IN THE HANDBOOK.
IT IS A SUPPLEMENT IN THE HANDBOOK, JUST LIKE THE
APPLICANT'S GUIDE IS A SUPPLEMENT.
I THINK PAUL SAID THERE WERE EIGHT OF THEM.
CHECK OUT IF YOU HAVE A HOSPITAL RIGHT ON THE
BORDERLINE. >>> NOW MOVING INTO REGULATORY
REQUIREMENTS. HUD HAS -- WE LOOK AT A LOT OF
FINANCIAL RATIOS. TWO RATIOS PARTICULARLY
IMPORTANT, REQUIREMENTS WITHIN THE REGULATION, THAT'S
OPERATING MARGIN AND DEBT SERVICE COVERAGE.
FOR THE OPERATING MARGIN, WE REQUIRE LOOKING BACK THE LAST
THREE YEARS. WE CALCULATE WHETHER THAT
OPERATING MARGIN IS POSITIVE. THE BEST WAY IS TO LOOK AT THE
OP RALTH INCOME THE LAST THREE -- OPERATING INCOME THE
LAST THREE YEARS. IF THAT NUMBER IS POSITIVE,
THEN GOOD CHANCE THAT'S GOING TO QUALIFY FOR THIS.
THE ONLY CAVEAT IS CALCULATING OPERATING MARGIN, DETERMINING
WHAT'S OPERATING INCOME IN SOME CASES IS SUBJECT TO SOME
DISCUSSION. THE HOSPITAL OR LENDERS MIGHT
CALCULATE IT DIFFERENTLY THAN WE DO, SO IF YOU HAVE A
HOSPITAL RIGHT ON THE BORDERLINE, AS FAR AS THE
OPERATING MARGIN IS CONCERNED, RECOMMEND YOU TALK TO US.
GENERALLY SPEAKING WHAT I'M TALKING ABOUT IS WHETHER
CERTAIN SOURCES OF INCOME ARE OPERATING ARE NON-OPERATING.
GENERALLY SPEAKING, IF IT'S INVESTMENT INCOME
CONTRIBUTIONS, WE'LL TAKE THAT OUT OF OPERATING INCOME AND
OPERATING MARGIN COMPONENT, IT IS IN DEBT SERVICE COVERAGE.
SOMETIMES DEPENDING ON THE HOSPITALS AND THEIR AUDITORS,
THEY CLASSIFY THAT DIFFERENT WAYS.
MAKE SURE YOU PAY CLOSE ATTENTION TO WHAT THE AUDIT
AND WHERE THOSE LINE ITEMS ARE, AND BACK THOSE TWO OUT
WHEN YOU DO THE CALCULATION. ALSO OPERATING MARGIN, WE ARE
NOT LOOKING FOR AN EXPENSE APPRECIATION, THOSE ARE
INCLUDED IN THE MARKETING CALCULATION.
GENERALLY SPEAKING, IF THE REVENUE INCOME IN QUESTION IS
RELIABLE, IF IT'S RECURRING, IF IT'S DEMONSTRATED TO HAVE
BEEN THAT WAY IN THE LAST FEW YEARS.
, WE CONSIDER IT OPERATING INCOME.
>> DEBT SERVICE COVERAGE IS A LITTLE LESS JUDGMENT INVOLVED
WITH THIS CALCULATION. BASED ON NET INCOME OR EXCESS
REVENUES OVER EXPENSES. WHATEVER IS IN THE FINANCIAL
STATEMENTS. WITH BOTH OF THESE WE HAVE THE
OBLIGATION, POET THE DEBT SERVICE COVERAGE IN THE EVENT
THEY DON'T MEET THESE TWO REQUIREMENTS, THERE ARE
OPPORTUNITIES TO RECAST THE HISTORICAL RESULTS, IN THE
EVENT THEY ARE REFINANCING TO A LOW FIXED RATE THROUGH F, OR
IF THEY'VE HAD ONE BAD YEAR IN THERE OR ACHIEVED A TURN HAD
BEEN AROUND, THERE'S SOME ACCOMMODATIONS WE CAN GIVE,
ALLOW HOSPITALS TO COME IN THE
DOOR: THAT'S GOING TO BE SOMETHING
DISCUSSED MORE DETAIL IN THE PANEL DISCUSSION, I THINK.
BUT, YOU KNOW, SUFFICE TO SAY THESE AREN'T, YOU KNOW,
NECESSARILY HARD AND FAST REQUIREMENTS.
THERE IS A LITTLE WIGGLE ROOM THERE IN THE EVENT THE
HOSPITAL IS BRDER LINE -- BORDERLINE AND HAS EXTENUATING
CIRCUMSTANCES. >> YOU KNOW, THE SECOND ONE
HERE, MORTGAGE PROCEEDS USED FOR CAPITAL PURCHASES, YOU
KNOW, ALL WE'RE SAYING THERE, IN GENERAL, IS THAT IF P YOU
ARE REFINANCING DEBT, THAT WAS USED FOR OPERATING PURPOSES,
LIKE LINES OF CREDIT ARE A PROBLEM, MORTGAGE PROCEEDS
CAN'T BE USED TO PAY OPERATING EXPENSES.
WE LIKE TO LOOK BACK AND ENSURE THAT EITHER MORTGAGE
PROCEEDS OR THE DEBT USED TO -- THE DEBT THAT WE'RE
REFINANCING WAS ORIGINALLY USED FOR CAPITAL PURCHASES,
AND THAT GOES TO THE CAPITAL DEBT DEFINITION LIKE HOW WE
MENTIONED THIS MORNING. REFINANCING LIMITS, OF COURSE
FOR 2 42 HAS TO BE AT LEAST 20% CONSTRUCTION FOR F IT'S
THE OPPOSITE. NO PICKUP PROJECTS, MEANS WE
CAN'T INSURE A DEAL FOR A CONSTRUCTION PROJECT THAT'S
ALREADY STARTED. DUE TO DAVIS BACON RULES.
AND LASTLY, DEBT MAY NOT BE REFINANCED UNLESS THE
CONSTRUCTION PROJECT ASSOCIATED WITH THAT DEBT WAS
COMPLETED MORE THAN TWO YEARS PRIOR TO APPLICATION.
OTHER REGULATORY REQUIREMENTS, OWNER-OPERATOR STRUCTURES
AREN'T ALLOWED, AND THIS IS QUITE DIFFERENT FROM THE 232
PROGRAM. I GUESS THERE'S A FEW
DIFFERENT REASONS FOR THAT. YOU KNOW, OUR LEGAL DOCUMENTS,
COVENANTS, REGULATORY AGREEMENTS AREN'T DESIGNED FOR
THAT PURPOSE. THERE IS A CERTAIN LEVEL OF
DISCOMFORT I THINK WITHIN THE 242 PROGRAM FOR DOING THESE
KIND OF DEALS, MAYBE IN THE FUTURE WE WILL FIND A WAY TO
GET MORE COMFORTABLE WITH THE STRUCTURE, BUT THE TIME BEING
OWNER OPERATOR STRUCTURES WITH SEPARATE ENTITIES AREN'T
ALLOWED. AND THAT WOULD REQUIRE
REGULATORY WAIVER IN ORDER TO CONSIDER THOSE TYPES OF DEALS.
THE FULLY FUNCTIONING HOSPITAL REQUIREMENT IS SOMETHING I
TOUCHED ON THIS MORNING WHEN I TALKED ABOUT CAR --
CARVE-OUTS. THE BASIS FOR THIS AND, YOU
KNOW, I COULD HAVE ARGUMENTS WITH THIS, WITH THE INDUSTRY,
I WOULD POINT TO 2 42 HIN 35 AS THE BASIS FOR THIS.
THE SECTION SAYS THAT THE MORTGAGE SHOULD BE ON ALL THE,
YOU KNOW, ALL THE REAL ESTATE, ET CETERA, USED IN THE
OPERATION OF THE ENTIRE HOSPITAL.
SO GENERALLY SPEAKING, ALL THE ASSETS NEEDED TO OPERATE THE
HOSPITAL SHOULD BE INCLUDED AS COLLATERAL.
THERE ARE SOME EXCEPTIONS TO THO, COULD HAVE RS -- TO THIS,
OF COURSE. THE QUESTION IS WHAT COULD BE
EXCLUDED TYPICALLY IN THE DEAL GENERALLY FOUNDATIONS THAT THE
HOSPITAL OPERATES. IT IS IMPORTANT TO THE
HOSPITAL, BUT NOT SOMETHING WE GENERALLY REQUIRE TO BE
INCLUDED AS COLLATERAL. PROPERTIES WITH ENVIRONMENTAL
PROBLEMS OR BIG ENVIRONMENTAL CHALLENGES ARE GENERALLY
INCLUDED -- OR EXCLUDED. UM, SOME HOSPITALS OWN
HOUSING, NOT VERY OFTEN, BUT IF THEY DO, THAT'S GENERALLY
EXCLUDED. I GUESS ONE KEY POINT HERE, IF
THE HOSPITAL WANTS TO CARVE SOMETHING OUT THAT WE MIGHT
CONSIDER IMPORTANT, WE NEED TO HAVE A DISCUSSION ABOUT IT AS
SOON AS EE -- WE CAN, EVEN IN THE PRELIMINARY REVIEW OR
PRE-APPLICATION PHASE. I UNDERSTAND THAT THIS IS, YOU
KNOW, HAS BEEN THE ABILITY TO SAY CARVE OUT A PIECE OF
PROPERTY HAS BEEN AN ATTRACTIVE FEATURE, SAY, FOR
THE 242 PROGRAM, AND WE'RE WILLING TO TALK ABOUT IT,
CERTAINLY. I GAVE THE EXAMPLE THIS
MORNING OF THE HOSPITAL THAT WANTED TO LEAVE SOMETHING OUT
OF COLLATERAL BECAUSE THERE WAS ANOTHER USE FOR IT, IT
EITHER SOLD OR DEMOLISHED OR SOMETHING.
IN THOSE CASES, AND -- IN THOSE CASES WE'RE WILLING TO
TALK ABOUT IT, CERTAINLY, AND, YOU KNOW, IN A LOT OF CASES WE
CAN WORK SOMETHING OUT. ALSO REGULATORY REQUIREMENT.
AND IN ALL OF THESE IN ONE WAY OR ANOTHER, THE STATUTORY
REGULATORY REQUIREMENTS ARE DEALT WITH, AND IN WHAT I
REFERENCED THIS MORNINGS THE PRELIMINARY REVIEW TEMPLATES,
EACH OF THESE QUESTIONS ARE DISCUSSED IN ONE WAY OR
ANOTHER IN THAT TEMPLATE, SO AS YOU WORK ON THE PRELIMINARY
REVIEWS, MAKE SURE YOU REVIEW THAT DOCUMENT IN DETAIL.
ONE OF THE QUESTIONS IS COMPLIANCE WITH STATE AND
FEDERAL REGULATIONS. AND IF THERE'S INVESTIGATION
ONGOING, IN GENERAL YOU COULD FIGURE OUT IF THERE'S AN
INVESTIGATION BY READING THE FINANCIAL STATEMENTS, IT WILL
BE DISCLOSED IN THERE. IF THERE'S AN INVESTIGATION
ONGOING, YOU KNOW, WE NEED SOME SORT OF EVIDENCE TO
DETERMINE THAT THE DOWN SIDE TO THAT INVESTIGATION ISN'T SO
BIG THAT IT WILL THREATEN THE CREDIT QUALITY OF THE
ORGANIZATION. WE UNDERSTAND THAT IT'S
NORMAL, OF COURSE OF BUSINESS TO HAVE THESE SORTS OF THINGS
HAPPEN. WE DON'T WANT TO TURN DOWN
DEALS BECAUSE THEY HAVE THIS SORT OF ISSUE.
WE WANT TO TALK TO THE LENDER AND WORK IT OUT.
BUT IT IS STILL SOMETHING THAT WE LOOK AT, BECAUSE IT IS A
REGULATORY, IMPORTANT REGULATORY REQUIREMENT.
WHEN IT COMES TO REGULATIONS, STATUTORY CRITERIA, WHAT'S
DIFFERENT IN 223(F), OF COURSE THERE IS A LIMIT ON
CONSTRUCTION. HARD COSTS, IF ANY, MAY BE FOR
EQUIPMENT ONLY. THAT'S AN IMPORTANT POINT.
AND ALSO GOES FOR 2 41 DEALS. 241 DEALS CAN HAVE, YOU KNOW,
JUST BE EQUIPMENT. I DON'T EXPECT THAT TO HAPPEN
OFTEN, BUT, YOU KNOW, IT'S ALLOWED.
DEBT SERVICE COVERAGE RATIO REQUIREMENT IS DIFFERENT FOR
223(F), WE REQUIRE 1.4 DEBT SERVICE COVERAGE WHEN LOOKING
AT THE LAST THREE FISCAL YEARS.
