U.S. Department of Housing and Urban Development

H O U S I N G

Special Attention of: Notice H 97-01 (HUD)

All Directors of Housing

All State and Area Coordinators Issued: January 13, 1997

All Multifamily Housing Directors Expires: January 31, 1998

All Production Branch Chiefs Cross References:

All Field Counsel

Subject: Issues Related to Licensure, Underwriting and Development

Processing of Nursing Homes, Board and Care Homes and

Assisted Living Facilities Insured under Section 232

I. PURPOSE

The purpose of this Notice is to address issues regarding

definition, licensing, underwriting, marketing and monitoring

projects insured under the Section 232 program. In view of

recent findings by the General Accounting Office (GAO), this

Notice provides special emphasis on underwriting assisted living

facilities.

II\. APPLICABILITY

The instructions herein apply to mortgages insured under Section

232 of the National Housing Act, including nursing homes, board

and care homes (B&Cs), and assisted living facilities (ALFs) as

appropriate.

III\. BACKGROUND

The Report of the GAO entitled \"Greater Oversight Needed of FHA\'s

Nursing Home Insurance Program (GAO/RCE-95-214),\" issued in

August 1995, made a number of important findings that are

addressed in this Notice.

Among other things, the report expressed concern that the

addition of the ALF market-driven product to the Section 232

program may result in potentially riskier loans that FHA may be

unable to underwrite and monitor effectively. This concern

extends to B&Cs, as well as to ALFS. As a result of the report,

FHA began post-endorsement reviews of projects insured under

Section 232 to determine prudent underwriting criteria that

should be used for those products and will share those findings

HM : Distribution: W-3-1, R-1,R-2, R-3-1(H)(RC),R-3-2,R-3-3,R-6,R-6-2,

R-7,R-8

with out State and Area Office (S/AO) Housing staff. This analysis

of B&Cs and ALFs will be ongoing and will be broadened to include

some basic information about all B&Cs and ALFS.

To assist this post-endorsement review monitoring, S/AOs must

submit to Headquarters, the processing for all ALFs and B&Cs,

whether 223(f), new construction or substantial rehabilitation.

The Forms HUD-92264, 92264A, 92273 and 92274 and the narrative

underwriting summary and EMAS market study should be submitted to

the Office of Multifamily Housing Development, New Products

Division, Room 6146.

Based on the GAO report, B&C defaults were high for projects

endorsed from 1987 to 1994. HUD paid claims on 10 out of 33

projects insured during that period. This claim rate of 30

percent compares to 8 percent for the nursing home program as a

whole. The primary reasons cited for the defaults of B&Cs were:

1\) inexperienced operators, 2) under-writing problems, (3)

projects too large for the market, and 4) over-estimation of

fill-up during the first year of operation.

Projects went into default because they did not fill up as

quickly as planned, i.e., the pro-forma marketing projections

were too aggressive. As a result, the projected income was

overestimated and projects had larger operating deficits than

anticipated before break-even occupancy was achieved.

In other cases, projects achieved a lower level of income than

projected because they were anticipated to have double-occupancy

rooms in markets where such sharing of living space by private

pay residents is not typical. In still other cases, the

mortgagor entity could not attract sufficient private pay

residents and, therefore, had to negotiate contracts with State

agencies for payments that were substantially less than the

private pay rates projected in the underwriting.

This Notice addresses the above issues raised by the GAO as well

as other matters related to ALF and other Section 232 processing.

IV\. ASSISTED LIVING FACILITIES

A. The ALF Product

In the last 10 years, developers have offered ALFs as an

alternative to nursing home care. ALFs are not a

replacement for nursing homes, although studies suggest that

at least 15 percent of nursing home residents could be

placed in lower levels of care. Moreover, according to an

American Association of Retired Persons survey, most older

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persons would rather remain in their own homes. Only 5

percent of frail elderly persons reside in institutional

settings.

Nevertheless, ALFs are an important product in the growing

seniors\' housing industry. For the Department to be

successful in this product, S/AO staff must educate itself

about all aspects of the ALF market, appraisal

considerations, underwriting and project operations.

Moreover, as the early experience with B&Cs shows, vigilance

is required in monitoring the implementation of ALFs as a

distinct product line to avoid the problems that GAO has

pointed out.

B. Underwriting

Recent Headquarters reviews of selected ALFs raised concerns

about underwriting of these facilities, which, as a class,

may expose FHA to higher risks if not properly underwritten.

