Rental Assistance Demonstration

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Rental Assistance Demonstration RAD Program
LHC

• www.renocavanaugh.com

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• Presenter and Contact Information

Efrem Levyelevy_at_renocavanaugh.com www.renocavanau
gh.com
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RAD Overview

• Goal Preserve vulnerable federally-assisted
  projects by converting existing subsidies to
  long-term Section 8 to leverage debt/equity
• Background PHA conversions through demo/dispo
  with replacement vouchers
• Authority (1) FY 2012 HUD Appropriations Act
  (2) Notice PIH 2012-32 (July 26, 2012)
• 1st Component Public Housing Mod Rehab
• Competitive Round Closed (12,000 Units)
• Second Round Open
• 60,000 Unit Cap (HUD intends 98 of these to be
  public housing conversions)
• 2nd Component Mod Rehab, Rent Supp RAP
• Non-Competitive
• No Unit Cap

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Policy Rationale

• Public Housing
• 25 Billion Backlog
• 25,000/Unit, but wide range from new
  Mixed-Finance to Demo/Replacement
• Declining Appropriations
• Losing gt10,000 Units/Year
• Deregulation
• Mod Rehab, Rent Supp RAP
• No Good Renewal Options
• Section 8 -More Stable Platform
• Funding Regs
• Allows Leveraging (Debt LIHTC)

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RAD 1st Component

• May Convert to Project-Based Rental Assistance
  (PBRA) or Project-Based Vouchers (PBV)
• Contract Term
• PBRA 20 Years
• PBV 15 or 20 Years
• Mandatory Renewals
• Use Agreement
• 1st Priority
• Term Concurrent with HAP
• Automatic Renewal

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RAD 1st Component

• Ownership/Control by Public or Nonprofit Entity
• Ownership. Public or non-profit entity has legal
  title to the real property.
• Control. Public or non-profit entity has the
  direct or indirect legal authority (via contract,
  partnership share or agreement of an equity
  partnership, voting rights, or otherwise) to
  direct the financial, legal, beneficial or other
  interests of the owner of a project or has 51
  percent or more interest of the general partner
  share in a limited partnership.
• Exceptions
• LIHTC Control via Ground Lease, ROFR, PHA
  Subordinate Debt
• Foreclosure, Bankruptcy, Termination or Transfer
  of Assistance
• Priority for capable public entity
• If none, then capable private entity

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RAD 1st Component

• Current Funding Cap per Statute
• Contract Rents
• PBRA Lower of Current Funding or 120 FMR (But
  exception rents available in some cases)
• PBV Lower of Current Funding, 110 of FMR, or
  Reasonable Rent
• Rent Adjustments Annual Operating Cost
  Adjustment Factor (OCAF)
• PBV Waivers on Inventory Cap, Income Mixing (up
  to 50) and Competitive Selection

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RAD 2nd Component

• Mod Rehab, Rent Supp and RAP Projects
• Conversion of TPVs to PBVs
• Standard PBV rules for Contract Term, Rents, Rent
  Adjustments, and Renewals
• Waivers of PBV rules for Inventory Cap, Income
  Mixing (up to 50), and Competitive Selection.
  Other exceptions still available for seniors and
  support services
• Two types of conversions prospective (through
  9/30/13) and retroactive (back to 10/1/2006)

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RAD 2nd Component (cont)
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Other RAD Requirements for PHAs

• PHA Plan. RAD conversion requires a significant
  amendment to PHA Plan, along with any necessary
  changes to ACOP and Section 8 Administrative
  Plan.
• Use of Public Housing Funds. PHA may use current
  public housing funds, including CFP and operating
  reserves, for predevelopment costs and in RAD
  Financing Plan
• Effect on Public Housing Funding and Unit Cap.
  For a project converted under RAD, PHA will not
  be eligible for Asset Repositioning Fee (ARF) or
  Replacement Housing Factor (RHF). Also, PHAs
  Faircloth cap will be reduced by number of
  units converted RAD.
• Davis-Bacon. Requirements apply to all initial
  repairs identified in Financing Plan to the
  extent they would qualify as construction or
  rehabilitation, regardless of whether the project
  qualifies as existing housing under standard
  PBV rules.
• Demo/Dispo. Section 18 does not apply to RAD
  conversions unless the number of assisted units
  would be reduced by more than a de minimis
  amount. (Essentially, a 1-for-1 replacement
  requirement). HUD will approve demolition or
  disposition as part of RAD review/approval not
  subject to HUD SAC review/approval.