TO SOME EXTENT IT REFLECTS A REGULATORY DESIRE, I'LL CALL
IT, FOR 1.4 COVERAGE POST-PROJECT IN 242.
WHEN WE REVIEW THE UNDERWRITING FOR 242 DEALS, WE
LIKE TO LOOK OUT TO THE OUT YEAR AFTER THE PROJECT IS
COMPLETE, AND WE LIKE TO SEE 1.4 TIMES DEBT SERVICE
COVERAGE. SO IN SOME WAYS, YOU KNOW, IT
MAKES SENSE THAT YOU HAVE -- WE LIKE TO SEE THE SAME IN THE
REFINANCING ONCE THE REFINANCING IS DONE WITH THE
RECAST, IF NECESSARY, THE MINIMUM IS 1 POIN 4.
-- 1.4 DEBT SERVICE COVERAGE. >>> PROBABLY THE MOST
SIGNIFICANT DIFFERENCE BETWEEN 242 AND 223(F) IS THE
THRESHOLD REQUIREMENTS IN 223(F), AND THIS IS DISCUSSED
IN 242.16 OF THE REGULATION. THIS FIRST ONE, THOUGH, I
THINK IT'S A LITTLE BIT MORE STRAIGHTFORWARD.
SO THE THRESHOLD REQUIREMENTS ARE THERE TO HELP ENSURE THAT
THE HOSPITAL APPLYING FOR 223(F) REALLY NEEDS THIS
REFINANCING, AND THE FIRST REQUIREMENT IS THAT THE
HOSPITAL PROVIDE AN ESSENTIAL HEALTHCARE SERVICE.
AND HOW DOES THE LENDER DEMONSTRATE THAT THIS IS IS
MET? YOU KNOW, IT SEEMS LIKE A
REASONABLE REQUIREMENT, AND, YOU KNOW, SO AFTER A LOT OF
THOUGHT, WHAT WE DECIDED WAS, THE HOSPITAL SUBMITTING
APPLICANT DATA REQUESTS, AND HUD IS DOING A MARKET NEED
MODEL, WELL, IT GOES TO SHOW, AND IT'S REASONABLE TO ASSUME
THAT IF THE HOSPITAL IS A NEEDED FACILITY, THAT IT MUST
PROVIDE AT LEAST ONE ESSENTIAL HEALTHCARE SERVICE.
SO LENDERS, FRANKLY, DON'T NEED TO WORRY TOO BUTCH -- TOO
MUCH ABOUT THIS. SUBMIT THE APPLICANT DATA
REQUEST, AND HUD WILL USE THAT DATA TO DETERMINE WHETHER OR
NOT THIS CRITERIA IS MET. AND, AS I SAID, MOST DEALS,
UNLESS THEY ARE STARTUP FACILITIES, WHICH HAVE A
LITTLE HARDER TIME, MOST DEALS WILL PASS THE MARKET NEED TEST
AND PASS THIS REQUIREMENT. THE REMAINDER OF THE
REQUIREMENTS WERE ALSO SUBJECT OF MUCH DISCUSSION AS WE WROTE
THE HANDBOOK, AND I'LL APOLOGIZE TO MY COHORTS, I AM
GOING TO ASK THEM TO FLIP AHEAD A COUPLE SLIDES TO I
THINK IT'S 54. YEP.
YOU KNOW, WHEN THIS ORIGINALLY WAS PUBLISHED BACK IN '9 AND
'10, WE HEARD A LOT FROM LENDERS ABOUT HOW WE'RE
INTERPRETING THESE, HOW IS HUD LOOKING AT THESE THRESHOLD
REQUIREMENTS, YOU KNOW, WHAT ARE WOO REQUIRING -- WE
REQUIRING, HOSPITALS, LENDERS WEREN'T SURE WHAT THEY NEEDED
TO SUBMIT TO US. SO AS A RESULT, IT WAS SORT OF
ALL OVER THE MAP. SO WHAT WE DID IN THE
HANDBOOK, IN THE APPLICANT'S GUIDE IS TO SAY, WELL, YOU
KNOW, WE UNDERSTAND WE NEED TO PROVIDE A LOT OF CLARITY
BEHIND THIS, WE UNDERSTAND THERE IS A LOT OF QUESTIONS,
LET'S WRITE UP SOMETHING THAT EVERYONE WILL UNDERSTAND AND
IT WILL ALL BE CLEAR BUT WHAT NEEDS TO BE DONE IN ORDER TO
MEET THESE QUALIFICATIONS. SO FIRST OF ALL, HOW DID
THE -- WHAT WE'RE ASKING FOR IS THE HOSPITAL PROVIDE
CERTIFICATIONS, OR THAT THE LENDER PROVIDE CERTIFICATIONS,
I'M SORRY, AND, YOU KNOW, THIS IS A SLIGHT DEPARTURE FROM HOW
WE'VE DONE THINGS IN THE PAST. GENERALLY YOU SUBMIT
INFORMATION IN HUD REVIEWS, AND DETERMINES WHETHER A
CERTAIN REQUIREMENT IS MET. WE SORT OF FLIP THE SWITCH
HERE AND DECIDED THAT A LOT OF THESE THRESHOLD REQUIREMENTS
ARE THINGS THAT THE LENDER KNOWS BETTER THAN HUD.
AND WE DON'T NECESSARILY WANT TO AT LEAST IN THIS CASE,
SUBSTITUTE OUR JUDGMENT FOR SOMETHING THAT YOU SHOULD KNOW
BETTER THAN US. AND THIS WILL BECOME MORE
CLEAR IN THE NEXT SLIDES, BUT ESSENTIALLY HOW THE
CERTIFICATIONS WORK, THEY ARE SUBMITTED AT THE PRELIMINARY
REVIEW PHASE. AGAIN, THIS IS ONLY FOR
223(F)'S. THEY ARE DETAILED IN THE
APPLICANT'S GUIDE, AND THEY ARE PART OF THE SUPPLEMENT TO
THE PRELIMINARY REVIEW TEMPLATES FOR 223(F).
AND AT A MINIMUM THE LENDER WOULD SUBMIT FOUR OF THESE TO
US. FOUR CERTIFICATIONS ALONG WITH
THE MORE DETAILED BROADER 223(F) TEMPLATE.
UPON RECEIPT OF THE CERTIFICATION, WE DO REVIEW
IT. THERE WILL BE DOCUMENTATION
THAT YOU WILL INCLUDE TO HELP US REVIEW IT.
BUT WE WON'T BE LOOKING -- WE WON'T BE LOOKING TO SECOND
GUESS WHAT THE LENDER IS GIVING US IN THE EVENT THAT
IT'S A QUESTION OF PROFESSIONAL JUDGMENT, YOU
KNOW, I THINK WE WILL BE -- WE WILL DO OUR BEST TO TAKE THE
LENDER'S JUDGMENT ON THAT. AGAIN, IT IS IMPORTANT TO GO
THROUGH AS A REGULATORY REQUIREMENT.
GETTING INTO THE MEAT OF THIS, THE MOST SIGNIFICANT THRESHOLD
REQUIREMENT IS THE 307 CRITERIA.
IN ORDER TO QUALIFY FOR A 223(F), AND WE LOOK AT THIS AT
THE REGULAR TORRE -- REGULATORY AS PRELIMINARY
REVIEW PHASE. IN ORDER TO QUALIFY, THE
HOSPITAL MUST MEET THREE OF SEVEN CRITERIA.
AND THREE OF SEVEN CRITERIA THAT DEMONSTRATE OR HELP
DEMONSTRATE THAT THE HOSPITAL'S PERFORMANCE WOULD
BE MATERIALLY IMPROVED BY DOING THIS REFINANCING.
THE 307 CRITERIA LISTS IT ON THIS SLIDE AND THE NEXT, IT IS
A MIX OF QUANTITATIVE, OTHER FACTORS THAT INVOLVE JUDGMENT,
BUT WITHOUT GOING THROUGH EACH OF THESE IN DETAIL, I WILL
MENTION SOME COMMON THREADS. A LOT ARE FAIRLY SELF
EXPLANATORY. WHERE THEY ARE NOT, RE -- WE
PROVIDED GUIDANCE IN THE PRELIMINARY VIEW TEMPLATE
SUPPLEMENT THAT DESCRIBES A LITTLE MORE OF WHAT WE'RE
LOOKING FOR. CERTAINLY IF YOU GOT A DEAL
COOKING AND YOU HAVE A QUESTION ABOUT WHETHER OR NOT
YOU THINK THE HOSPITAL MEETS THESE REQUIREMENTS, GIVE US A
CALL. WE COULD PROVIDE SOME COMFORT
THAT MAYBE NEEDED TO PUT YOUR NAME ON A CERTIFICATION FORM
THAT WE'RE WILLING TO HELP. WE DON'T WANT THESE CRITERIA
TO BECOME AN UNDUE BARRIER TO GETTING GOOD DEALS IN THE
DOOR. AND I THINK WE'VE TRIED TO DO
THAT, TRYING TO BE VERY CLEAR AND TRY TO DO THAT AS PART OF
THE HANDBOOK AND THE APPLICANT'S GUIDE.
SO THE FIRST, THE COMMON THREAD, I WOULD SAY, IS THAT
WE HAVE PROVIDED SOME ACCOMMODATIONS IN THESE SEVEN
CRITERIA FOR HOSPITALS SEEKING TO REFINANCE VARIABLE DEBT
INTO FIXED RATE DEBT. IF YOU READ THE REQUIREMENTS,
THE CRITERIA, LITERALLY THEY DON'T A MREER -- APPEAR AS TO
EXCLUDE TO A LARGE DEGREE HOSPITALS THAT WANT TO
REFINANCE INTO THE SAFETY OF THE FIXED RATE DEBT.
SO AN EXAMPLE OF THIS ACCOMMODATION IS NUMBER ONE,
THE -- CRITERION ONE, PROPOSED REFINANCING WOULD REDUCE THE
HOSPITAL'S TOTAL OPERATING EXPENSES BY AT LEAST .25%.
AGAIN, TAKING AT FACE VALUE IT APPEARS TO EXCLUDE DEALS, BUT
THE ACCOMMODATION WE'VE GIVEN IS IN THE EVENT OF THE
HOSPITAL'S REFINANCING FROM A VARIABLE RATE, THE LENDER CAN
RECAST INTEREST EXPENSE, TAKING INTO ACCOUNT FUTURE
CHANGES IN RATES TO ARRIVE AT AN AVERAGE.
WE KNOW THAT HOSPITALS, WHEN THEY MAKE A DECISION TO
REFINANCE, THEY ARE LOOKING AT A LONGER TIME HORIZON.
THEY ARE NOT JUST LOOKING AT HOW THIS WILL IMPACT THEM NEXT
YEAR; THEY ARE LOOKING AT THE NEXT 25 YEARS.
SO I THOUGHT IT WAS NECESSARY TO INCLUDE THIS ACCOMMODATION
FOR THOSE HOSPITALS THAT, YOU KNOW, HAVE THAT CASE.
AND THE ACCOMMODATION IS ALSO ALLOWED IN CRITERION 7.
>> ANOTHER COMMON THREAD AT THAT GOES THROUGH THESE
CERTIFICATIONS, THE LENDER NEEDS TO CONSIDER ALL DEBT TO
BE REFINANCED, EXAMPLE, NUMBER FOUR, HOSPITALS' ANNUAL TOTAL
DEBT SERVICE IN EXCESS OF 3.4% OF TOTAL OPERATING REVENUES.
AGAIN, YOU KNOW, WHAT WE DECIDED WHEN WRITING THE
REGULATION IS THAT, YOU KNOW, A HOSPITAL NEEDS TO REFINANCE
IF ITS ANNUAL DEBT SERVICE TO OPERATINGER -- OPERATING
REVENUES ARE HIGH. THAT'S HOW WE CAME UP WITH
THIS ONE. BUT THE LENDER NEEDS TO
CONSIDER, YOU KNOW, EACH OF THE PIECES OF DEBT THAT THEY
ARE PLANNING ON REFINANCING. SO THE LENDER MUST BASE THE
CALCULATION OF ANNUAL TOTAL DEBT SERVICE ON ALL THE
PROPOSED MORTGAGOR'S LONG TERM DEBT DURING THE LAST THREE
FISCAL YEARS, AND THIS IS, YOU KNOW, GUIDANCE GIVEN IN
CRITERION NUMBER FOUR, AND ALSO THE FIRST ONE.
SUPPORTING DOCUMENTATION IS REQUIRED FOR EACH OF THESE
CERTIFICATIONS. THAT'S REGULATORY LANGUAGE.
