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March 21, 2019
Steps in a RAD Conversion Process
RAD Basic Training‐ Ten Step Conversion Process
• Strategic Planning• Financial Feasibility• Financing Mechanism• RAD Application(s)• Commitment to Enter into Housing
Assistance Payment Contract (“CHAP”)
1
• Financing Plan Submission• Management and Occupancy
Strategy• RAD Conversion Commitment
(“RCC”)• Closing• Post‐Closing
Strategic Planning
• Complete prior to moving ahead with a potential portfolio conversion
• Determine who you will be as an agency post‐conversion– Vision and Mission Statement
• Hire a consultant to assist the PHA with this process– Build Existing PHA Profile – On‐Site Information Gathering
• Personal interviews
2
Strategic Planning continued
– Anonymous On‐line interview• Residents, Executive Staff, Employees and Stakeholders
– Complete SOAR analysis with consultant• Strengths• Opportunities (weaknesses)• Aspirations• Results• Forward thinking model
– Develop the Strategic Plan– Build Strategic Planning Roadmap and Timeline – short term/long term.
3
Financial Feasibility – Physical Condition
4
• Primary goal of RAD– The long‐term physical preservation of the public housing portfolio
• Cap funds vs. Reserve for Replacement Account• Financial Feasibility of a RAD Transaction
– The determination as to whether or not a PHA currently has, or can secure the financial Resources needed to cover the next 20‐years of physical needs of the property.
Financial Feasibility – Physical Condition continued
5
• How to determine the 20‐year needs of a property:– RAD Capital Needs Assessment “CNA E‐Tool”
• PHAs must commission a CNA E‐Tool from a third‐party provider
• Critical needs: Health and safety issues that must be fixed prior to closing
• Short‐term needs: rehab scope• Long‐term needs: 20‐year physical needs of the project
Financial Feasibility – Physical Condition continued
• Reserve for Replacement (“R4R”) 20‐year Schedule– Rehab Scope: transaction dependent – IDRR – Initial Deposit to the R4R
» A one‐time lump sum deposited into the R4R at closing– ADRR – Annual Deposit to the R4R
» Yearly ongoing deposits made to the R4R that are part of the operating budget
• Balancing Act between the three to cover the needs• Come up with a per unit estimate of 20‐year needs ($5,000 ‐ $85,000)
6
Financial Feasibility – Two Financial Tests
• Net Operating Income (“NOI”)– Determine rental/property income– Prepare property level expense budget– Rent minus expenses equals NOI– NOI allows the PHA to borrow money from a lender if needed– Lenders and HUD have standards of NOI for a RAD transaction
• Sources and Uses (discuss later) – At the RAD closing, there must be enough funds available to pay for
all of the closing costs including the 20‐year physical needs.•
7
Financial Feasibility – Rental Income
• RAD Contract Rents– No additional or incremental funding associated with RAD– Based on 2018 public housing operating subsidy, capital grant and tenant
rent for each AMP– https://www.hud.gov/RAD/library/notices– RAD contract rents are adjusted upward each year by an Operating Cost
Adjustment Factor (“OCAF”)• Set state by state effective every February
8
Financial Feasibility – Rental Income continued
9
Both total$574
$114
$250
$210
Financial Feasibility – Rental Income continued
• Rent Boosts– Rent Bundling
• PHAs can adjust the subsidy (rents) across multiple projects• The “donor” projects must convert prior to the “recipient” project
• Bundle with regular PBV projects– Replacement Housing Factor Funds (“RHF”)
• PHAs scheduled to receive ongoing RHF funds that have been awarded but not disbursed may forgo that stream and increase the RAD rent by an offset amount 10
Financial Feasibility – Rental Income continued
– Tenant Paid Utility Savings• If proposed rehab will reduce the cost of utility payments by the residents, HUD will boost the CHAP rent by 75% of the projected monthly savings
– Moving‐To‐Work Agencies– RAD 75% and Section 18 ‐ 25%
11
Financial Feasibility – Operating Expenses
• In public housing, expense accounting is done on an AMP level • In Section 8, expense accounting is done on the project level• Public Housing per unit expense levels run much higher than in Section 8
– Central Office Operating Costs (“COCC”)– Scattered Site operations– Union wages or benefits– Insurance underwriting
• If the PHA needs to borrow money:– Expenses need to be reduced to convert to the Section 8 platform– In a healthy financially viable project, the expense levels are 65% of operating
income 12
Financial Feasibility‐ Existing PHA Debt