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RAD - Procurement

• May spend up to 100,000 in public housing funds
  for predevelopment costs without HUD approval
• However, must follow public housing procurement
  rules (small purchase procedures)
• If predevelopments costs exceed 100,000, then
  either i) obtain good-cause waiver or ii) use
  non-public housing funds
• Post-conversion, a PHA can only contribute public
  housing funds pursuant to HUD approved financing
  plan
• HUD-approved post-conversion funding does not
  trigger 24 CFR part 85
• Still need to comply with state/local procurement
  requirements

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Resident Rights

• Consultation. Resident consultation before RAD
  application and following award is important and
  required
• Resident Displacement/Right to Return. No
  permanent involuntary displacement may result
  from RAD conversion, including as a result of
  changes in bedroom distribution, reduction of
  units, or reconfiguration. Any resident
  temporarily relocated has right to return
• URA. Any temporary relocation must comply with
  Uniform Relocation Assistance and Real Property
  Acquisition Policies Act of 1970
• Waiting List. If project-specific waiting list
  exists, it must be used after conversion.
  Otherwise, one must be established consistent
  with public housing rules which provide access
  from PHAs community-wide list. Thereafter,
  waiting list managed under Section 8 rules
• No Rescreening. Current public housing residents
  are not subject to rescreening, income
  eligibility, or income targeting provisions
• PBV Lease Renewal. Unlike standard PBV program, a
  residents lease must be renewed unless cause
  exists
• Tenant Rent Increases. If tenants rent would
  increase more than greater of 10 or 25, then
  increase phased in over 3-5 years
• Procedural Rights. RAD statute requires certain
  rights of public housing residents be retained
  for converted projects, including requirements
  for adequate written notice of lease termination
  and access to grievance process.

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Choice Mobility

• HUD Goal Provide residents of all covered
  projects with portable tenant-based vouchers
  after initial occupancy
• PBV standard rules voucher after 1 year
• PBRA more flexibility 2 years turnover
  project caps
• Vouchers from turnover or another PHA

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HUD Process

• Commitment to enter a Housing Assistance Payment
  (CHAP) effectively this is the HUD RAD award
  letter
• CHAP sets forth units to be converted, size, and
  contract rents as well as Milestones that must
  be met after issuance of the CHAP
• For LIHTC deals, milestones begin at award of
  LIHTC funding

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RAD Milestones

• Within 30 days a) lender engagement or
  commitment and b) statement of capacity of
  development team
• Within 60 days a) significant amendment to
  Annual/Five Year plan and b) election to convert
  to PBV or PBRA
• Within 90 days a certification from PHA that all
  lender due diligence including a physical
  condition assessment and environmental reports
  has been completed and the PCA must be submitted
  to HUD
• Within 150 days a certification from PHA that
  all applications for firm commitments have been
  submitted (note for FHA-insured deals, this is
  the Firm Commitment Application)
• Within 180 days the Financing Plan must be
  submitted to HUD
• Within 320 days submit a firm commitments for
  all financing
• Within 360 days financial closing
• Within 12-18 months after issuance of HAP,
  completion of work.

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RAD Financing Plan

• Key elements of Financing Plan are
• Identify type of conversion (PBV or PBRA)
• Physical Condition Assessment
• Scope of Work for rehab or new construction
• Completed Environmental Review
• Relocation Plan
• Development Budget
• Development Team (all principals must have
  Previous Participation Certification in APPS
  i.e. Form 2530 clearances)
• Proposed Financing (including consent of first
  mortgage lender to Use Agreement)
• Other items Operating Pro Forma, Market Study,
  and Construction Management

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RAD Conversion Commitment

• The RCC will include key conditions to conversion
  such as
• Effective Date of HAP (to be held in escrow)
• Scope of Work
• Timeline for Work
• Key terms of financing, replacement reserve
  funding, and other special conditions

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RAD Form Documents

• Financing Plan
• Conversion Commitment
• Use Agreement (and Release of DOT)
• PBV HAP and Rider
• PBRA HAP
• RAD Closing Package and Checklist under
  development