WE DON'T -- YOU KNOW, WE WOULD LIKE TO SEE HOW THE LENDER DID
THE CALCULATIONS, WHAT INFORMATION THEY WERE RELYING
ON IN ORDER TO DO THAT. AN EXAMPLE IS NUMBER FIVE, THE
HOSPITAL HAS WITHDRAWAL OR EXPIRATION OF ITS CREDIT
ENHANCEMENT FACILITY OR LENDER PROVIDING THE FACILITY HAS
BEEN DOWNGRADED, ET CETERA. IN ORDER TO MEET THE CRITERIA,
THE LENDER MUST PROVIDE DOCUMENTATION SHOWING ONE OF
THESE EVENTS HAS OCCURRED OR IS INENT -- IMMINENT.
DOUCHLT AGS WILL DIFFER CASE BY CASE -- DOCUMENTATION WILL
DIFFER CASE BY CASE. IT IS UP TO THE LENDER TO
DETERMINE WHAT IS SUFFICIENT DOCUMENTATION AND PROVIDE THAT
TO HUD FOR THE QUANTITATIVE CRITERIA, IT'S PROBABLY A
LITTLE EASIER, YOU WILL JUST NEED TO GIVE YOUR
CALCULATIONS, AND HOPEFULLY THOSE WILL TIE TO THE AUDIT
THAT YOU'RE BASING THEM ON. BUT, AGAIN, IT IS UP TO THE
LENDER TO DETERMINE WHAT IS SUBMITTED WITH THESE
CERTIFICATIONS. >>> ANOTHER COMMON THREAD, HUD
IS DEPENDING ON THE LENDER, AGAIN, THE BEST EXAMPLE I
THINK IS NUMBER 6, HOSPITAL IS PARTY TO COVENANTS ON ITS
EXISTING FK THAT ARE SUBSTANTIALLY -- FINANCING
THAT ARE SUBSTANTIALLY MORE RESTRICTIVE THAN THE SECTION
242 MORTGAGE COVENANT. LENDER IN THE BEST POSITION,
LENDER AND HOSPITAL IN THE BEST POSITION TO DETERMINE
WHETHER OR NOT THE COVENANTS THAT THEY ARE INVOLVED WITH
NOW ARE MORE OR LESS RESTRICTIVE THAN THE 242
COVENANTS, SO THIS IS A PARTICULARLY GOOD EXAMPLE OF
WHERE THE LENDER IS IN A BETTER POSITION TO DETERMINE
WHETHER OR NOT THEY MEET THE CRITERIA.
FINALLY, FLEXIBILITY AND CLARITY.
THERE WAS A LOT OF QUESTIONS ABOUT WHAT WE WOULD ALLOW A
FEW YEARS AGO FOR THE CRITERION 7, WHICH IS SORT OF
THE CATCH-ALL. THERE ARE OTHER CIRCUMSTANCES
THAT DEMONSTRATE THE HOSPITAL'S FINANCIAL
PERFORMANCE WOULD BE MATERIALLY UNPROVED.
WE GOT ALL SORTS OF, YOU KNOW, RATIONALE FOR THAT ONE.
SO WE FIGURED IT COULD USE A CLARIFICATION, AND PROVIDED
WITHIN THAT CERTIFICATION, YOU'LL SEE IT, IF YOU READ IT,
OUR SPECIFIC CIRCUMSTANCES THAT THE HOSPITAL OR LENDER
CAN RELY ON WHEN FINDING THIS. OPERATING MARGIN IS IMPACTED
BY A CERTAIN DEGREE, OPERATING INCOME OPERATED BY A CERTAIN
DEGREE, AND ALSO IF THE REFINANCING VARIABLE TO FIXED
WERE, YOU KNOW, THAT'S ENOUGH TO MEET THE REQUIREMENT.
SO OVERALL, I THINK FOR NEW LEDDERS, THIS IS A LITTLE --
LENDERS, THIS IS HARD TO ABSORB.
THESE CRITERIA ARE, YOU KNOW, A LITTLE CONFUSING, YOU KNOW,
I HOPE, THOUGH, IF YOU HAVE A DEAL COOKING, THEN, YOU KNOW,
YOU'LL READ THESE OVER AND FIND OUT THAT, YOU KNOW, THERE
ARE NOT SO BAD. YOU KNOW, THERE WAS A LOT OF
QUESTIONS, AS THEY MENTIONED, A FEW YEARS AGO, AND LOT OF
PROBLEMS AT HUD TRYING TO FIGURE OUT HOW WE WERE GOING
TO INTERPRET THESE. WE TURNED DOWN A LOT OF DEALS,
UNFORTUNATELY, A FEW YEARS AGO.
I'M SURE A LOT OF IT WAS BECAUSE OF SOME OF THE
CONFUSION BEHIND THIS. I'M HOPING WE ARE GOING TO
HAVE A BETTER EXPERIENCE AS FAR AS GETTING DEALS IN THE
DOOR AND THIS SHOULD BE ONE WAY THAT HELPS THAT HAPPEN.
ALL RIGHT. THANK YOU.
THANK YOU VERY MUCH. [ APPLAUSE ]
>> THANKS, PAUL. YOU KNOW, JUST A WORD ABOUT
PAUL'S WORLD. HE AND HIS GROUP -- WORK
EXTREMELY *** TRYING TO MAKE A VERY DAUNTING PROCESS
AS EASY AS POSSIBLE. AS YOU CAN SEE, SOME OF THE
NEW LENDERS IN THE ROOM, THERE IS A LOT OF CRITERIA INVOLVED.
THERE IS A LOT OF DETAIL INVOLVED.
THERE IS A LOT OF HEAVY LIFTING INVOLVED ON HUD'S SIDE
TO TRY AND REALLY QUALIFY THESE TRANSACTIONS, AND WE
WORK VERY HARD TO GIVE EVERY TRANSACTION EVERY OPPORTUNITY
TO MEET CRITERIA AND TO TALK TO YOU ABOUT WHAT THESE
CRITERIA ARE, WHAT FLEXIBILITY WE HAVE WITH THEM.
SO CLEARLY WE'RE IN YOUR CAMP, WE WANT TO DO THESE
TRANSACTIONS WITH YOU. IF WE COME UP AND BUMP UP
AGAINST SOME VERY FIGHT AREAS -- TIGHT AREAS, WE ARE
WILLING TO TALK OUR WAY THROUGH THOSE WITH YOU.
SO, AGAIN, HUD'S DOORS ARE WIDE OPEN.
WE HOPE YOU BRING MORE OPPORTUNITIES OUR WAY.
WITH THAT, WE'RE GOING TO NOW ASSEMBLE A PANEL DISCUSSION,
AND I WOULD LIKE TO ASK THE PANELISTS TO COME UP TODAY.
TODAY WE'LL HAVE A BRIEF DISCUSSION WITH BILL WILLIAMS,
JOHN WHITEHEAD, JAY B. NATHAN -- J. B. NATHAN.
GIVE ME A MOMENT TO ASSEMBLE THAT TEAM.
>> OKAY. WELL, WE ARE MAKING PROGRESS
THROUGH OUR PROGRAM TODAY, BUT REALLY WE'RE JUST GETTING
STARTED. PAUL REALLY TOUCHED ON A LOT
OF GENERAL AREAS THAT ARE THE REGULATORY AND STATUTORY
REQUIREMENTS OF THE UNDERWRITING SIDE, BUT I THINK
WE'RE GOING TO HAVE TO GO A LITTLE BIT DEEPER INTO THE
DETAILS OF SOME OF THOSE AREAS TO MAKE THIS A LITTLE CLEARER
FOR YOU. AS PAUL MENTIONED, THERE ARE A
NUMBER OF FACTORS THAT HUD TAKES INTO CONSIDERATION WHEN
ASSESSING THE NEED AND THE ABILITY FOR US TO GRANT
MORTGAGE INSURANCE. AS HE NOTED, MARKET NEED, DEBT
SERVICE COVERAGE, OPERATING MARGINS, FKS FEASIBILITY --
FINANCIAL FEASIBILITY STUDIES, THERE ARE PREMIUMS, THERE ARE
FEES, EQUITY REQUIREMENTS, PROJECTED SAVINGS.
A LOT OF INFORMATION THERE THAT PAUL JUST DELIVERED TO
YOU. WE ALSO BEING THE GOVERNMENT
HAVE A WHOLE LOT OF NIFTY FORMS FOR YOU TO FILL OUT AS
WELL. AND SO TO ADDRESS SOME OF
THIS, WE'VE GATHERED A PANEL TODAY WHO ARE GOING TO
BASICALLY REVIEW HOW HUD LOOKS AT THESE AREAS OF INTEREST,
AND HOPEFULLY PROVIDE YOU A BIT OF CLARITY.
ONCE AGAIN, I WOULD LIKE TO INTRODUCE BILL WILLIAMS, JOHN
WHITEHEAD, JB NATHAN, KELLY GIL AND NATE DEAN.
THANK YOU, TEAM. [ APPLAUSE ]
>> I'LL START OFF WITH THE INTEREST EXPENSE RECASTING.
FIRST OF ALL, I WOULD LIKE TO SAY, WE JUST WANT YOU TO BRING
US GOOD DEALS, OKAY? [ LAUGHTER ]
>> THAT'S GETTING HARDER TO DO, WE KNOW THAT.
THERE ARE SEVERAL SUBJECT MATTER EXPERTS IN OUR GROUP
THAT KNOWS THAT AS WELL AS ANYBODY.
BUT ON THE RECASTING OF INTEREST EXPENSE, ONE OF THE
THREE OF SEVEN CRITERIA IS THAT OBVIOUSLY THE INTEREST
EXPENSE IS BETTER IN TERMS OF THE NEW DEAL.
SO WE WANT TO LOOK AT THAT. BUT IF YOU MEET THE OPERATING
MARGIN REQUIREMENT AND THE DEBT SERVICE COVERAGE RATIO
REQUIREMENT RIGHT OFF, THEN THERE IS NOT A WHOLE LOT OF
REASON TO GO INTO A LOT OF PAPERWORK IN TERMS OF LOOKING
AT A REKAGS AND THAT KIND OF THING -- RECAST AND THAT KIND
OF THING. IF YOU MEET THE REQUIREMENTS,
YOU MEET THE REQUIREMENTS. THAT GETS BACK TO BRING US
GOOD DEALS. BUT THERE ARE GOING TO BE
HOSPITALS IN THIS 223(F) ARENA, ABSOLUTELY, THAT WILL
REQUIRE A RECAST OF INTEREST EXPENSE, BECAUSE THEY HAVE AN
EGREGIOUS DEBT DEAL NOW. THEY WANT 223(F) THAT WE DID
SEVERAL YEARS AGO, THAT JB AND I WORKED ON, THEY HAD AN
INTEREST RATE BETWEEN 15 AND 20% OUT IN CALIFORNIA.
AND I SAID THEY COULD HAVE GOTTEN A BETTER DEAL FROM THE
MAFIA OUT THERE. JUST KIDDING.
[ LAUGHTER ] >> BUT WE'RE GOING TO SEE SOME
EGREGIOUS DEALS, AND IN THIS 223(F) ARENA, BUT WE'RE ALSO
GOING TO SEE SOME DEALS THAT HAVE MAYBE FOUR, FIVE, SIX
PERCENT INTEREST AND THEY HAVE A SWAP THAT'S BEEN KILLING
THEM THE LAST FEW YEARS. MAYBE THAT'S CHANGING, RIGHT?
INTEREST RATES GO UP, MAYBE THAT CHANGES.
BUT WE WILL RECAST THE INTEREST EXPENSE.
THAT IS TRYING TO DO AN APPLES TO APPLES COMPARISON, AND
JB AND I, AGAIN, HAVE HAD SOME DISCUSSION ABOUT THAT.
IT IS NOT QUITE AS SIMPLE AS IT SEEMS.
BECAUSE YOU MAY HAVE FIXED AND VARIABLE DEBT MIXED.
YOU MAY HAVE TWO OR THREE ELEMENTS THERE THAT YOU HAVE
TO RECAST. NOT JUST A PURE INTEREST RATE
TO INTEREST RATE APPLES TO APPLES COMPARISON.
SO MY THEORY IS CALL US. CALL PAUL, CALL MYSELF.
JB, OR ONE OR TWO OF THE OTHER PEOPLE THAT HAVE BEEN AROUND A
WHILE AND WE'LL WORK THROUGH THAT WITH YOU IN ADVANCE OF
YOU SENDING US AT THAT PRELIMINARY BOOK.
THE OTHER REALLY IMPORTANT THING THAT I WANTED TO TALK
ABOUT IS, GO BACK TO YOUR OLD FINANCE BOOK THAT YOU HAD IN
GRAD *** SCHOOL, WHERE IT -- GRADUATE SCHOOL, WEIGHTED
AVERAGE COST OF CAPITAL, DELETE THE COST OF EQUITY AND
THAT'S BASICALLY WHAT WE WANT TO SEE ON THE RECAST, WHERE
YOU HAVE MIXED ELEMENTS, FIXED AND VARIABLE, AND SO FORTH.