• Energy Performance Contract (“EPC”)• Capital Fund Financing Program (CFFP”)
13
Financial Feasibility‐ Net Operating Income
• Income minus expenses equals Net Operating Income (“NOI”)• Since RAD rents are set, the only way to increase NOI is to reduce
expenses
14
Financial Feasibility – Sources and Uses
• Sources in a RAD Transaction can include– PHA Reserves– First Mortgage Debt– Tax Credit Investor Equity– Grant money from various institutions– A soft debt note to be paid out of cash
flow
15
Financial Feasibility – Sources and Uses continued
• Uses can include– Payoff of existing PHA debt– Rehab expenses (hard costs)– Legal, third party reports,
bank fees and more• Predevelopment expenses – Capital Funds up to $100,000
– IDRR and Contingencies
• The Sources and Uses must match in order for the transaction to be viable
• The Uses will dictate what type of financing mechanism will be needed (debt or equity)
• The higher the per unit cost of capital repairs, the higher the Uses and the greater the need for additional Sources of Funds
16
Financing Mechanisms – Straight Conversion
• The only source of capital used to close a Straight Conversion is PHA reserves, cap funds, operating subsidy.
• The Project does not take on new debt, and therefore the closing costs are significantly less than on a debt closing
• Projects that are in excellent physical condition and don’t need rehab• Projects have likely been recently renovated, including major systems,
windows and roofs, leaving the capital needs over the next 20 years at a minimum
• On occasion they may be referred to as RAD‐O‐Matics
17
Financing Mechanisms ‐ Debt‐Only
• Project has more capital needs than in a Straight Conversion• The transaction requires loan proceeds in order to fund the 20‐year
needs of the Project • The Project has sufficient NOI to support new debt• A Debt‐ Only deal can be structured with an initial rehab scope or
without• Up to $25,000 per unit of repairs• Can be combined with other sources of funding like PHA reserves or
Grants18
Financing Mechanisms –4% Low‐Income Housing Tax Credit (“LIHTC”)
• More complicated than a Debt‐Only deal• Requires a change in ownership structure and investment partners• Project typically needs between $35,000 and $75,000 of rehab per unit • Transaction has higher closing costs, strict regulatory compliance
monitoring, and takes longer to reach the closing table – However, investor partner contributes a significant amount of
equity towards rehab
19
Financing Mechanisms ‐9% Low‐Income Housing Tax Credit (“LIHTC”)
• The most challenging financing structure to achieve • Project typically requires more than $75,000 of rehab per unit or new
construction• Higher pre‐development costs, and same restrictions as the 4% Transaction • The equity raised is significantly higher than a 4% Transaction • BUT, credits are awarded competitively and are difficult to win • Currently a Limitations in RAD Notice: “one bite at the apple” with exceptions
– This will likely change with REV 4• Have Plan B in place just in case the Project is not selected
20
RAD Applications
– Prior to submitting an application, a PHA must hold two resident meetings
– Resident Information Notice “RIN”– Now RAD application are submitted
on‐line – web‐based form– Basic information about the
transaction and PHA
21
• General requirements for a RAD Application– RAD Board Approval Form– PIC Development Profile– Resident Meeting Information– Deal does not have to be fully baked– Deals can change dramatically from
application submission to closing
RAD Applications continued
– PHA defines which properties they want to convert as a “Portfolio”– PHA submits RAD Applications for at least 50% of the projects in the Portfolio– PHA submits basic, supplemental info for the remainder of the project (but not
applications)– The Portfolio Award will reserve RAD authority for all of the units in the
Portfolio Application– The RAD applications for the remainder of the portfolio will be due one year
from receipt of the Portfolio Award22
• Portfolio Application and Award
RAD Applications continued
• Multiphase Application and Award– A PHA can submit a request to develop a Project in phases– A Project is defined as either one contiguous site or a single AMP– This allows for extended time frames to redevelop projects or AMPs– A PHA submits a RAD Application for the Phase 1 project and
proposed timing for the remainder of the Phases, but not applications
– There is no limit to the number of phases
23
RAD Applications continued