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PHA Development Methods
Public Housing Public Housing RAD RAD
Conventional Mixed Finance Conventional Section 8/LIHTC
PHA owns project subject to HUD Declaration of Trust Private owner (LIHTC entity) owns project (PHA may have GP interest) subject to HUD Declaration of Restrictive Covenants PHA owns project directly (or through an affiliated single purpose entity), subject to RAD Use Agreement Private owner (LIHTC entity) owns project (PHA may have GP interest), subject to RAD Use Agreement
All public housing funds (possibly other soft sources) Multiple sources of funding, including LIHTC Mortgage loan proceeds (possibly other sources) Multiple sources of funding, including LIHTC
All public housing units Often mixed-income (pub. housing, LIHTC, market) All RAD Section 8 units May be mixed income (Sec. 8, tax credit, market) subject to RAD one-for-one replacement requirements
Property manager typically PHA (but can be private) Property manager typically private (but may be PHA) Property manager probably PHA (but can be private) Property manager probably private (but may be PHA)
PHA procures General Contractor directly Field Office approves proposal Owner entity contracts with General Contractor and other parties HUD Headquarters review PHA procures General Contractor directly HUD RAD review Owner entity contracts with General Contractor and other parties HUD RAD review
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• RAD Initial Awards Characteristics

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30-Day Competitive Initial AwardsPublic Housing
Mod Rehab Awards
Initial Public Housing Awards
Total Public Housing Applications 113
Total Awarded Public Housing Projects 110
Total Awarded PHAs 68
Total Awarded Public Housing Units 11,910
Initial Mod-Rehab Awards
Total Mod Rehab Applications 3
Total Awarded Mod Rehab Projects 2
Total Awarded Mod Rehab Owners 2
Total Awarded Mod Rehab Units 343
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Public Housing Initial Awards Key
Characteristics

• PHA Size
• 32 Small (lt250 Units in Inventory)
• 52 Medium (251-1,249 Units in Inventory)
• 16 Large (1,250 Units in Inventory)

Based on 68 awarded PHAs
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Public Housing Initial Awards Key
Characteristics

• Capital Needs
• 22 New Construction
• 78 Rehab
• 24 proposed Greater than 50K in Rehab
• 23 proposed 30K 50K in Rehab
• 21 proposed 10K 30K in Rehab
• 32 proposed Less than 10K in Rehab

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Public Housing Initial Awards Key
Characteristics

• Type of Section 8 Subsidy (by Project)
• 54 Project Based Vouchers (PBV)
• 46 Project Based Rental Assistance (PBRA)

• Type of Section 8 Subsidy (by Unit)
• 44 Project Based Vouchers (PBV)
• 56 Project Based Rental Assistance (PBRA)

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Public Housing Initial Awards Key
Characteristics

• 977 Million in Total Financing Sources
• 74 million PHA Supplied
• 257 million 1st Mortgage
• 409 million in 4 9 LIHTC
• 237 million in Secondary Financing

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Public Housing Initial Awards Key
Characteristics

• PHA Objectives
• Modernize aging family elderly properties
• Sub rehab of deteriorated properties
• Thin densities/mix-incomes via PBVs transfer
  authority
• Demolish/replace severely distressed/obsolete
  properties
• Portfolio streamlining

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Public Housing Initial Awards Key
Characteristics

• 9,470 Jobs from 650 million in leverage
• 4,895 Direct (construction, etc.)
• 1,565 Indirect (materials, etc.)
• 3,010 Induced (resultant consumer spending)

Does not include PHA supplied funds or
secondary financing sources
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Initial Conversion Awards 2nd Component
Rent Supp/RAP MR Awards to Date
Total Rent Supp RAP Conversion Requests Mod Rehab Conversion Requests Additional Requests in Pipeline 31 2 (3,073 units) 24
Total Awards Closed or Approved 28
Total Letters of Interest Received To Date 140
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• Current-Future
• PHA Choices

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Tale of the CurvesSection 9
Public Housing capital repair needs are in excess
of 25.6 Billion
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Tale of the CurvesSection 9
Graph does not include 4billion in 2009 to Cap
Fund through ARRA
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Some Reasonable Workarounds