OF COURSE WE'LL HAVE FOR-PROFIT AND NON-PROFIT
HOSPITALS IN THIS MIX, SO WE MAY HAVE SOME FOR-PROFIT
HOSPITALS THAT HAVE A HALF A DOZEN DIFFERENT DEBT PIECES
OUT THERE. SO IT GETS A LITTLE MORE
DIFFICULT, YOU KNOW, WHEN YOU GET AWAY FROM JUST THE
REFINANCE OF A TAX EXEMPT BOND ISSUE THAT HAS A 4% RATE FOR
30 YEARS OR WHATEVER IT IS. ALSO WANT TO MENTION THAT SWAP
COST IS NOT INTEREST COST. THAT IS NOT INCLUDED IN THIS
APPLES TO APPLES COMPARISON. WE UNDERSTAND THAT COST, WE
UNDERSTAND IT'S OUT THERE. AND THEREIN IS THE REASON WE
SAID, IF YOU HAVE A PARTICULARLY BAD YEAR WITH
SWAP COSTS OR SOMETHING ELSE, WE CAN THROW OUT THE YEAR WHEN
WE -- WE WANT TO LOOK AT THREE AUDITS, BUT WE'LL THROW OUT
ONE OF THOSE YERS -- YEARS IF THERE WAS A BAD YEAR WITH SWAP
COSTS OR SOME SPECIFIC REASON LIKE THAT.
AND THEN THE NEXT SLIDE THAT I WANT TO TALK ABOUT IS
TURNRND -- TURN AROUND. THE REASON I LINKED THIS UP TO
THE RECASTED INTEREST EXPENSE, NOT THAT IT'S A NEW CART GORY,
WE LOOK AT TURN AROUND SITUATIONS AND HAVE LOOKED AT
TURN AROUND SITUATIONS OVER THE YEARS.
THE DIFFERENCE FOR 223(F) IS, OKAY, IF WE LOOK AT AN
INTERESTING RATE RECAST AND YOU ARE STILL NEGATIVE, THEN
WE'LL LOOK AT THE TURN AROUND SITUATION, WE'LL SIGH -- SAY,
OKAY, LOOK, THEY ARE OBVIOUSLY IN A TURN AROUND SITUATION.
WE HAVE GOT TO HAVE ANOTHER YEAR AUDITED FINANCIALS, AND
GOT TO MEET THE REQUIREMENTS. IF YOU NEED ANOTHER YEAR AFTER
THAT, YOU KNOW, MAYBE IT'S TWO YEARS THAT WE NEED.
BY COMMITMENT TIME ON A DEAL, WE NEED TWO YEARS OF AUDITED
FINANCIALS THAT MEET THE REQUIREMENTS.
SO THAT BEING SAID, YOU KNOW, TURN AROUND SITUATION
OBVIOUSLY WE WANT TO SEE AT LEAST 1.40 DEBT SERVICE
COVERAGE RATIO, AND THE OPERATING MARGIN BEING BREAK
EVEN OR BETTER. I DON'T LIKE THAT ZERO.
I LIKE TO SAY IT'S BREAK EVEN OR BETTER.
BECAUSE THAT'S REALLY WHAT WE'RE AFTER FROM AN OPERATIONS
STANDPOINT, INCLUDING OR EXCLUDING THERE'S OPERATING
INCOME AND EXPENSE ITEMS, THAT ARE NECESSARY TO ARRIVE AT A
GOOD NUMBER. OKAY?
I THINK THAT'S ENOUGH OF THAT. YOU MAY HAVE SOME MORE
SPECIFIC QUESTIONS LATER AT THE END OF THE DAY IN OUR Q&A
SESSION. WE WOULD BE GLAD TO ANSWER ANY
DETAILED QUESTIONS YOU HAVE. >> NEXT TOPIC IS THE STUDY OF
MARKET NEED AND FINANCIAL FEASIBILITY.
>> FOR SECTION 242 APPLICATIONS.
THE REGULATIONS HAVE ALWAYS REQUIRED THAT THE STUDY OF
MARKET NEED AND FINANCIAL FEASIBILITY BE INCLUDED IN THE
APPLICATION. THERE IS A REASON FOR THAT.
THE STUDY PRESENTS ASSUMPTION
S. ASSUMPTIONS ABOUT UTILIZATION
REVENUES AND EXPENSES, AND PRESENTS A FINANCIAL FORECAST
THAT'S BASED ON THOSE ASSUMPTIONS.
IN THE CASE OF A BIG CONSTRUCTION PROJECT, THERE
ARE A LOT OF UNKNOWNS, THERE ARE A LOT OF ASSUMPTIONS THAT
HAVE TO BE MADE. AND IT'S' GORE THAT REASON
THAT WE -- IT'S FOR THAT REASON THAT WE HAVE ALWAYS
REQUIRED THAT STUDY, AND WE REQUIRED IT TO BE -- MATH MAY
ORIGINATE THE FORECAST TO BE PREPARED BY A CPA FIRM
EXCEPTABLE TO HUD. AND YOU CAN SEE IN THE
APPLICANT'S GUIDE WHAT THAT ACCEPTABLE TO HUD REQUIRES.
IN THAT CASE THERE'S SIGNIFICANT CHANGES IN THE
NATURE OF THE HOSPITAL'S BUSINESS, AND THAT'S WHY WE
WANT THAT STUDY EVERY TIME. INCIDENTALLY IN THE PAST, WE
HAVE ALSO JUST SORT OF REFLEXIVELY REQUIRED THE STUDY
FOR 247 SUPPLEMENTAL LOANS, ALTHOUGH THAT WAS NOT ALWAYS
BASED ON A REAL NEED FOR THE STUDY.
SO THINGS ARE CHANGING. NEXT SLIDE.
OKAY. IN THE REGULATIONS IN THE
HANDBOOK, FOR 223(F) RE-FI'S, FOR 241 SUPPLEMENTAL LOANS AND
FOR 223 A. 7 RE-FI'S, WE HAVE A LITTLE SOMETHING DIFFERENT
HUD DETERMINES IF THE STUDY IN THOSE CASES HAS TO ADDRESS
MARKET NEED, AND THAT DETERMINATION WILL BE BASED ON
THE RESPONSE TO THE APPLICANT DATA REQUEST THAT YOU SEND IN,
AND OTHER INFORMATION THAT HUD WILL HAVE CONCERNING THE
MARKET AREA. CERTAINLY IN THE CASE OF A
223(F) AND A 2 41 -- NOT A 223(F), A 241 AND A 223(A)7,
HAD YOU HAD HAS BEEN DEALING WITH THAT HOSPITAL FOR YEARS.
WE HAVE A PRETTY GOOD HANDLE ON THE MARKET AND THE
SITUATION. SO WE WILL MAKE A DECISION
WHETHER THERE HAS TO BE A STUDY OF MARKET NEED IN THOSE
CASES. AND WE'LL ALSO BE MAKE AGO
DECISION ON WHETHER A CPA FIRM HAS TO BE ENGAGED IN A STUDY.
SO GENERAL RULE, THE BIGGER THE PROJECT, AND 241, THE MORE
LIKELY THAT CPA INVOLVEMENT IS GOING TO BE NEEDED, BECAUSE
THERE'S MORE ASSUMPTIONS. AND THE GREATER THE LIMITED
REHABILITATION IN A 223(F), OR AN A7, THE MORE LIKELY A
CPA WILL BE NEEDED BECAUSE THERE'S ASSUMPTIONS OUT THERE.
BUT I THINK YOU'LL FIND THAT MANY OF THE CASES HUD WILL
DECIDE THAT THE TIME AND EXPENSE INVOLVED IN THAT STUDY
IS NOT GOING TO BE REKWIEFRD, AND -- REQUIRED, AND SHOULD
MAKE ALL HAPPY, MAKE THE HOSPITALS HAPPY.
>> PREMIUMS AND FEES. I GET THE PRIVILEGE OF TALKING
ABOUT MONEY. I SAY SEND IT IN AND WE'LL
HAVE A TALK. [ LAUGHTER ]
>> NO, AS YOU KNOW, THERE WAS A NEW NOTICE THAT WAS PUT OUT,
I WANT TO SAY LAST AUGUST. IT DID CHANGE THE FEES IN
HERE, SO FOR 223 A. 7 -- 223(A)7'S, THE MIP IS 55 BASIS
POINTS, BUT 50 BASIS POINTS FOR THE FIRST YEAR.
IT'S 55 BASIS POINTS THEREAFTER.
THE NEW RATE FOR 223(F) AND 241 IS 65 BASIS POINTS, AND
FOR 242'S IT'S 7 OBEY SIS POINTS.
-- 70 BASIS POINTS. BUT FOR THE 223(F), 241 AND
242 LOANS, IT'S 1% FOR THE FIRST YEAR.
A LOT OF US HAVE INTERNAL DISCUSSIONS ON THIS IT, SO WE
GENERATED A LOT IN HERE. SECTION 207 PART B. IS
ACTUALLY PART OF THE 242 REG, SO IF YOU GO BACK TO 207 PART
B, AND I WANT TO SAY DOT 252, THEREIN IT STATES FOR THE
FIRST YEAR IT'S 1%. SO YOU BASICALLY HAVE A 100
BASIS POINTS FOR THE FIRST YEAR IN TERMS OF THE FEE.
SO KELLY, YOU'RE LOOKING AT ME ON THIS ONE.
>> I DON'T KNOW IF YOUR REFERENCE WAS QUITE RIGHT, BUT
WE CAN MOVE ON. >> OKAY.
WE'LL MOVE ON. WE'LL CHECK THAT OUT.
>> NOT THE FEE BASIS, JUST THE REFERENCE.
>> THE REFERENCE I MADE, I'LL TELL YOU RIGHT NOW, THE
REFERENCE -- >> OKAY.
>> I WOULD HAVE TO LOOK THAT UP TO BE EXACTLY SURE.
WE WILL MOVE ON TO THE NEXT SLIDE IN HERE.
WE GOT THE PREMIUMS AND FEES IN THERE, AND BASICALLY WHAT
WE HAVE, WE'VE GOT AN INSPECTION FEE ON EVERY DEAL,
WE DO ASK THE OFFICE OF ARCHITECTURE AND ENGINEERS TO
GO OUT AND LOOK AT THE DEAL IN HERE.
YOU SAY, WELL, WE DON'T HAVE A CONSTRUCTION PROJECT, WHY
DOUGH THEY NEED TO LOOK AT THAT?
-- WHY DO THEY NEED TO LOOK AT THAT?
IF IF THERE WAS A LEAK OVER THE O.R., THAT COULD AFFECT
THE ABILITY OF THE HOSPITAL TO REPAY THE LOAN.
BASICALLY THEY WILL BE DOING SOME REVIEW ON ANY DEAL THAT
HAPPENS IN HERE. THE REG SAYS THAT NOT LESS
THAN TEN BASIS POINTS. SO BASICALLY YOU COME IN WITH
10 BASIS POINTS FOR A STARTING POINT IN THERE ON ANY DEAL
THAT WE'VE GOTTEN HERE. IF YOU GO TO THE NEXT SLIDE IN
HERE, THEN WE TALK ABOUT PRORATING IT, SO HOW YOU FAIR
ON THIS. THERE WAS A LOT OF COMMENT, A
LOT OF INPUT FROM YOUR COMMUNITY.
FROM THE LENDER COMMUNITY WHICH RESPECTED THIS.
AND BASICALLY WHAT THE NEW REG CAME OUT, AND BASICALLY SET IT
OUT WAS THAT IF THE HARD COSTS ARE LESS THAN 10% OF THE
MORTGAGE, THEN IT WILL BE 10 BASIS FEE, AND THEN AT 5% OR
GREATER, BUT LESS THAN 10%, IT WOULD BE 20 BASIS POINTS.
AND THEN 30 BASIS POINTS, THEN 40 BASIS POINTS, THEN
BASICALLY AT THE POINT WHERE YOU HIT 20% HARD COSTS OR
GREATER, IT'S 50 BASIS POINTS. IN THERE WITH REGARD TO THAT.
MORTGAGEE FEES, ON THAT ONE BASICALLY YOU SET YOUR OWN
FEES, ALL HUD DOES IS SAY THAT THERE'S A MAXIMUM AMOUNT IF --
IN THERE. OFTENTIMES YOU DO SET THE FEES
AT LESS THAN THE MAXIMUM. SO ALL HUD DOES IS CHECK TO
SEE IF IT IS IN THERE. WE DID DO SOME THINGS TO
CLARIFY IN THERE. ONE OF THE THINGS YOU'LL
NOTICE IN THE NEW HANDBOOK, WE USE THE TERMS THAT ARE IN THE
REGS, SO YOU DON'T HAVE TO GUESS, YOU KNOW, WHAT'S WHAT.
WE'LL REFER TO IT AS THE INITIAL SERVICE CHARGE, AND
THE INITIAL YEAR SIS -- SERVICE CHARGE MUST BE LESS
THAN OR EQUAL TO 2% OF THE LOAN AMOUNT.