Of particular concern was the use of cap rates and expense

ratios that were too low. For example, the cap rates used

(most of them less than 10 percent) did not reflect the

proper returns expected for the level of risk involved with

this facility type. Likewise, ALFs entail a high degree of

expenses relative to rental apartments which must be

reflected in the underwriting.

S/AOs should review the Section 232 Handbook (4600.1 REV,

dated September 1992 and 4600.1 REV, dated January 1995) in

conjunction with this notice as well as reach out to State

agencies and industry resources to garner greater

understanding of this product. The Handbook, particularly

the Valuation instructions, cover analysis of income and

expenses, proprietary income, and other aspects of ALF

underwriting. It is essential to get a thorough

understanding of the product. While Headquarters can assist

through written guidance and training, there is no

substitute for learning about local conditions.

ALFs are primarily a private pay product. In some cases,

the owner/operator may set aside some units to be used for

low-income residents if bond financing requires it or the

owner so designates. If so, the income stream must be

adjusted downward to show the discounted rate for the set-aside

of low income units. For underwriting purposes, the

category of income must indicate the number of market units

at the private pay rate and the number of units at less than

the market rate.

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C. Mortgagor Experience

Inexperience of the operator was the single most specified

reason for default and claim for the 10 B&C claims cited in

the GAO report. S/AOs must ensure that only experienced

developers and operators participate in FHA\'s ALF program.

Therefore, the developer or a member of the development team

should have a proven track record of 3 to 5 years in the ALF

or B&C market. This experience must be in developing,

marketing, and operating ALFS. These facilities are

different from those of other project types insured under

Section 232. With the focus on hospitality coupled with

health care, ALFs are very different from rental apartments

and even from nursing homes, and management experience is

more important than the real estate.

S/AOs should make it a condition that developers without the

above experience must contract with a management

company/operator that is knowledgeable about the industry

and has a proven track record. (See Handbook 4600.1, REV-1,

Change 1, paragraph 13-10.) Offices should also encourage

sponsors to use a lender familiar with Section 232

processing.

D. Market

Marketing an ALF to the frail elderly population requires

in-depth knowledge of 1) product, 2) location, 3) price, 4)

accommodations, 5) business, 6) design ; and 7) community

relations. The ALF market is private pay and consumer

driven. Residents have options and exercise choices

regarding how they spend their money for the type of

residential care facility they select, i.e., nursing home,

ALF, home care or senior retirement facility. As an aid to

assessing the market for ALFS, see Attachment 1, EMAS

guidelines for market analyses.

Market Study

The market study must show that sufficient demand exists for

the proposed project with the amenities and services

offered, at the appropriate price, at the size, and at that

location. Since every market has different characteristics,

the market study should reflect: 1) types of competitors, 2)

pricing, 3) age of facility, 4) referral sources, 5) track

record of owner/operator (years of experience in the

business), 6) name recognition- and 7) expertise of the

development team.

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S/AOs should research the market and validate the data (age,

income, and frail elderly population). The HUD economist

should conduct an independent market analysis of current and

anticipated supply/demand including collecting data on the

competitive environment. This should consist of current

projects and those in the pipeline (planned or under

construction) and information on the trends on wages,

pricing structure, occupancy and demographics. Any market

plan should deal with the primary market (5-mile radius).

The secondary market may include up to a 15-mile radius for

a study. The market study must provide a statement of

market condition, penetration, and market position of the

proposed developer.

A market study is no substitute for a financial feasibility

study. Each should focus on: 1) demographics, 2) trends, 3)

neighborhoods, 4) pricing, 5) economics; and 6) market area

that the project will serve. The economist must validate

the sponsor\'s market study by conducting an independent

market study of the market place to assess the supply/demand

(existing, pipeline, and planned beds/units). The

independent study must have evidence to support market

demand.

In addition to the formal market analysis, S/AOs must review

the proposed business component. This product is much more

a health care business enterprise that must be profitable

for the project to remain viable rather than a housing

facility that merely provides additional services and

amenities. The real estate is not what makes the project

financially successful. For those providers that market

special care programs, (Alzheimer\'s, hospice), it is

important to review the business plan, proposed activities,

staff ratios, room rates, architectural designs, State and

local inspection reports, and referral sources.