• Over the Years.
• Mixed Finance H6 married to ACC Op Fund levels
  RO, DoT
• Section 8 PBVs married to Mixed Finance, H6, now
  CNI
• Section 18 Demo/Dispo for TPVs but 75 million
  doesnt go far
• Section 22 Conversions not heavily used
• CFFP at 31 collateralization static inventory
  controls
• OFFP not heavily used
• EPCs, but what about the rest of the place?
• MtW good for 38 PHAs, but what about the other
  3060?
• ARRA re-investment bump

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State of the PH Inventory

• Not so Good
• 1.15 million units across 3100 PHAs
• Plus 2.2 million HCVs, of which 69,000 PBVs
• By comparison 1.5 million project-based MF
  units (Sections 8, 202, 811, 236, etc)
• Capital repair needs in excess of 25.6B across
  portfolio (23,365/unit)
• Section 9 funding platform unreliable
  (pro-rations, appropriation cuts), limited access
  to debt/equity capital (Declaration of Trust)
• Losing 10,000-15,000 hard units/year

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Tale of the CurvesSection 8
PBRA OCAF 4 per year
Graph does not include 2billion in 2009 to PBRA
through ARRA
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Where Do PHAs Go from Here?

• Remain primarily Section 9-oriented continue
  to
• Hope for bending the Op Cap funding curves to
  full ( catch-up) funding levels at an enterprise
  level?
• Subject to pro-rations, limitations on ability to
  maintain agency-level reserves and...?
• Work around the DoT, with limited ability to
  access full value of assets or leverage cash
  flows?
• Have limited ability to establish Operating
  Replacement Reserves through Mixed-Financecomprom
  ised by ACC-related transition reserves?
• Tilt large Mixed Finance transactions to
  multi-phase 9 LIHTCs with small, QAP-by-QAP
  allocations?
• Seek new PH-only capital sources to work down the
  back log, stem the loss of 10,000-15,000 hard
  units/year?

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Where Do PHAs Go from Here?

• Or, advance themselves as community-based
  affordable housing providers...contd
• Tapping unused PA Volume Cap low FHA rates by
  making 4 LIHTCs more viable using higher RAD
  rents, short bond structures?
• Accessing CDBG, HOME funds more readily,
  including disaster-related CDBG boosts or special
  allocations?
• Accessing the full value of their assets,
  operating cash flows?
• Joining a stronger constituency to
• Continue to reasonably grow Section 8 needed
  annual OCAF budget-based adjustments as needed?
  
• Seek new PH-MF housing capital funding sources
  with a broad constituency?

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• Implications for the
• Rest of Us

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Implications for Future Processes Products

• What really need...
• Simplified means to help small-medium size, low
  resource-capacity PHAs access debt/equity
  resources mostly available to larger, higher
  resource-capacity PHAs
• Establishedor newintermediary/advisor to offer
  inventory assessments, deal packaging potential
  predevelopment-construction-bridge financing
  accommodating permanent debt take-out, including
  FHA products
• One-stop black box deal packages combining
  predevelopment, acquisition, construction,
  bridge, permanent debt LIHTC equity financing
• Move to standardized financing documents,
  processes
• MassDocsall soft lenders use unified application
  documents
• Enterprise Community Investment ask force

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Implications for Future Processes Products

• What really need...contd
• Reduce transactional complexities of 4 LIHTC/TE
  bond dealsmany now making bond-burning
  transitions to FHA (223(f), 221(d)(4), other
  facilitiesto perform like 9 LIHTC transactions
• Develop simplified financing product with fewer
  moving parts complexities bonds, tranches,
  etc assumed in upper tier structure
• Maximize elasticity/efficiencies of 4 LIHTC/TE
  bonds with needed gap financing as alternative
  multi-phase stack-up of 9 LIHTC deals
• MD-CDA MHRP-provided gap financing of up to
  500k/project30 new 4/ TE deals
• Facilitate more short bond structures
• De-coupling TE bonds from 4 LIHTCs a la FY13
  budget proposals