THE PERMANENT FINANCING FEE MUST BE LESS THAN OR EQUAL TO
1 1/2% OF THE LOAN AMOUNT. HOWEVER, IF YOU ARE USING
BONDS, AND THERE IS A BOND-RELATED TRANSACTION, THEN
THERE COULD BE ADDITIONAL 2%, BRINGING THAT UP TO 3% TOTAL.
SO IF YOU TAKE THE 3 1/2 PLUS THE 2, YOU'RE TALKING ABOUT 5
1/2% TOTAL THAT CAN BE INCLUDED IN THE MORTGAGE ON
THOSE DEALS THERE, OR 3 1/2% IF IT DOES NOT INVOLVE BONDS.
THAT WILL BE THE INDICATES -- THE CASE IF THERE'S GINNIE
MAE'S. ON 233 A-7, THERE IS ANOTHER
THING, THAT'S THE COMBINED PERMANENT FINANCING FEE PLUS
THE INITIAL SERVICE CHARGE IS LIMITED TO ONE 1/2 PERCENT --
1 1/2%. WE DON'T CARE HOW YOU DIVIDE
IT, BUT THE TOTAL IS LIMITED TO 1 1/2%.
HOWEVER, AGAIN, IF THERE IS A BOND-RELATED TRANSACTION THAT
GOES ON THERE, IT GOES UP TO 3 1/2%.
IN SOME RARE CASES, YOU MAY BE USING A BEGIN AGS OF -- A
COMBINATION OF TAXABLE AND NON-TAXABLE FINANCING, SO YOU
MAY BE USING BOTH BONDS AND I WANT TO SAY GINNIE MAE'S OR
SOMETHING LIKE THAT. AND IN THOSE CASES IF YOU'LL
TAKE A LOOK AT APPENDIX 4, SUPPLEMENT TO 6, WE TELL YOU
BECAUSE THEN A PRORATION COMES INTO PLAY, AND THAT'S A LITTLE
MORE DETAILED THAN WE WANT TO GO TO HERE, BUT IT IS AN
EXAMPLE IN THERE THAT TELLS YOU EXACTLY HOW THEY DO THE
PRORATION. >> NEXT TOPIC IS DETERMINING
THE MONTHLY COST SAVINGS WHEN REFINANCING.
THE REGS AT 242.91 SAY, WITH RESPECT TO 223(F), THAT
REFINANCING SHOULD BE EMPLOYED TO LOWER THE MONTHLY DEBT
SERVICE COSTS. AND IT SAYS WITH RESPECT TO
2223(A)7 REFIE, THE MONTHLY DEBT SERVICE PAYMENT MAY NOT
EXCEED THE DEBT SERVICE PAYMENT CHARGE FOR THE
EXISTING MORTGAGE. SO BASICALLY THE SAME RULE
APPLIES TO BOTH. HOWEVER, WHEN YOU GET TO
ACTUALLY CALCULATING THINGS, THERE'S SOME QUESTIONS THAT
COME UP. NEXT SLIDE.
YEAH. THE FIRST POINT IS, AND THIS
IS SOMETHING THAT CAME IN IN SOME COMMENTS FROM SOME OF YOU
FOLKS ON THE REGULATIONS WHEN THEY WERE GOING THROUGH
CLEARANCE. IF THERE IS -- IF THERE ARE
NEW HARD COSTS ASSOCIATED WITH THAT 223(F), OR A7, IF THEY
ARE DOING SOME REPAIRS, RENOVATIONS, WHAT HAVE YOU,
LIMITED REHAB, AS WE CALL IT, BELOW 20%, WHAT YOU WANT TO DO
IS BACK UP THE DUTCH SR VISCOUS SHIP -- ASSOCIATED
WITH THAT PART OF THE PROJECT, AND COMPARE APPLES TO APPLES,
YOU KNOW. WHAT THEY WERE PAYING TO BEGIN
WITH, AND WHAT THEY ARE PAYING NOW ON THE SAME AMOUNT.
YOU KNOW, IT'S BEING BORROWED. SO THAT'S ONE GOOD THING ABOUT
THE COMMENTS WE GOT. SECOND POINT IS, IF MORE THAN
ONE LOAN IS BEING REFINANCED, NEED TO CALCULATE THE MONTHLY
COST SAVINGS USING THE WAITED AVERAGE, MONTHLY DEBT SERVICE
COST OF THOSE LOANS AND IF YOU HAVE ANY PROBLEM FIGURING OUT
HOW TO DO THAT, CALL JB. THIRD POINT IS, WE'RE ASKING
FOR IN THE APPLICANT'S GUIDE, WE ARE ASKING FOR A
CERTIFICATION FROM YOU THAT THE MONTHLY DEBT SERVICE COSTS
ARE BEING LOWERED WITH SOME EXPLANATION OF HOW YOU ARRIVED
AT THAT CONCLUSION. AND SO AS PAUL WAS SAYING, IN
MANY CASES, YOU ALL ARE IN A BETTER POSITION THAN WE ARE TO
MAKE THOSE DETERMINATIONS. SO THAT'S IT ON MONTHLY COST
SAVINGS AND RE-FI'S. >> 241'S.
>> OKAY. SO 241 SUPPLEMENTAL LOANS.
THIS IS SOMETHING THAT HAS BEEN PUT INTO THE HANDBOOG,
AND I AM GOING TO -- HANDBOOK, AND I AM GOING TO FLIP BACK TO
THE STATUTORY LANGUAGE THIS REQUIREMENT IS BASED ON.
BUT THE HANDBOOK LAYS OUT NOW CASH EQUITY REQUIREMENTS FOR
241'S, AND IT IS A 10% CASH REQUIREMENT, MUST PROVIDE 10%
OF THE TOTAL ESTIMATED PROJECT COST IN CASH AS A MINIMUM
EQUITY CONTRIBUTION, IN ADDITION TO MEETING ALL OTHER
242 REQUIREMENTS. AND WHEN WE SAY ALL OTHER
REQUIREMENTS UNDER 242, I WOULD SAY FOR THE MOST PART,
MOST OF THE 242 REGS WILL APPLY TO A 241 LOAN.
THERE MAY BE SOME INDICATIONS WHERE THEY DON'T, BUT I WOULD
SAY THE RULE OF THUMB IS IF IT'S A 241, ASSUME THAT THE
242 REGS APPLY ACROSS THE BOARD TO A 241 LOAN.
CAN WE FLIP BACK? SORRY TO DO THIS TO YOU.
CAN YOU FLIP BACK TO SLIDE 26, I BELIEVE.
SORRY. I THINK THAT'S JUST THE
STATUTORY LANGUAGE FOR THE 241 STATUTE, WHICH SHOWS YOU WHERE
THE 10% CASH EQUITY REQUIREMENT CAME FROM.
YES. THAT'S PERFECT.
ALL RIGHT. SO THIS IS STRAIGHT FROM THE
STATUTE. SUPPLEMENTAL LOAN SHALL BE
LIMITED TO 90% OF THE AMOUNT WHICH THE SECRETARY ESTIMATES
WILL BE THE VALUE OF SUCH IMPROVEMENTS, ADDITIONS AND
EQUIPMENT. EXCEPT SUCH AMOUNT WHEN ADDED
TO THE OUTSTANDING BALANCE OF THE MORTGAGE SHALL NOT EXCEED
THE MAXIMUM MORTGAGE AMOUNT INSURABLE UNDER THE SECTION
PURSUANT TO WHICH THE MORTGAGE COVERING SUCH FACILITY IS
INSURED. SO THAT'S BEEN INTERPRETED AS
MEANING THAT THERE NEEDS TO BE A 10% CASH EQUITY REQUIREMENT
FOR A 241, AND THAT'S WHERE THE HANDBOOK REQUIREMENT HAS
COME IN, WHICH IS STRAIGHT FROM WHAT THE STATUTORY
LANGUAGE. THOSE ARE JUST OTHER
REQUIREMENTS, JUST SO YOU KNOW, 241, MATURITY DATE, HAS
TO BE ACCEPTABLE TO THE SECRETARY, INTERESTS, AND IT
IS GOVERNED BY THE LABOR STANDARDS UNDER 212, SO
DAVIS-BACON, AND WHAT OTHER FEDERAL LABOR STANDARDS, 241
IS REQUIRED TO COMPLY WITH THOSE FEDERAL LABOR STANDARDS.
I THINK THAT'S IT, UNLESS PROGRAM GUYS HAVE ANYTHING TO
ADD IN. NO?
>> I DID GO BACK AND CHECK THE REG THERE, THAT'S MODERN
ELECTRONICS, 24-207.252, WHICH IS SUBPART B.
>> OKAY. >> POSTED ON THE WEB.
>> OKAY. >> HELLO, EVERYONE.
IT'S GREAT HAVING THESE TRAINING SESSIONS, IT LETS US
CATCH UP WITH ALL OF YOU WHO WE DON'T SEE MUCH, AND IT ALSO
LETS THOSE OF US AT HEADQUARTERS CATCH UP WITH
SOME OF OUR COLLEAGUES FROM ACROSS THE COUNTRY.
SO IT'S ALWAYS A REAL NICE TIME, AND WE APPRECIATE YOU
COMING OUT. WANTED TO TALK TO YOU ABOUT
OUR 223 AP PROGRAM D A7 PROGRAM ABOUT STUFF YOU CANNOT
READ ONLINE. WE HAVE HAD A LOT OF INTEREST
IN THE LAST 18 MONTHS IN REFINANCING OUR PORTFOLIO.
AND MANY OF THAT HAS COME THROUGH THE A7 PROGRAM.
AND I WANT TO TALK TO YOU ALL ABOUT HOW TO SMOOTH OUT THE
APPLICATION PROCESS, BECAUSE, YOU KNOW, ROGER LUKHOFF AND
ROGER MILLER ANXIOUSLY MAKE THEMSELVES AVAILABLE TO SIGN
OFF ON COMMITMENTS. THEY READJUST THEIR SCHEDULES
TO SAVE JUST A HALF A DAY IN THE PROCESS, YOU KNOW, WHEN
NEEDED. SO WE ALL IN THE ROOM, LENDERS
AND US, NEED TO DO A BETTER JOB OF COMMUNICATING SMOOTHLY
TO GET THESE COMMITMENTS THROUGH THE PROCESS.
SO THE FIRST THING I RECOMMEND IS TO CALL PAUL GIAUDRONE.
IF YOU CAN'T GET AHOLD OF HIM, CALL ME, AND WE WILL HELP YOU
DETERMINE WHETHER OR NOT 223 A7 IS APPROPRIATE, AND THE
BEST AVENUE FOR YOU TO PURSUE. IT MIGHT BE SOME OTHER PROGRAM
IN IT OHF, LIKE A 241, MAYBE. SO CALL PAUL, FIGURE OUT THE
APPROPRIATENESS OF THE APPLICATION, DISCUSS, YOU
KNOW, DISCUSS THE SCOPE, IF THERE IS A PROJECT, IF THERE
ARE NEEDED REPAIRS, KIND OF DISCUSS WHAT THAT MIGHT
ENTAIL, AND THAT CAN KIND OF LEAD TO SOMEWHAT OF A DECISION
TREE PROCESS ABOUT WHAT DIRECTION TO GO.
NEXT SLIDE, PLEASE. AFTER THAT, THESE LAST FEW
MONTHS WE'VE HAD SOME BUMPS IN THE ROAD WITH OUR PROCESSING,
AND THOSE PROVIDE LEARNING OPPORTUNITIES ON HOW TO
EDUCATE YOU ALL IN ADVANCE. HERE ARE SOME COMMON ISSUES
THAT CAN TAKE TIME, AND YOU ALL CAN WORK ON THESE KIND OF
PARALLEL TO EVERYTHING ELSE. THE FIRST IS, FILLING OUT THE
APPLICATION FORM ACCURATELY. THE FORM 92013, KIND OF KNOW
AHEAD OF TIME WHAT ALLOWABLE COSTS ARE, WHETHER OR NOT
THERE ARE NEEDED REPAIRS TO BE INCLUDED, WHAT IS
MORTGAGEABLE, WHAT IS ALLOWABLE, GET THAT FILLED OUT
CORRECTLY. SEND US A NIGHT -- A NICE,
NEAT, COLLATED BINDER FORM. IT MAKES IT EASIER AND FASTER
FOR US TO REVIEW, AND IF IT'S FASTER FOR US, IT'S FASTER FOR
YOU TO GET THROUGH THE PROCESS.
2530S. THAT'S AN ONGOING ASSET
MANAGEMENT REQUIREMENT, IN THEORY THOSE SHOULD BE UPDATED
I BELIEVE ANNUALLY. SOMETIMES THEY ARE NOT.
JUST KNOW THAT THOSE ARE NEEDED IN ORDER TO GET THROUGH
THE PROCESS. SO YOU CAN START THOSE AHEAD
OF TIME. YOU DON'T NEED TO WAIT FOR US
TO REMIND YOU. THIS A7'S ARE NEW LOANS.