Feasibility Study

A feasibility study determines if the proposed project can

be produced at and marketed at the prices reflected in the

market study. The feasibility is an opinion or a report of

the financial forecast and management\'s assumptions. If the

project is an expansion to an existing facility, the

mortgagor should provide an overview of the facility

(including key management staff), services, occupancy,

detailed list of sources and uses of funds, facility

utilization, historical report on revenue and expenses,

working capital funding, debt service coverage, payor

sources, contracts - VA, County, State, Health Maintenance

Organizations, Managed Care Organizations.

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If the project is a new facility, the mortgagor should

include in the business plan: size, services provided,

marketing area, name and experience of the design architect

and general contractor, forecast of facility utilization,

revenue and expenses and key management staff and their

experience with developing/managing a comparable type of

facility. The feasibility study must test the financial

viability of the project to generate income based on

stabilized occupancy and the prognosis of the market over

the next 5 years.

E. Pre-Marketing

The developer should start the pre-marketing approximately 6

months before the project becomes operational. This approach

should expedite the lease-up period. A pre-marketing budget

(typically around \$1,500 per bed/unit according

to industry sources) allows the mortgagor to pay rent,

hire marketing staff, and buy promotional services,

consultants and supplies. It ensures that the mortgagor

will focus on marketing from initial endorsement to project

completion, operation, and stabilized occupancy. The pre-

marketing is critical to the initial occupancy as well as

the ongoing fill-up period. The premarketing expense is a

soft cost that should be included in the mortgage. The

marketing expense is as important as the location,

reputation of the developer, and the project design.

The approach to pre-marketing is different for independent

living units (ILU) than ALF units in cases where an ALF

contains ILUs. The market study must show the additional

time it may take to fill up ILUs (12-18 months.) The lead

time to get an executed admission contract for an ILU is

longer than for an ALF. The lead time to get an executed

admission contract for an ILU unit (generally 12-18 months)

is longer than for an ALF unit. However, the above is only

meant as a guide, the real test is the track record of the

developer.

S/AOs should look closely at the Initial Operating Deficit

(IOD) escrow to offset a slow lease-up period. The IOD will

be critical to the success of the project during the first

10-12 months. The IOD escrow must be funded to offset the

slow fill-up period for new facilities.

F. Design

The proper mix of accommodations is an important factor in

the success of the lease-up and occupancy. As discussed

previously, some developers with nursing home experience may

want to develop mostly semi-private rooms even though this

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type of unit has not been successful in the ALF market. Because

ALF residents generally are private pay and have a choice

(unlike Medicaid recipients in nursing homes), private rooms

with a full bath are the standard. There may be a few semi-private

rooms in some facilities where market experience supports

it. However, the rationale for the semi-private rooms

will be based on the desire of the developer to have some

units affordable for SSI and low-income residents or for

specialized markets. Alzheimer\'s facilities may be developed

as free-standing facilities; however, the trend is to

build smaller facilities comprising 16-44 beds.

While there is no typical ALF model, some developers have

been successful with a prototype model used in multiple

locations. HFAs may choose to develop ALFs with an

affordable housing component by reducing the construction

cost and partnering with local communities. If so, these

facilities have less space, fewer services, and different

design features.

Also, developers that initially built retirement communities

with ILUs may have to retrofit those units and convert them

to ALFs due to \"aging in place.\" In order to qualify for

Section 232 mortgage insurance; however, the units must be

constructed to meet Federal, State, local building and fire

codes, and Federal and State accessibility requirements.

The design of the ALF should be a residential vs.

institutional model and give the appearance of a home-like

environment. The building should be designed to maximize

the needs and preferences of the residents that occupy the

units. A minimum of 25 square feet (sf) of dining area and

30 sf of recreational and common space are recommended

minimum standards. The unit size may vary from 150 sf

(semi-private room) to 650 sf for a two-bedroom unit. The

size will be subject to pricing, what the market will

support, and the cost of construction.

The design of the facility must closely match the needs of

the regulatory environment, providers who will operate the

facilities and the residents who will occupy the units. HUD

should encourage creativity in design while still adhering

to enforcement codes, zoning, licensing, and local

ordinances. The developer should design an ALF to meet

residents\' needs and at the same time keep in mind that the

product is market driven and the consumer has choices.

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G. Averages

There are some overall industry statistics and \"rules of

thumb\" that S/AOs should be familiar with when processing

ALFS. In learning about the industry in a particular area

of the country, staff will undoubtedly need to fine tune

these items in view of local conditions. The following are

not meant to be hard and fast rules or limits where local

experience suggests otherwise. Examples to consider are:

1\. According to an April 1996 survey of 120 projects by

Capital Valuation Group, the average freestanding ALF

project costs \$6.4 million and generates \$2.3 million in

annual revenues.