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• ...including HUD

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What RAD Can Do Now
Terms
15-20 year, renewable contracts with Use Agreement Predictable initial contract rent setting annual operating cost adjustments for inflation (OCAF) Established Replacement and Operating Reserves standard industry underwriting requirements RAD HAP funding begins at construction closing No limitations on use of project cash flow PHA Ownership/control similar to LIHTC practices Long term affordability ensured PHA
Financing
Availability of FHA 223(f) 221(d)(3) insurance, with priority processing Access to FHA LIHTC Pilot processing Ability to tap 9 4 LIHTCs, including short bond structures Ability to support transaction with public housing reserves and capital funds, including Replacement Housing Factor funds Access to HOME and CDBG for development budgets Available sales proceeds can support other affordable housing purposes
Process
Open applications through 9/15 Initial review/approvals in 30-45 days RAD Transaction Manager assigned upon initial approval Ability to review prospective deals with RAD Team prior to application Submit full AMP or part of an AMP No SAC approval Subsidy layering review via RAD Simplified procurement Freed from PH Annual Plans, PHAS, Community Service, PIC, etc.
Flexibility
Transfer assistance from unworkable units prior to conversion Market accommodations in meeting 1-for-1 preservation (e.g., convert efficiencies to 1 bdrms long-term vacant units) Combine RAD agency PBVs or SAC TPVsgtPBVs Flexibility to reduce densities, replace housing off-site, produce mixed income communities Allows PHA to undertake renovations immediately or after conversion, as warranted Demolition/New Construction allowed Soon Ability to bundle project applications for flexibility with initial contract rents
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What RAD May Do Soon

• Changes to Notice in the Works
• Remove per PHA Mixed Finance caps
• New accommodations for fast-moving, multi-phase
  projects
• For multiple project submissions, re-combine per
  property Capital Operating fund allocations
  across bundle of projects as warranted
• Acceptance of CNI Implementation Grant
  application as RAD application
• More.

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What RAD is Shaping at HUD

• Rethinking the PIH and MF Housing Program-Intake
  Chutes
• Upstream desk review of PHA objectives relative
  to initial contact Section 18 dispositions/RAD
  conversions, Mixed-Finance, CFFP, EPC, Mod Rehab,
  McKinney SROs, FHA insurance
• Priority processing of time-limited /or complex
  recapitalization transactionsCNI Implementation
  grantees, LIHTC Pilot, RAD-FHA Mortgagees
• Organization of a recap office integrating PIH
  MF Housing processes teams
• Review, restructuring of MF Housing PIH asset
  management processes

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Sample RAD Deals

• Deal prototypes
• Conversion/No Rehab (includes conversion-only HUD
  mixed-finance transactions)
• FHA/No LIHTC Basic Rehab/Conversion
• 4 LIHTC/Bond/FHA Substantial Rehab/Conversion
• 4 LIHTC/Bond/Private Financing Substantial
  Rehab/Conversion
• 9 LIHTC/FHA or Private Substantial
  Rehab/Conversion

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Parties

• Developer PHA or private developer
• Lender(s)
• LIHTC Investor (if applicable)
• State Housing Finance Agency
• Development team (e.g. general contractor,
  architect, attorneys, accountants, management
  agent, etc.)

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Developer Responsibilities Create and Implement
the Development Vision

• Develop overall program (design, unit mix, income
  mix)
• Assemble/Manage Development Team
• Architects/Engineers
• General Contractor
• Attorneys
• Accountants
• Manage Closeout, Cost Certification

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Developer Responsibilities Structure the
Financing

• Proforma/Underwrite Project
• Acquire Allocation of Tax Credits
• Select/Negotiate Tax Credit Investor
• Arrange First Mortgage
• Identify/Negotiate Gap Financing

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Development Models
Minimum PHA Involvement
Maximum PHA Involvement
Developer responsible for all developmentservices
including design, construction,and
construction/permanent financing
PHA negotiates scope of responsibility with
private developer (e.g. developer fee,
guarantees, role in owner entity, etc.)
PHA is responsible for everything
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RAD/LIHTC Development Structure Diagram
Housing Corporation General Partner for-profit
corporation (may be PHA related entity)
Investor Entity
.01 owner and General Partner
99.99 owner Limited Partner
Limited Partnership Owner Entity Limited
Partnership
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Public Housing Sources

• Traditional Public Housing Sources for PHA
  Development
• Capital Funds
• Replacement Housing Factor (RHF) Funds
• Central Office Cost Center (COCC) Funds
• Operating Reserves
• PHA Program Income
• Cash Flow to support permanent debt service

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Non-Public Housing Permanent Sources

• Low-Income Housing Tax Credits
• CDBG Funds
• HOME Funds
• AHP Loans
• FHA Debt
• Private Debt