WITH NEW LOANS COME NEW COVENANT.
GET THOSE OUT TO YOUR BORROWER SOON.
START WORKING THROUGH AND IDENTIFYING ANY POTENTIAL
ISSUES THAT YOU WILL NEED TO NEGOTIATE.
YOU CAN DO ALL THOSE PARALLEL TO OUR CREDIT REVIEW PROCESS.
YOU KNOW, JUST GET IT GOING. FIGURE OUT WHETHER OR NOT
THERE ARE ANY ENTITIES AFFILIATED WITH THE HOSPITAL
THAT YOU WANT TO CARVE OUT. TRADITIONALLY FROM A CREDIT
PERSPECTIVE, WE DON'T LIKE THAT.
HOWEVER, IT IS ALLOWED, BUT YOU NEED TO MAKE YOUR CASE.
FIGURE THAT OUT AHEAD OF TIME. IF THIS -- BY DEFINITION A7'S
ARE WITH US, THE HOSPITAL MIGHT HAVE WHAT WE CALL AFTER
ACQUIRED PROPERTIES. IF THOSE ARE NOT YET PART OF
OUR COLLATERAL, WE WILL TYPICALLY ASK YOU TO BRING
THOSE IN. CHANCES ARE THOSE ARE
PROPERTIES THAT WE DON'T HAVE AN ENVIRONMENTAL REVIEW ON
FILE. THAT CAN TAKE TIME.
GET AHEAD OF THAT. CONSTRUCTION.
SOMETIMES THERE IS A LITTLE BIT OF CONSTRUCTION NEEDED
POTENTIALLY, YOU KNOW, QUOTE, UNQUOTE, NEEDED REPAIRS.
AGAIN, FIGURE THAT OUT AHEAD OF TIME.
HOW IN DEPTH DOES OUR OFFICE OF ARCHITECTURE AND ENGINEERS
NEED TO BE INVOLVED. THESE ARE ALL THINGS THAT TAKE
TIME, AND CAN ADD TIME TO THE
PROCESS. TO THE EXTENT YOU CAN PARALLEL
TRACK THESE, IT WILL ONLY SERVE YOU AND YOUR CLIENTS
BETTER. THAT'S IT.
QUESTIONS? QUESTIONS FOR THE PANEL?
NO? OKAY.
WE ARE GOING TO MOVE RIGHT INTO OUR NEXT PANEL DISCUSSION
HERE. OH, YES, PLEASE.
>> ON THE 241 EQUITY REQUIREMENT, THAT'S A NEW
INTERPRETATION OF THE ACT THAT CONFLICTS WITH HUD'S PAST
GUIDANCE IN THE 232 PROGRAM, SO I'M JUST WONDERING WHY ARE
WE CHANGING THAT NOW. IT'S INCONSISTENT WITH THE
APPLICANT'S GUIDE ON SIZING. AND QUITE FRANKLY, YOU KNOW,
WHAT'S THE BENEFIT TO THE HUD LOOKING AT TO FORCE HOSPITALS
TO SPEND CASH, YOU KNOW, IN REDUCED LIQUIDITY AS OPPOSED
TO USING SOME OF THEIR EQUITY TO INVEST BACK INTO THE
PROJECT. >> OKAY.
I AM NOT AN UNDERWRITER. >> THAT WAS FROM JIM
HAMMERNICK FROM 15 YEARS AGO. >> MY LITTLE BIT OF, YOU KNOW,
KNOWLEDGE ON THIS COMES PURELY FROM THE STATUTE, AND THEN
WHEN WE WENT BACK, I HAD, I DON'T KNOW IF IT WAS PAUL OR
SOMEONE IN THE OFFICE, WENT BACK AND LOOKED AND SAID FOR
ALL THE 241'S WE'VE DONE, THERE'S ALWAYS BEEN A CASH
EQUITY REQUIREMENT. THIS ISN'T SOMETHING NEW.
DON'T KILL THE LAWYER, I AM JUST TELLING YOU WHAT I AM
RELAYING -- >> I JUST EXPLAINED TO YOU THE
CONFUSION. IN NEW YORK STATE THE NEW YORK
DEPARTMENT OF HEALTH REQUIRES FOR THEIR RULES A 10% CASH
EQUITY. SO IF YOU'RE LOOKING AT NEW
YORK HOSPITALS, YOU'LL SEE A 10% CASH EQUITY REQUIREMENT.
BECAUSE OF NEW YORK RULES. BUT THERE ARE OTHER DEALS
OUTSIDE OF NEW YORK IF YOU WERE TO LOOK AT IT, AND HUD
GUIDANCE, SO SO MY CONCERN IS CONFUSION, CONFUSING NEW YORK
OR DASNI RULES WITH A HUD RULE.
>> I THINK I CAN SPEAK TO THAT.
>> WE HAVE NEW YORK AND NEW JERSEY IN THE BACKGROUND, I
WAS ASKED TO DO SOME OF THAT RESEARCH, AND KIND OF BRING UP
THE OLD HOSPITALS. ALSO, IF ALL THE PROPERTY WAS
PART OF THE LOAN TO START WITH, BECAUSE REMEMBER WE
DON'T LIKE CARVE-OUTS IN HERE, IT'S ALREADY PART OF THE
COLLATERAL, SO THEREFORE THEN ON A 241 SUPPLEMENTAL, YOU
WOULD HAVE TO HAVE 10% EQUITY IN THERE, BECAUSE THAT'S THE
ONLY WAY YOU ARE GOING TO BE ABLE TO MEET THE EQUITY
REQUIREMENT IN THERE. IF -- YOU KNOW, THAT KIND OF
WENT INTO THE BACKGROUND IN THERE, TOO.
NOW, COULD YOU HAVE CURVED OUT -- CARVED OUT PROPERTY IN
THE PAST IN HERE AND STUFF LIKE THAT, AND THEN YOU'RE
USING CARVED OUT PROPERTY, WHICH HAS EQUITY IN IT, IN
HERE, YOU KNOW, JUST AT THE END OF THE LINE, THE 10% CAME
DOWN AS PART OF THE INTERNAL DISCUSSIONS IN THERE.
AND QUITE FRANKLY, ON ALL OF THE DEALS THAT WE COULD
RESEARCH BACK, I ACTUALLY WENT BACK I THINK LIKE TEN YEARS ON
ALL THE 241'S THAT I COULD PULL UP.
I THINK I ACTUALLY ON MY COMPUTER I HAD THEM BACKED UP
ABOUT 2002. I STARTED HUD 2001, SO I
DIDN'T HAVE ANY BEFORE THAT. .
BUT GOING BACK 2002, 2003, EVERY 241 DEAL THAT WE DID,
DID ACTUALLY PUT IN 10% EQUITY OR GREATER.
>> OKAY. GO BACK TO SLIDE 26.
>> SURE. WE CAN GO BACK TO SLIDE 26.
YOU KNOW, I'M CURIOUS, ROD AND NIKI, HOW YOU GUYS WOULD
INTERPRET -- WHAT YOUR INTERPRETATION OF THE STATUTE
IS. I'M HAPPY TO DISCUSS.
>> I'LL SAVE THIS, BECAUSE WE ARE GOING TO PUT TOGETHER A
MEMO WITH SOME DHENTS COMMENTS.
SO THAT SHOULD GO IN THAT NEXT WEEK.
WE'LL SUBMIT THAT NEXT WEEK AND THEN WE CAN FOLLOW UP,
UNLESS EVERYBODY HERE WANTS TO HAVE THIS CONVERSATION, BUT I
DON'T THINK THEY DO. SO WE'LL DO THAT NEXT WEEK.
>> AWENED I -- YOU AND I CAN TALK OFFLINE.
>> YES. >> OKAY.
THANKS. AND WHAT WE'RE GOING TO DO AT
THIS MOMENT, WE ARE GOING TO MOVE INTO OUR SECOND PANEL
DISCUSSION AT THIS POINT, AND TALK ABOUT THE POLICIES OF HOW
WE OPERATE. BEING THE GOVERNMENT, WE HAVE
A LOT OF POLICIES ABOUT HOW WE OPERATE FOR A LOT OF WHAT WE
DO. TODAY WHAT WE WOULD LIKE TO DO
IS BRING YOU SOME CLARITY REGARDING SOME OF THE POLICIES
PERTAINING TO LOAN-TO-VALUE, THE APPRAISALS, THE TIMING OF
ADVANCES, HOW WE TREAT SWAPS, AND OTHER MORTGAGE COSTS
ASSOCIATED WITH THE PROGRAM. FOR THIS PANEL WE'LL HAVE
JB NATHAN, JOHN WHITEHEAD AND BILL WILLIAMS.
THE REST OF YOU CAN STEP OFF, IF YOU WOULD LIKE, OR STI --
STAY UP THERE, THAT'S FINE. PLEASE, GO RIGHT AHEAD, MOVE
INTO OUR NEXT SESSION. >> OKAY.
LET'S TALK ABOUT THE STARTUPS, AND IT SAYS INITIAL OPERATING
COSTS, BUT IN FACT WE'RE TALKING ABOUT WORKING CAPITAL
OVERALL. AND I POINT THAT OUT
SPECIFICALLY BECAUSE WORKING CAPITAL REQUIREMENTS,
ESPECIALLY FOR STARTUP HOSPITAL INVOLVES A LOT MORE
THAN JUST THE FIRST YEAR OP RALTH EXPENSES -- OPERATING
EXPENSES. THINGS SUCH AS INVENTORY,
PREPAID INSURANCE, CONTRACTS THAT YOU MIGHT HAVE WITH
DOCTORS FOR IMPROVEMENT AND ALL THAT WILL BECOME BALANCE
SHEET ITEMS THAT ARE CAPITALIZED, BUT WILL REQUIRE
SUBSTANTIAL AMOUNTS OF WORKING CAPITAL.
WHEN WE LOOK AT STARTUPS, AND I GOT TO TELL YOU ON THE FRONT
END, WE HAVEN'T HAD A GOOD HISTORY WITH STARTUPS, HAVE
WE? ESPECIALLY NOT LATELY.
I THINK THE INDUSTRY IS SIGNIFICANTLY TOUGHER THAN IT
HAS BEFORE. TAKES SIGNIFICANTLY MORE TIME
TO GET PROVIDER NUMBERS, BEGINNING WITH THE MEDICARE
NUMBER, THEN MEDICAID AND SO ON.
AND ALL OF THAT RESULTS IN A SITUATION WHERE YOU BASICALLY
NEED WORKING CAPITAL FOR THE FIRST 6 TO 12 MONTHS OF
OPERATIONS, NOT THE FIRST 3 TO 6 MONTHS LIKE WE MIGHT HAVE
NEEDED 10, 15, 20 YEARS AGO. QUITE FRANKLY FOR A HOSPITAL
UNDER 100 BEDS, I PERSONALLY DON'T FEEL COMFORTABLE UNLESS
I'VE GOT PROBABLY SOMETHING AROUND $50 MILLION FOR A
STARTUP. THAT IS FROM DAY ONE THROUGH
THE END OF THE FIRST YEAR TO ALLOW FOR THOSE PROVIDER
NUMBERS THAT MAY NOT COME IN THE FIRST THREE TO SIX MONTHS
AND SO FORTH. AND OTHER WORKING CAPITAL
REQUIREMENTS. DON'T FORGET THE MRF.
I WAS WORKING WITH A STARTUP HOSPITAL NOT LONG AGO, AND A
NATIONALLY RENOWNED CONSULTING FIRM HAD NOT INCLUDED THE
MRF IN THE FIRST YEAR AS A WORKING CAPITAL REQUIREMENT.
AND THAT'S A SIGNIFICANT NUMBER, AS YOU KNOW.
ALL THAT ASIDE, DON'T DO 'EM. THE INDUSTRY IS SUCH NOW THAT
IT IS REALLY, REALLY TOUGH TO START A GREENFIELD OPERATION,
RECRUITING ALL THOSE DOCTORS THAT ARE NEEDED, AND CHANGING
REFERRAL PATTERNS WITH MANAGED CARE COMPANIES AND ALL THOSE
KIND OF THINGS. HOWEVER, WE WILL LOOK AT ANY
PROJECT YOU BRING US. WE HAVE CONFIDENCE IN YOU THAT
YOU ARE BRINGING US A PROJECT THAT IS NEEDED, FIRST OF ALL,
AND THAT IS GOING TO BE THERE FOR THE LONG TERM.
BUT BURT MIRARCHI IS SITTING IN THE BACK OF THE ROOM.
HE WILL TALK ABOUT ASSET MANAGEMENT, MAYBE THROW IN A
COUPLE SITUATIONS WE'VE HAD RECENTLY.
BUT THIS STARTUP AND ESPECIALLY THE WORKING CAPITAL
REQUIREMENT IS VERY SIGNIFICANT.