2\. The care in an ALF is delivered at approximately 70

percent of the cost of care in a nursing home.

3\. The average operating expenses are approximately 55

percent of the cost of care.

4\. The resident turnover is approximately 40 percent per

year.

5\. The income estimate (for qualification purposes) should

take into account that the resident will spend

approximately 75 percent of income on the monthly ALF

costs.

6\. The resident will need an income of approximately \$25,000

per year to reside in an ALF.

7\. The average admission per month after the initial fill-up

is three to four residents per month.

8\. The typical fill up takes 10-12 months for experienced

operators. The overall industry absorption rate is

three net admissions per month.

9\. The average construction cost is \$85 per square foot.

10\. The profit margin is 35-40 percent before debt service

coverage.

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H. Major Concerns

The emergence of ALFs could have a negative impact on HUD\'s

nursing home portfolio in those States that have a Medicaid

waiver to use monies previously targeted for nursing

facilities, as families and States seek alternatives to

higher priced skilled facilities. However, many nursing

homes may be able to reposition their markets toward higher

levels of care, such as sub-acute care, in the face of

changes to Medicare and Medicaid reimbursements to offset a

potential negative impact. The emergence of ALFs could also

generate a great deal of business for FHA from smaller

facilities requiring substantial rehabilitation and

refinance. The S/AO must pay close attention to the track

record of the project owner/developer for all existing

facilities, whether or not they require rehabilitation,

refinance or acquisition. The past 3 years of financial

data will be critical in determining the project\'s

feasibility. The historical profit margin will be an

important factor in determining financial feasibility. The

major concern and caution is that inexperienced operators

will attempt to build retirement housing for seniors

financed with Section 232 insurance.

As the industry matures and lenders learn about the Section

232/223(f) product, there will be inquiries about

refinancing retirement centers, congregate housing, and

independent living units. The above projects would only

qualify if they meet the State licensure requirements and

program eligibility and underwriting requirements under

Section 232.

J. Coding (2088)

There is a separate Section of the Act Code assigned to ALFs

and B&Cs in the F47 MIAS System. The code the S/AO should

use for ALFs is RNL and RNT for B&Cs when transmitting the

290s to MIAS. Using the above codes will allow the

Department to track the growth of these products. These

suffixes have not yet been implemented in MIDLIS.

V. OTHER ISSUES

In addition to the GAO Report, two recent Inspector General Audit

Reports have raised issues about nursing home and ALF

developments which we would like to bring your attention.

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A November 13, 1995, Office of Inspector General Report, \"Section

232 Nursing Homes, The Americana and Monticello Hall, Office of

Housing, (96-SE-119-0001)\" prepared by the Office of Audit,

Northwest/Alaska, presented findings on the cases of Pleasant

Valley Health Services Corporation, a California based nonprofit

mortgagor. Issues raised by the bankruptcy of two of its

projects under Section 232 led to a review of the sole-asset

mortgagor requirement and the proper filing of UCC documents.

In the Seattle case, Headquarters granted a waiver of the sole

asset requirement because the sponsor had a firm commitment and

was about to close when the sole asset requirement was

established for nonprofit entities. However, the nonprofit

ultimately went into bankruptcy, the two insured projects

defaulted, and HUD\'s interests were unprotected in a series of

areas including UCC filings and bed authority that was not tied

to the project.

A separate review by the District Inspector for Audit in the New

England District raised concerns about lease payments during the

construction period and obtaining operating statements from the

Mortgagor/Lessor as well as recommended revisions to several

processing forms and the regulatory agreement.

A. Waiver of Sole Asset Mortgagor Requirement

Waiver authority of the sole asset mortgagor has been

delegated to the field as part of the overall delegation of

waiver authority for handbooks, notices, and similar

instructions. However, experience has indicated that S/AOs

must exercise extreme restraint in granting this waiver.

S/AOs must ascertain, on a case-by-case basis, that FHA\'s

financial interests are protected. Any such waiver should

be made only where there is a compelling reason and not mere

convenience. S/AOs should consider what compensating

collateral is adequate to protect the insurance fund. The

Department\'s security for nonrecourse loans must not be

diminished.

