“Portfolio Review” is a term that long term care facility owners and HUD-insured lenders are hearing more frequently. Although portfolio review is not a new concept at HUD, the current economic situation is making the procedure more prominent. With greater frequency, multi-facility borrowers are under pressure to refinance loans. Because the CMBS market cannot provide the volume of loans necessary, many borrowers increasingly are turning to HUDinsured loans to refinance their facilities. Other borrowers are simply interested in taking advantage of historically low interest rates. As a result, HUD has found itself in somewhat unfamiliar territory – handling a significant number of loans secured by multiple facilities owned by a single borrower or an affiliated group of borrowers.

Portfolio transactions involve an additional level of review by HUD. Details regarding this additional level of review were first provided in Notice H 01- 03 (HUD), issued on April 10, 2001, titled “Review of Health Care Facility Portfolios and Changes to the Section 232 Programs.” Notice H 01-03 (“Notice”) applies to:

proprietary and nonprofit owners and operators of health care facilities and their affiliates where there is: (1) an application for mortgage insurance involving new construction or substantial rehabilitation; (2) an application for mortgage insurance for purchasing or refinancing an existing facility (232/223(f )); (3) a transfer of physical assets (TPA); or (4) a change in the lessee or management agent of a facility.

The Notice describes three portfolio sizes: large, mid-size, and small. Large portfolios involve an owner or operator seeking Section 232 Program mortgage insurance financing (1) for 50 or more projects within any 18 month period; or (2) whose portfolio has a combined estimated mortgage amount in excess of $250 million. Large portfolio owners or operators are also required to purchase a “standardized credit analysis product” from one of the three Wall Street rating agencies. This credit analysis has three parts: (1) a corporate credit analysis; (2) site visits (to each project); and (3) a performance review of the applicant’s other properties and lines of business. The Notice provides a detailed list of the information that HUD expects to be divulged by each part of the credit analysis.

The three-part credit analysis, the supporting documentation given to the rating agency, and Form HUD 2530 on the owner, the operator, and their affiliates must all be submitted to HUD. The owners or operators must also provide a certification to HUD showing information about all of their HUD pre-applications and applications and detailing their involvement in the various portfolio projects. Large portfolio owners or operators are allowed to refinance the entire portfolio at one time or in stages, but whichever route is chosen, HUD must provide a favorable “mortgage credit review” before applica-tions for individual projects are submitted to the appropriate Hub Office.

Midsize portfolios differ primarily in that they contain from 11 to 49 projects within any 18-month period and have a combined estimated mortgage amount of $75,000,100 up to $250 million. Owners or operators of midsize portfolios are not required to obtain the performance review demanded of large portfolio owners, but they, too, must obtain a corporate credit analysis and site visits (performed as part of the regular loan insurance commitment processing). Their certification and Form HUD 2530 requirements are the same.

Small portfolios involve up to 10 projects within any 18-month period with a combined estimated mortgage amount of up to $75 million. Thus, portfolio review by HUD is required only when there are more than 10 properties in the portfolio and the loan amount of the portfolio exceeds $75 million.