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Operating Proformas

• Must project for term of initial PBV or PBRA
  contract
• Rents must be set in accordance with RAD rules
  (incorporate OCAF into projections)
• Vacancy and bad debt set at not less than greater
  of i) average of past three years or ii) 3 for
  vacancy and 2 for bad debt (or stricter lender
  requirements)
• RE taxes set at most recent actual tax bill
  amount
• Note Continuation of PILOT requires legal
  opinion
• Other operating expenses set at no less than 85
  of most recent three year average (unless HUD
  waives based on reasonable justification)
• Replacement Reserve set based on capital needs
  (need to maintain minimum balance of 5 of total
  aggregate capital needs)

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RAD Permanent Debt Terms

• HUD requirements
• Fixed interest rate
• Fixed term
• Fully amortizing over no more than 40 years
• Maturity date or balloon no earlier than 18 years
  (except loans in PBV deals may be coterminous
  with PBV HAP)
• DSC cannot be less than 1.11 or lender
  requirements

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RAD Developer and Other Fees

• For non-LIHTC, developer fee up to 10 of
  development budget (less dev fee, reserves, and
  related party acq costs)
• Payout limits 33 at closing, 33 at 50 rehab
  completion and remainder at 100 rehab
  completion (and certification of HUDs inspector)
• For LIHTC deals, developer fee lesser of i) 15
  or ii) state LIHTC agency limits
• Other potential PHA fees
• Ground lease payments
• Seller financing (i.e. acquisition note)
• Financing fees
• Cash flow
• RAD fees earned by PHAs are unrestricted,
  non-federal funds

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RAD New Construction

• Demolition of existing public housing and new
  construction is permissible
• May transfer RAD assistance to a replacement site
• Must meet requirements in HUD PIH Notice 2012-32
  (e.g. energy efficiency, accessibility, site
  selection, etc.)
• Relocation Plan
• PCA not required

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LIHTC Guarantees to Investors

• Development Deficit
• Developer agrees to fund development shortfalls
• Typically unlimited
• Recapture
• Developer agrees to fund loss of credits
• May carve out for bad acts of Investor
• Operating Deficit
• Developer agrees to fund operating deficits
• Usually limited to a period of years (e.g. 3
  consecutive years of DSC or breakeven)
• May be capped at developer fee
• Limitations on PHAs
• Limit to unrestricted non-federal funds
• Limitations on Exempt Organizations - Urban
  Memo/Choi Memo
• Requires caps on certain guaranties provided by
  tax exempt entities

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RAD Subsidy Layering and Future Refinancing

• RAD does not require subsidy layering except
• Contribution of public housing operating funds in
  excess of average amount of operating reserves
  over past three years
• Contribution of Capital Funds or RHF funds
• Owners must obtain HUD approval for future
  refinancing

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RAD FHA-insured Financing

• With FHA-insured financing, HUD will follow HUD
  FHA processes
• Less clear HUD process if private lender is
  involved
• Need to coordinate timing of LIHTC and HUD RAD
  processes
• Loan to Value/ DSC FHA affordable transaction
  standards
• FHA financing subordinate to RAD Use Agreement

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RAD FHA Streamlined Processing and Closing

• Streamlined Processing
• Transaction Manager
• Kick off call in lieu of concept meeting
• Designated Underwriter (May be transaction
  manager)
• One stage applications
• Electronic submission followed by single
  original/hard copy
• Closing
• Waiver of survey
• Deferred submission of Plans and Specs
• Partnership Agreement w/application submission
• Request Title
• Release of ACC and Declaration of Trust

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RAD FHA Milestones

• RAD Acceptance and CHAP
•  
• Within 30 days Lender Engagement Letter or
  Commitment
• Statement of Development Team Capacity
•  
• Within 60 days Owner/PHA submits Amendment to
  5-year plan
• PHA decision on PBV vs. PBRA
•  
• Within 90 days PHA certifies due diligence/3rd
  party reports
•  
• Within 150 days PHA/3rd party reports
•  
• Within 150 days PHA certifies it has filed FHA
  Firm Commitment application
•  
• Within 180 days PHA submits financing plan to
  HUD, Relocation Plan
• Within 320 days (not later than 40 days before
  closing)
• FHA Firm Commitment and RAD Conversion
  Commitment

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Question and Answer Period