– The PHA submits the RAD Application for Phase 2 when it is ready to move forward
– The PHA must submit its last RAD Application in a Multiphase Award prior to September 30, 2024
• Many‐to‐One Application– Used to combine projects from different AMPs into one RAD
application– A RAD application is submitted for the “primary” AMP– Additional information is provided for the “supplemental” AMPs
24
RAD Applications continued
• Partial Conversion– A PHA may choose to convert only part of a project
or AMP
25
Commitment to Enter into a Housing Assistance Payment (“CHAP”)
• A PHA can expect to receive a CHAP approximately 60‐90 days after application submission
• CHAP will outline:– Rents and UAs– Any special conditions
• Each PHA is assigned a RAD Readiness Transaction Manager (“RTM”) who will set kickoff call– RTM monitors progress of PHA on submitting the Financing Plan– Liaison between HUD’s Office of Recap and PHA
26
Commitment to Enter into a Housing Assistance Payment (“CHAP”) continued
• PHA must submit a PIC Removal application for the units listed on the CHAP– Instructions come with a welcome email from the RAD Applications
• The person listed on the application as the primary contact will receive a user name and password to log onto the RAD Resource Desk
27
RAD Resource Desk
• Information portal for RAD• HUD Notices, Forms, Training, Data, and Q&A• Upload items for HUD review• Transaction Notes
28
Financing Plan – Submission
• For every project that receives a CHAP, the PHA must submit a Financing Plan that includes:
• Narrative Overview of the transaction
• PBV or PBRA final decision – Choice Mobility Waiver if needed
• Capital Needs Assessment – E tool and Scope of Work
• Environmental Review
• Fair Housing reviews and approvals if required– Change in unit configuration– Change in occupancy– Reduction in units– New construction
29
Financing Plan – Submission continued
• Development Budget and Development Team• Proposed Financing and Letters of Interest from all financial sources• Operating Pro Forma• Approval of the Significant Amendment to the PHA Plan• Approval to release any non‐dwelling unit property from Declaration of
Trust (“DOT”)• Affirmative Fair Housing Marketing Plan ‐ PBRA
30
Financing Plan – Submission continued
• Transfer of Assistance “(TOA”) Approval– TOA is a tool PHAs can use to move the housing assistance from one project to
another• Project is obsolete physically or financially• Residents would be better served in a different location• The existing site has higher and better use than low‐income housing• Flood Plain/environmental issues• Accessibility issues• Resident Comments• Title Report 31
Financing Plan – Due Dates
• Financing Plan due dates are established according to the type of financing structure
• Straight and Debt‐Only– FP due 180 days after CHAP award
• 4% LIHTC– 90 days following award of LIHTC– PHA expected to submit LIHTC application within 180 days of CHAP award
• 9% LIHTC– This will be changing
•32
Management and Occupancy Strategy
• Occupancy Related Items– Keep track of Existing RAD
Residents because they have special occupancy provisions
• No rescreening• Under‐occupied units• Rent phase in
– Wait List and Preferences
– Occupancy Standards– Affirmative Fair Housing
Marketing Plan– Lease requirements and
executing new leases• Tenant Selection Plan
33
Management and Occupancy Strategy continued
• Prepare for Funding– Move existing households from PIC to TRACS or VMS– Transmit Vouchers beginning the HAP effective date– Rehab Assistance Payments
34
RAD Conversion Commitment (“RCC”)
• Once a Financing Plan is submitted to HUD, it is reviewed by a Financing Transaction Manager (“FTM”)
• HUD will issue an RCC when the transaction is approved that sets out closing requirements– Number of units– Contract rents– Sources and uses– Special conditions
• Depending on the completeness of the Financing Plan, the RCC should be issued within 90 days of financing Plan submission 35
Closing
• After the RCC is issued, HUD will assign a Closing Attorney and Closing Coordinator
• The PHA’s Legal Counsel will draft closing documents• HUD expects the transaction to close within 90 days of RCC issuance• Preparations must be made for the Project to leave the public housing portfolio
and convert to Section 8
36
Post‐Closing Organizational Changes
• HAP Contract Related Items• OCAF adjustments• UA adjustments• Reserve for Replacement requirement• Need HUD approval of repairs not considered routine• Don’t have direct access to the funds• MOR• Financial reporting ‐ FASS
37
Questions and Answers
38
Thank you for your time!