I AM WORKING WITH A BANKER NOW ON A PROJECT THEY ARE TRYING
TO PUT TOGETHER THAT WILL REQUIRE A SUBSTANTIAL AMOUNT
OF WORKING CAPITAL, AND THAT'S THE FIRST SUBJECT THAT I
TALKED ABOUT, MAKE SURE THAT YOUR MORTGAGOR AND ALL THOSE
PEOPLE ASSOCIATED WITH THAT, INCLUDING THE MEDICAL CENTER,
MAKE SURE THEY UNDERSTAND THAT THIS IS ONE OF THE MOST
SIGNIFICANT THINGS THAT WE NEED TO TALK ABOUT ON THE
FRONT END AND ONE OF THE MOST SIGNIFICANT REQUIREMENTS FOR
THE SUCCESS OF THE HOSPITAL IN THE FIRST YEAR AND BEYOND.
>> WE TALKED A LITTLE BIT ABOUT THE CASH OR LETTER OF
CREDIT REQUIREMENT. THAT'S SPECIFICALLY FOR
NON-PROFITS. WE ARE GOING TO LOOK AT EVERY
DEAL ON A CASE BY CASE BASIS WHEN IT COMES TO A STARTUP.
ESPECIALLY THE WORKING CAPITAL REQUIREMENTS.
WE ARE GOING TO LOOK AT A FOR-PROFIT ENTITY PROBABLY IN
GREATER DETAIL. WE MAY EVEN REQUIRE ADDITIONAL
WORKING CAPITAL FOR A FOR-PROFIT ENTITY BECAUSE THEY
DON'T HAVE AMPO FOR ONE THING, WHICH MAY BE 2 OR $3 MILLION
THEY DON'T HAVE IN THE PROJECT.
AND ALSO, REWANT TO MAKE SURE WHOEVER THE INVESTORS ARE,
WHOEVER THE OWNERS ARE, WHOEVER THE PARTNERS ARE, OR
WHATEVER, THAT THEY HAVE SUBSTANTIAL WORKING CAPITAL,
NOT ONLY FOR THE STARTUP, BUT FOR CONTINUED OPERATIONS IN
TERMS OF CAPITAL NEEDS AND FUTURE YEARS AND SO FORTH AND
SO ON. AND I AM TELLING YOU, THE
HOSPITAL VISIT IS NOT GOING TO GET ANY EASIER.
I HAVE SAID THIS BEFORE, GOING TO SAY IT AGAIN.
IT IS EASIER FOR CONGRESS TO CUT MONEY OUT OF A HOSPITAL
BUDGET OR OUT OF MEDICARE OR MEDICAID THAN IT IS TO DO
SOMETHING WITH HEALTH INSURANCE.
SO JUST KEEP THAT IN MIND. WE HAVE A BLIZZARD OF
REQUIREMENTS OUT THERE NOW RELATED TO READMISSIONS
PENALTIES, REAL MONEY PENALTIES, REAL DOLLARS,
VALUE-BASED PURCHASING. WE'RE GOING TO HAVE MORE AND
MOVER OF THAT GOING FORWARD. LOOKING AT A HOSPITAL 2%
MARGINAL BOTTOM LINE, THAT COULD EASILY GO AWAY WITH TWO
OR THREE OF THOSE PROGRAMS THAT TAKE BACK REAL DOLLARS,
AND THAT INCLUDES THE RECOVERY AUDIT CONTRACTOR PROGRAM WHICH
IS SOMETHING WE DON'T TALK ABOUT A LOT, BUT IS A VERY
PROFOUND PROGRAM IN TERMS OF NOT ONLY THE TAKE-BACKS, BUT
THERE IS EMPHASIS ON LESS ADMISSIONS.
QUALIFYING ADMISSIONS AND THAT.
AND THAT IS HAVING A PROFOUND EFFECT ON THE INDUSTRY NOW.
WHEN THEY TALK ABOUT, WELL, YOU KNOW, THE AMBITIONS ARE
GOING DOWN BECAUSE PEOPLE AREN'T DOING THIS OR THAT.
I THINK THE RECOVERY AUDIT CONTRACTORS ARE HAVING A
PROFOUND EFFECT ON THAT IN THAT A LOT OF ADMISSIONS THAT
WE PUT IN THE HOSPITAL THREE OR FOUR YEARS AGO, ARE NO
LONGER QUALIFIED FOR INPATIENT.
THEY MAY PUT THEM IN OBSERVATION, WHICH IS WE ALL
KNOW YOU LOSE MONEY ON AND SO FORTH.
ALL THAT BEING SAID, IN OUR DEPARTMENT, WE HAVE SEVERAL
SUBJECT MATTER EXPERTS THAT CAN TALK WITH YOU AGAIN ON THE
FRONT END. CALL US, LET'S TALK ABOUT P A
STARTUP BEFORE YOU PUT A BOOK TOGETHER.
AND ALL THOSE CONSIDERATIONS: AGAIN, IF YOU HAVE ANY
QUESTIONS LATER IN THE DAY, WE WILL BE GLAD TO ENTERTAIN
THOSE QUESTIONS. NEXT, LOAN-TO-VALUE.
JB? >> LOAN-TO-VALUE, I AM GOING
TO TRY AND BE FAST HERE, BECAUSE WE'RE SUPPOSED TO BE
OUT IN 10 MINUTES. SECTION 242.23 DOES SPECIFY
THAT YOU HAVE A MAXIMUM OF 90% LOAN-TO-VALUE.
HOWEVER, IF YOU INCLUDE SWAP TERMINATION COSTS, IN THE
MORTGAGE, THEN THAT GETS REDUCED TO A MAXIMUM OF 85%,
AND IT IS CALCULATED ACCORDING TO THE HUD MODEL.
I DO BELIEVE THAT THAT MODEL IS ACTUALLY POSTED ON THE WEB;
IS THAT CORRECT? ALL RIGHT.
GLO IS TELLING ME IT WAS POSTED THERE.
IT IS TECHNICALLY A HUD FORM AND CALCULATION IN THERE, SO
BUT ON THE OTHER HAND, IN THE -- I WANT TO SAY
TRANSPARENCY, IN THE SPIRIT OF TRANSPARENCY AND STUFF, WE PUT
IT IN THE INSTRUCTIONS ON THE WEB FOR YOU, SO, YOU KNOW, YOU
CAN SEE EXACTLY HOW WE'RE GOING TO CALCULATE IT.
IT HAS BEEN IN A POINT THERE'S BEEN DISPARITY BETWEEN WHAT
HUD GETS AND THE LENDER COMMUNITY GETS.
WE THOUGHT WE SHOULD BE MORE SPECIFIC ON THAT FOR YOU.
THE APPRAISALS ARE ACCEPTED IF THEY ARE DONE IN ACCORDANCE
WITH HUD DIRECTIVES. IN MOST CASES HUD APPRAISALS
ARE NOT NECESSARY IN HERE. HOWEVER, IN SOME CASES, IF YOU
DON'T MEET THE LOAN-TO-VALUE, THE HOSPITAL HAS BEEN AROUND
FOR SEVERAL YEARS, THEN AN APPRAISAL MAY WORK.
YOU MAY NEED TO TALK TO US FIRST, BECAUSE WE NEED TO
APPROVE THE APPRAISER. YOU AS THE MORTGAGEE HAVE TO
HIRE THE APPRAISER. YOU HAVE TO HAVE THE PRIVACY
OF CONTRACT WITH THE APPRAISER, SO THEY ARE NOT
WORKING WITH THE HOSPITAL, THEY ARE WORKING FOR YOU AS
THE MORTGAGEE ON THERE. DO WE HAVE AN ACTUAL SLIDE
THAT GOES INTO MY NEXT SLIDE? OKAY.
THE HANDBOOK REFERENCES IN THERE, APPLICANTS ARE
CAUTIONED THAT ONE FACTOR THAT HUD WILL CONSIDER UNDER THE
UNDERWRITING WILL BE THE REPLACEMENT COSTS ARE BAY IK
ISLY TO THE MORTGAGE AMOUNT WHICH IS THE LOAN-TO-VALUE IN
THERE. OBVIOUSLY A HIGHER
LOAN-TO-VALUE MEANS THERE IS INCREASED RISK TO HUD IN THE
EVENT OF INSURANCE CLAIM. HISTORICALLY WHEN I'VE LOOKED
AT THIS, WE SEEM TO GET ABOUT 67 CENTS ON THE DOLLAR.
SO OBVIOUSLY THE HIGHER THE AMOUNT WILL AFFECT IT.
GO TO THE NEXT SLIDE. I'VE ALREADY POINTED OUT THE
MORTGAGEE ACTUALLY CHOOSES AND HIRES THE APPRAISER.
THERE ARE CERTAIN VERY MINIMUM HUD REQUIREMENTS.
THAT'S THE PERSON OBVIOUSLY HAS TO BE A CERTIFIED
APPRAISER. THEY NEED TO HAVE HEALTHCARE
EXPERIENCE, INCLUDING HOSPITALS, AND THEY NEED TO
REGULARLY BE ENGAGED WITH RECENT HOSPITAL EGGS PEERNS IN
HERE. -- EXPERIENCE IN HERE.
OBVIOUSLY YOU WANT SOMEBODY WHO KNOWS WHAT THEY ARE DOING
IN HERE, PARTICULARLY WHEN WE ARE UNDERWRITING A HUNDRED
MILLION DOLLAR LOAN. THE LOWER REPLACEMENT COST,
INCLUDING EQUIPMENT, SALES COMPARISON, AND INCOME
APPROACHES WITH USE, SO THIS IS A LIMITED APPRAISAL.
WE ARE REPLACEMENT COST PROGRAM, NOT A MARKET VALUE
PROGRAM. WHAT'S GOING TO HAPPEN IS
WE'RE GOING TO TAKE THE REPLACEMENT COST, WHICH IS
USUALLY OUR MOST APPRAISALS, THE LOWER VALUE, BUT THEN IT'S
LIMITED BY THE SALES COMPARISON AND THE MARKET OR
INCOME APPROACHES. SO IF IT COMES OUT LOWER, SO
BASICALLY IT ENDS UP BEING LOWER OF THE THREE VALUES.
IT DOES USE FAIR MARKET VALUE FOR LAND, BECAUSE THAT'S THE
BASIS FOR LAND COULD BE USED FOR ANYTHING.
IT HAS TO BE COMPLETED WITHIN 120 DAYS OF THE APPLICATION.
AND IT WILL TAKE THE PLACE OF NET BOOK VALUE.
NET BOOK VALUE IS A PROXY, WE ARE A REPLACEMENT COST
PROGRAM. ONCE YOU DO THE APPRAISAL, THE
APPRAISAL IS IT. IF IT COMES IN LOWER, TOUGH
BEAN IN THERE. NOW, ON WHAT CASE IS AN
APPRAISAL REQUIRED. AN APPRAISAL IS REQUIRED IF
YOU -- IF THE HOSPITAL PURCHASED A NON-ARM'S LENGTH
TRANSACTION IN HERE, THEN OBVIOUSLY YOU CAN'T USE
PURCHASE PRICE THEN BECAUSE IT'S THERE.
IT WILL BE CONSIDERED IF THE PROPERTY WAS ACQUIRED MORE
THAN THREE YEARS PRIOR, AND THEN THE AGE, BUILDING AND
DEPRECIATION RESULT IN A SIGNIFICANT UNDERVALUING THE
NET BOOK VALET APPROACH. IF IT WAS ACTUALLY PURCHASED
WITHIN THE LAST THREE YEARS IN AN ARM'S LENGTH TRANSACTION,
WE'RE JUST GOING TO GO BY THE PURCHASE PRICE IN HERE.
SO IF YOU JUST BOUGHT IT LAST YEAR FOR X NUMBER OF DOLLARS,
IT WAS NOT AN ARM'S LENGTH THING, THEN, YOU KNOW, THAT'S
ABOUT AS GOOD AS YOU CAN GET, BECAUSE AN APPRAISAL IS AN
ESTIMATE. PURCHASE PRICE IS WHAT THE
DEAL WAS. >> NEXT SHORT TOPIC, IS THE
RULES FOR THE AMOUNT AND TIMING OF ADVANCES AND
MORTGAGE PROCEEDS. TO BEGIN WITH, CASH EQUITY
REQUIREMENT, THE MORTGAGOR HAS TO PROVIDE EVIDENCE TO HUD TEN
DAYS BEFORE INITIAL ENDORSEMENT THAT THE CASH
EQUITY IS AVAILABLE IN A RESTRICTED FUND OR ACCOUNT, OR
IN THE INDICATION OF NOT FOR PROFITS AND GOVERNMENTAL
HOSPITALS, THAT A LETTER OF CREDIT IS IN PLACE FOR THE
EQUITY. SO THAT'S SOMETHING TO
REMEMBER AS THE DATE FOR INITIAL CLOSING A PURCHASE.
AND THE RULES FOR THE INITIAL ADVANCE, MAXIMUMS THAT CAN BE
INCLUDED IN THE FIRST ADVANCE ARE LAID OUT THERE.