B. Uniform Commercial Code Documents

UCC documents must be filed in each State where the project

is located and where the project owner is located if they

are in different States. The UCC filing statements must

specifically cover nursing home revenue as project revenue.

The closing checklist of legal requirements (see Appendix 1

of HUD Handbook 4430.1 , REV-1) continues to list the UCC or

chattel mortgage documents as exhibits.

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In addition, the new revised guide form for the mortgagor\'s

attorney\'s opinion addresses the responsibility for proper

filing of the UCC financing statements.

C. Project Bed Authority

Any modifications (additions, deletions or major

improvements) in the bed authority for a nursing home

insured under Section 232 must be approved by HUD to protect

FHA\'s security in the project. This must be reflected in

the Regulatory Agreement. Moreover, security interest in

the bed authority should be perfected to the project to the

extent possible under State law.

D. Leased Facilities

S/AOs must review lease agreements between the mortgagor and

lessee to ensure that the agreement reflects a market

comparable lease payment. Offices should take exception

when the agreement, especially for cases involving

substantial rehabilitation of an existing nursing home,

provides for a reduced (less than market) lease payment for

the period up to cost certification cut-off in an attempt to

avoid the application of net income as a recovery of

construction costs, For all projects involving an identity-of-

interest lease, at cost certification, the mortgagor and

lessee are required to submit a certified operating

statement which reflects the income collected and expenses

incurred in accordance with the lease agreement. Mortgagees

must be advised that failure to disclose a lease arrangement

or identity of interest will be considered a serious

violation and will be grounds for Departmental sanction.

E. Lease Payment/Net Income During Construction Period

Total income, including lease payments, must be recognized

during the construction/rehabilitation period. When an

identity-of-interest lease situation exists, all project

income during the construction, irrespective of the lease

amount paid by the identity of interest lessee, will be

considered and mortgage reductions applied accordingly.

There should be no difference in the overall basic income

figures whether or not there is an identity of interest

lessee.

At the time of cost certification, an audited operating

statement in accordance with the requirements set forth in

paragraph 11-6.B.3 of Handbook 4470.1 REV-2 . covering the

period from the beginning of marketing and rent-up

activities (or date of initial endorsement in rehabilitation

projects involving insurance of advances or start of construction

for rehabilitation projects involving insurance upon completion)

to the cost certification cut-off date, must be submitted by:

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1\. The mortgagor entity, in all cases.

2\. Lease Arrangements

a\. The lessee, when an identity-of-interest exists

between the mortgagor and lessee and the lessee

has executed the Regulatory Agreement-Nursing

Home, Form HUD-92466 NHL). While a review of both

the mortgagor\'s and lessee\'s statements is

required in determining the actual amount of net

income available to off-set allowed costs, primary

emphasis is given to the lessee\'s statement.

Review the statements in accordance with the

instructions in Chapter 11 of Handbook 4470.1 REV-2.

In addition, when reviewing the lessee\'s

statement:

1\) increase net income by the amount of the

lease payment paid to the mortgagor (lease

expense).

2\) increase net income by any income, other than

lease income, reported on the mortgagor\'s

income statement.

3\) decrease net income to include typical

project operating expenses from the

mortgagor\'s statement which the mortgagor is

required to pay per the lease agreement,

i.e., real estate taxes, insurance, etc.

Make sure there is no duplication of

expenses.

b\. The mortgagor entity only, where no identity-of-interest

exists between the mortgagor and lessee

and the lessee has executed the Regulatory

Agreement-Nursing Home, Form HUD-92466 NHL. The

mortgagor\'s income statement should reflect a

market comparable lease payment as income.

3\. The mortgagor, where the mortgagor and the

administrator are the same entity and Form HUD-92466

NHL has not been executed.

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Treat any net income resulting from review of the

operating statement in accordance with the instructions

contained in paragraph 11-6.B.3.k of Handbook 4470.1

REV-2.

F. Regulatory Agreement for Leased Facilities

Current instructions require an executed lease between the

lessor and lessee in those projects that are operating

facilities at the time they obtain FHA insurance. S/AOs are

required to approve a signed copy of the lease (Form HUD-92466 NHL).

This requirement can be found in Handbook

4600.1, REV-1, Change 1, Chapter 14, paragraph 14-12 and 13.

The lessee (tenant) only has the right to use the building

equipment that is stipulated in the lease. In addition to

executing a regulatory agreement, the lessee must sign a

Previous Participations Certification (Form HUD-2530). The

term of the lease does not have to parallel the same term of

the mortgage.

G. Forms Revision

The following forms are being revised to more accurately

reflect the requirements of the program. S/AOs should make

the following changes until the forms are revised:

1\. Form FHA-2433 Mortgagor\'s Certificate

Include language that clearly states that the

mortgagor/lessor must report lease payments during the

construction period as rental income.

2\. Form FHA-3305 Agreement and Certification

Include language that clarifies that not only must the

mortgagor report all receipts and disbursements from

the date of first occupancy, but also that all receipts

and disbursements must be reported during the

rehabilitation period for substantial rehabilitation

cases.

3\. Form HUD-92466 NHL Regulatory Agreement

Include a provision that any and all future lessees

must execute a Regulatory Agreement. There must also

be language to require the lessee to submit financial

statements to the S/AO or designee within 60 days of

the close of the project\'s fiscal year.

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4\. Regulatory Agreements

We will develop a separate Regulatory Agreement for the

Section 232 program in the near future. The Agreement

will be tailored to residential health care facilities

and clarify such areas as distinguishing between

\"rents\" and \"accounts\" or \"fees and charges.\"

In at least one jurisdiction, a bankruptcy court has

ruled that monies paid for nursing home care are no

more \"rents\" than are hospital charges. The court said

that the fact that patients live there is incidental to

providing them with nursing care.

VI\. UNDERWRITING CONCERNS RELATING TO CREDIT SUBSIDY

A. Implications of Actuarial Analysis for FHA\'s Section 232

program

Price Waterhouse recently completed an analysis of the

Section 232 program for credit subsidy re-scoring purposes.

The program, overall, appears to be in relatively sound

shape from a strict \"credit subsidy\" perspective. That is,

standing alone and analyzed in isolation, an assuming no

radical and unanticipated health reform revisions are

forthcoming, the program is self-sufficient. However, the

study uncovered a pattern which FHA must correct in order to

protect the Insurance Fund and improve program performance.

B. The Pattern: Causes and Cures

A critical fact revealed by reanalysis of the 35 years of

program data is that most claims occur within the first 7

years (see Attachment 2.) Years one through four are

particularly disastrous, accounting for nearly two-thirds of

all claims. This new construction/substantial

rehabilitation underwriting problem must be addressed,

because it has an enormous effect on credit subsidy results

(which are most strongly influenced by early program cash

flows since less \"discounting\" back to present value is

required for years one through four losses, when measured

against MIP income).

One may attribute some of these losses to early state-Medicaid

or Medicare reimbursement errors and implementation

delays in the late 1960\'s and early 1970\'s, or unintended

State budget-driven underfunding or cost cutting measures in

the late 1980\'s and early 1990\'s. However, this admonition

to examine the underwriting problems carries even greater

weight when one understands that approximately one-third of

assigned nursing facilities \"righted themselves\" while being

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HUD-held and, upon disposition, repaid all accrued interest,

unpaid principal balance, and other holding and disposition

costs. This suggests that even thinly-capitalized businesses

could eventually succeed if operating deficits had been more

accurately forecasted. The lesson learned is that HUD must

evaluate the adequacy of the operating deficit reserves

carefully. During the fill-up period, the payroll

(relatively large front-end requirements) and marketing

costs are the primary contributors to project defaults and

FHA\'s losses. S/AOs must assure that adequate operating

reserves are established to address the above concerns.

Any questions on this Notice should be addressed to Courtland

Wilson, New Products Division at (202) 708-0743, extension 2542.

Nicolas P. Retsinas

Assistant Secretary for Housing-

Federal Housing Commissioner

Attachments

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Attachment 1

GUIDELINES FOR CONTENT AND FORMAT OF A MARKET ANALYSIS REVIEW

SECTION 232 RESIDENTIAL CARE FACILITIES

A. Project Description:

1\. Number of units by bedroom size or type of accommodation.

2\. The estimated total month cost for shelter and mandatory

services by size of unit or type of occupancy, or

accommodation.

3\. The estimated total month cost for optional services or care

provided on an as needed basis.

4\. The proportions of the project to be occupied by public

pay/assisted tenants, e.g., SSI, and that by private

pay/market rate tenants.

5\. The amenities, services and care provided by this type of

housing and how these relate to the physical or mental,

social conditions of the prospective tenants.

6\. Project location in terms of proximity to facilities and

services essential to the tenants such as hospitals,

medical/health care facilities, social and community services,

public transportation, shopping and recreational activities;

and an any other location considerations relevant to the

market or marketability of the proposed project.