75% OF THE LEGAL EXPENSE, 65% OF THE ORGANIZATIONAL EXPENSE,
75% OF THE CONSULTING EXPENSE: FINALLY, TIMING OF
DISBURSEMENT OF PROCEEDS. FOR A PROPRIETARY HOSPITAL,
ALL OF THE EQUITY HAS TO BE DISBURSED BEFORE LOAN
PROCEEDS. IN THE CASE OF A NOT FOR
PROFIT OR GOVERNMENTAL HOSPITAL, ONCE CONSTRUCTION
GETS TO THE POINT WHERE IT'S 75% COMPLETE, AND IT WILL
DEPEND UPON OUR OAE FRIENDS TO HELP US DETERMINE EXACTLY WHEN
THAT IS, BUT AT THAT POINT, ALL EQUITY FUNDS AND FUNDS
FROM OTHER SOURCES SUCH AS GRANTS OR LOANS HAVE TO BE
DISBURSED BEFORE ANY MORE OF THE MORTGAGE PROCEEDS CAN BE
DISBURSED. AND THIS IS SOMETHING THAT WE
PUT IN PLACE TO ENSURE THAT IT HELPS KEEP THE MORTGAGE AMOUNT
FROM GROWING BIGGER THAN WE THOUGHT MAYBE IT SHOULD BE.
SO AT ANY RATE, THOSE ARE THE RULES FOR AMOUNT AND TIMING OF
ADVANCES AND PROCEEDS. >> OKAY.
SWAP TERMINATION COSTS. THIS IS SOMETHING, AS PAUL
NOTED EARLIER, THAT WE LOOKED AT SEVERAL YEARS AGO, AND OVER
THE LAST SEVERAL YEARS, LOOKING AT THOSE 223(F)
TRANSACTIONS THAT WE DIDN'T DO, THERE WAS SEVERAL OF THOSE
THAT HAD SIGNIFICANT SWAP TERMINATION COSTS.
ONE IN PARTICULAR, I REMEMBER, HAD A $14 MILLION SWAP
TERMINATION COST. THEY ONLY HAD 10 OR 12 MILLION
IN THE BANK. SO COULDN'T DO THAT DEAL.
SO THAT'S WHY WE PUT THIS IN THE NEW REGULATIONS FOR
223(F), WE UNDERSTAND THAT SOME HOSPITALS WILL NEED SOME
HELP ON THE SWAP TERMINATION COST.
WE CAN PUT IT INTO A NORMAL 223(F) UP TO 10% OF THE
MORTGAGE, UNLESS THERE'S SUBSTANTIAL CONSTRUCTION OR
REA -- REHAB, IN WHICH CASE IT DROPS TO 5%, OR UP TO $10
MILLION. AND THE LTVFL REQUIREMENT GOES
DOWN TO 85% -- LTV REQUIREMENT GOES DOWN TO 85%, IF WE
INCLUDE THE 10% OF THE MORTGAGE AS SWAP COST.
WE ALSO WANT TO MAKE SURE EVERYBODY UNDERSTANDS THAT A
SWAP HAS TO HAVE ORIGINATED WITH THE ORIGINAL FINANCING,
TAX EXEMPT ISSUE OR WHATEVER, AND THAT IT IS A QUALIFIED
HEDGE ACCORDING TO TREASURY RULES, AND ULTIMATELY WE ARE
GOING TO GET A FAIRNESS OPINION.
AND CFO'S LAUGH WHEN I TALK ABOUT FAIRNESS OPINIONS.
BECAUSE THEY DON'T THINK IT'S FAIR AT ALL.
[ LAUGHTER ] >> THAT ASIDE WE WILL MAKE
SURE THAT IT MET ALL THE REQUIREMENTS FOR A QUALIFIED
HEDGE IN THAT. SO WITH INTEREST RATES GOING
UP, MAYBE THAT'S NOT AS MUCH OF A PROBLEM GOING FORWARD,
BUT WE'LL SEE. BUT WE HAVE ALREADY SEEN AT
LEAST A COUPLE OF 223(F) INQUIRIES THAT HAD SWAP COSTS,
AND WE'RE LOOKING AT THAT IN DETAIL.
>> AND WHILE WE'RE TALKING ABOUT MORTGAGEABLE COSTS, WHAT
IS ALLOWABLE IN THE MORTGAGE, I CALL YOUR ATTENTION TO
APPENDIX 2 OF THE HANDBOOK, WHICH IS ALLOWABLE COSTS, AND,
THAT'S IMPORTANT, AND PROBABLY IMPORTANT FOR YOU TO POINT OUT
TO THE MORTGAGOR, BECAUSE THEY NEED TO KNOW WHAT CAN AND
CANNOT BE INCLUDED, AND PAY FOR WITH LOAN PROCEEDS WHEN
THEY ARE PREPARING THEIR PLANS, THEIR BUDGETS, AND
APPLICATIONS FOR MORTGAGE INSURANCE.
COUPLE EXAMPLES I PICKED OUT AT RANDOM, THE MORTGAGOR'S
COSTS IN FUNDRAISING FOR THE EQUITY PORTION, AND THINGS
LIKE AWARENESS CAMPAIGNS, AND GRAND OPENINGS.
THOSE ARE NOT INCLUDABLE IN THE LOAN.
WE THINK MAYBE THEY SHOULD BE, BUT THEY ARE NOT.
AND THE MORTGAGOR NEEDS TO KNOW THAT.
ANOTHER ONE, BONUS PAYMENTS TO CONTRACTORS FOR ANY REASON.
THAT'S ANOTHER ONE THAT MAY NOT BE INCLUDED.
NOW, SOMETHING THAT CAN BE INCLUDED, AND THIS KIND OF
TIES IN WITH THE SWAP TERMINATION ISSUE.
THE COST TO REQUIRING DEBT TO BE REFINANCED MAY BE INCLUDED
IN THE MORTGAGE. SO IF YOU HAVE PREPAYMENT
PENALTIES OR PREPAYMENT PREMIUMS, OR DEFEASANCE COSTS
FOR THE OLD BONDS, THOSE ARE INCLUDABLE, AND UNLIKE THE
SWAP TERMINATION COSTS, THERE ARE NO LIMITS IN TERMS OF, YOU
KNOW, LOAN-TO-VALUE, OR PERCENTAGE OF LOAN OR WHAT
HAVE YOU. SO A WARNING, ONCE YOU START
ADDING THESE COSTS TO THE MORTGAGE, YOU CAN FIND, IF
THEY ARE SIGNIFICANT, YOU CAN FIND THAT MAYBE IT IS NOT
GOING TO PASS UNDERWRITING ANYMORE.
SO THAT'S THE DANGER. BUT THEY CAN BE INCLUDED.
AND THAT'S IT ON MORTGAGEABLE COSTS.
>> INSURANCE. >> LAST, BUT NOT LEAST, IS THE
APPENDIX ON INSURANCE THAT'S IN THE NEW HANDBOOK.
WE TALKED WITH JOHN AND OTHERS, INCLUDING SERVICERS,
AND WHAT WE FOUND OUT WAS THAT INSURANCE IS REALLY NOT
DEFINED IN TERMS OF OUR REQUIREMENTS OR THE SERVICER
REQUIREMENTS, SO WE FELT COMPELLED TO INCLUDE THIS
CHAPTER IN THE HANDBOOK. IT BASICALLY OUTLINES THE
MINIMUM REQUIREMENTS, SUCH AS $1 MILLION, 3 MILLION ON A
STANDARD MALPRACTICE POLICY AND THAT KIND OF THING.
SO I WOULD SUGGEST TO YOU THAT YOU TAKE THESE AS MINIMUMS.
MOST HOSPITALS THAT HAVE CASH FLOW WILL ALMOST ALWAYS HAVE
THE APPROPRIATE COVERAGES, BUT WHEN CASH FLOW IS TIGHT, THEY
START IB KREEGSING THOSE DID HE -- INCREASING DEDUCTIBLES,
THEY MIGHT DO THIS OR THAT. SO WATCH OUT FOR IT THAT.
AND ALSO I THINK THIS IS GUIDANCE TO THE SERVICERS,
BECAUSE THEY ARE PRIMARILY RESPONSIBLE FOR COLLECTING
THOSE MONEYS, AS THEY DO WHAT THEY DO, AND THEN THEY PAY THE
RENEWALS FOR THOSE POLICIES WHEN THEY COME UP.
WE DON'T WANT ANY OF THAT REFINANCED.
AND, AGAIN, THAT GETS INTO HOSPITALS WITH CASH FLOW
PROBLEMS. IF THEY HAVE CASH FLOW
PROBLEMS ALL OF A SUDDEN REFINANCING THAT HALF MILLION
DOLLAR MALPRACTICE POLICY LOOKS ATTRACTIVE, EVEN THOUGH
IT MAY BE A 6 OR 7 OR 8% INTEREST RATE.
SO WATCH OUT FOR THAT AS WELL. WE ALSO TALK ABOUT SOME OF
THOSE MISCELLANEOUS ITEMS IN THERE SUCH AS EARTHQUAKES AND
TORNADOES AND FLOODS AND SUCH, AND IT SEEMS LIKE THAT'S
HAPPENING MORE AND MORE. I SUGGEST TO YOU THAT YOU LOOK
AT THOSE REQUIREMENTS AND THINK ABOUT THOSE
REQUIREMENTS, BECAUSE IF THEY ARE NEEDED, THEY ARE NEEDED.
I UNDERSTAND THE COSTS MIGHT BE SIGNIFICANT, LIKE IN
CALIFORNIA FOR EARTHQUAKE AND THAT.
BUT, HEY, IF THEY ARE SITTING ON A FAULT LINE IN CALIFORNIA,
AND IT IS A $200 MILLION PROJECT, THEY PROBABLY SHOULD
HAVE THAT INSURANCE. AND I AM A BIG BELIEVER IN
HAVING BUSINESS CONTINUATION INSURANCE AS WELL.
WHICH WE DON'T REQUIRE, BUT ITS A GOOD THING TO HAVE,
ESPECIALLY IF IN YOUR A FLOOD ZONE, POTENTIAL FLOOD ZONE,
TORNADO ALLEY IN OKLAHOMA, AS MOORE OKLAHOMA WAS, OR JOPLIN,
MISSOURI, ALL THAT ASIDE, I THINK IT IS INCUMBENT UPON THE
BANKERS INITIALLY TO THINK ABOUT THOSE RISKS AND
CATHERINE IN THE BACK OF THE ROOM SOMEWHERE, THINKS ABOUT
THOSE RISKS THAT MAYBE SOMETIMES WE DON'T THINK THAT
MUCH ABOUT. THAT'S A SIGNIFICANT RISK IF
WE'VE GOT A MORTGAGE OUTSTANDING IN CERTAIN PARTS
OF THE COUNTRY. INSURANCE OBVIOUSLY SHOULD BE
ACCORDING TO INDUSTRY STANDARD, BUT WE WILL ALSO
ACCEPT A CAPTIVE INSURANCE COMPANY IF AN ORGANIZATION IS
LARGE ENOUGH, AND HAS ENOUGH CASH FLOW TO DO THEIR OWN
CAPTIVE, THAT'S OKAY. IF THEY ARE DOING IT IN
CONJUNCTION WITH OTHER HOSPITALS OR THE STATE
HOSPITAL ASSOCIATION, OR WHATEVER.
BUT IN THOSE CASES WE WILL DEFINITELY MAKE SURE AN
INDEPENDENT 5:00 TU AY -- ACTUARY HAS LOOKED AT IT AND
AN INDEPENDENT INSURANCE CONSULTANT, AND WE WILL PORE
OVER THOSE FINANCIALS TO MAKE SURE, SPEAKING OF CATHERINE,
THERE IS NO SUBSTANTIAL RISK IN THAT ARENA, WHICH CAN
CERTAINLY OCCUR. I'VE SEEN IN MY 30-YEAR
CAREER, I'VE SEEN INSURANCE COMPANIES, LOCAL CAPTIVE
INSURANCE COMPANIES, INSURANCE COMPANIES ASSOCIATED WITH
GROUPS OF HOSPITALS, OR EVEN HOSPITAL ASSOCIATION GO
BELLY-UP, YOU KNOW, WHEN THINGS GO BAD, IN THAT ARENA.
TAKE A LOOK AT THOSE REQUIREMENTS.
AND I THINK WE'RE DONE. THANK YOU, CREW.
[ APPLAUSE ] >> SO IT'S LUNCHTIME.
OUR TARGET TIME BACK HERE IS 1:30, SO RIGHT ACROSS THIS
COURTYARD IS A GIGANTIC FOOD COURT, SO IF YOU WANT TO FIND
LUNCH, GO OUT THE BACK DOORS OVER HERE, STRAIGHT ACROSS, A
LOT OF LUNCH ITEMS OVER THERE. SEE YOU AT 1:30.
THANK YOU.