B. Summary of Findings and Recommendation:

Statement of recommendation of approval or disapproval and brief

summary of findings supporting the recommendation.

C. Definition of the Market and Submarket Area:

Description of the geographic boundaries of the housing market

area and an explanation for the definition, including a discussion of

the primary and secondary geographic market areas and the qualitative

submarkets for the project by socioeconomic characteristics: income,

household size, age of head, etc.

D. Current Inventory: Quantitative and Qualitative Characteristics

of Projects in the Market Area.

1\. Total number of units or accommodations by type or bedroom

size, e.g., one-bedroom apartments, independent living units,

private, semiprivate rooms, wards, etc.

2\. Total monthly charges by bedroom size or type of

accommodations

E. Alternative Health/Medical Care and Social Service System

1\. Description of the extent and types of alternative housing,

care and services in the market,

a\. Home health care, adult day care, housekeeping services,

meal preparation, visiting nurses, on-call transportation

services health care, and alternative providers of supportive

services for the target market such as state and local

government social service agencies or fraternal, social,

charitable or religious organizations.

b\. The impact of these alternatives on demand for the

subject project.

2\. Discussion of the current levels of public payments by the

State for the types of care proposed relative to the typical

\"private pay\" rate for the same level of shelter, care and

services.

F. Characteristics of Pipeline Activity:

1\. Total number of units under construction by the total monthly

costs by bedroom size or type of accommodation, and the services or

amenities planned (mandatory or fee for service).

2\. Total number of units in the planning stages with permits or

firm financial commitments. It is essential to have the most up-to-date

and comprehensive information possible on the pipeline so

that disagreements of supply volume with lenders and sponsors may

be accurately discussed and resolved.

G. Demand Estimate and Analysis

1\. The market analysis is based on an estimate of annual demand

for the type of residential care. The demand estimate should show

the number of units or accommodations by type and the total monthly

charges.

2\. An analysis which reconciles the proposed project with the

demand estimate, taking into consideration the forecast household

and population growth of the target group(s), the current vacancy

situation, and the supply in the pipeline.

3\. The demand estimate should reflect \"effective demand\" and

should be based on the numbers of households with sufficient

incomes and need for the type of shelter and care that could

reasonably be expected to be captured by the market during the

forecast period.

4\. Typical types of services and amenities offered, whether these

are mandatory or optional fee for services, and whether services

are provided by the facility (directly or by contract) or through

a third-party arrangement (tenant and care provider).

5\. A discussion of the types of projects and other housing

options comparable to and competitive with the subject project;

both in terms of the type of ownership/financing and tenant

admission, e.g., private or public financed, extent of private pay

or public pay (medicare, medicaid and SSI patients).

6\. Condition of inventory with consideration of the proportion

that may be substandard or obsolete in terms of physical plant,

services, amenities, etc. This is particularly important when the

proposal involves skilled nursing care or project with a

combination of levels of care revolving around a \"medical model\".

6\. Characteristics of the current tenants in terms of socio-economic

and psycho-physiological conditions e.g., age, income,

sex, and limitations in activities of daily living, cognitive

impairments, disabilities, etc.

7\. Absorption experience of recently completed projects on a

units per month basis, discussing the level and extent of any pre-sale

or pre-marketing efforts.

8\. Extent of turnover and size of waiting lists in existing

projects.

9\. Current occupancy in comparable and competitive projects and

in the market area for the type(s) of product, including a discussion of

reasons for any vacancy or absorption problems in the market.

10\. Current total monthly charges for comparable and competitive
product,

with consideration of typical amenities and service package.

11\. Extent of concessions or similar incentives in existing projects or

projects in initial rent-up.

4\. A descriptive analysis of the demand estimate which addresses the

primary determinants including:

a\. Current and projected population of the target group(s) by age

cohort and the proportion of the market each group comprises.

b\. Current and projected estimates of the primary group to be served

by social, physiological, psychological characteristics, i.e., the

extent and type of limitations in activities of daily living or

cognitive impairment/disability.

c\. Current income level/band of income of prospective households

comprising demand, including cost/rent to income ratio(s) assumed in

the analysis.

ATTACHMENT 2

ATTACHMENT 2 CONTAINS HISTORICAL CLAIM EXPERIENCE - SECTION 232 - FISCAL
YEARS

1960 THROUGH 1995.