- Financing Requirements and Considerations.
To the extent that a PHA lacks recent experience in accessing various forms of debt and/or equity capital, it may wish to consider engaging technical assistance offered by local or national development intermediaries, professional financing advisors, consultants, and/or development partners to augment its capacities. In reviewing the Financing Plan for final approval, HUD assesses the capacity of the development team.
- Debt Financing. Covered Projects are eligible for financing from private and public lending sources. All loans made that are secured by Covered Projects must be subordinate to a RAD Use Agreement. Unless otherwise approved by HUD, permanent debt financing on Covered Projects must:
- Be at a fixed rate of interest, for a fixed term, fully amortized over no more than 40 years;
- Not have a balloon payment until after the earlier to occur of a) expiration of the term of the HAP Contract or b) 17 years from the date of the permanent debt financing; and
- Not have a debt service coverage less than the higher of 1.11 or lender requirements.
The conditions in this paragraph are applicable to first mortgages and not applicable to soft, subordinate financing. All subordinate (or secondary) financing must be disclosed and then approved by the first-mortgage lender as well as HUD.18
RAD does not prohibit excess loan proceeds from being used to support other purposes consistent with the PHA’s mission, e.g., renovations to other properties, though other financing sources may impose such restrictions.
Sources of private and public debt financing to consider include any and all sources that are commonly used in other low-income, use-restricted developments. In addition to commercial lenders, applicants should consider facilities—both construction and permanent—offered by Community Development Financial Institutions (CDFIs), Government Sponsored Enterprises (GSEs), including the network of Federal Home Loan Banks, and applicable private foundation financing. Public financing that may be available includes state and locally provided facilities employing federal Community Development Block Grants (CDBG), the Housing Trust Fund (HTF), and state housing agency–provided financing. Many municipalities offer infrastructure and other forms of development financing through tax-increment financing (TIF) initiatives or other comparable public finance programs. In some cases, transit- oriented development programs may prove accessible. Additionally, HOME funds can be used to assist RAD projects after any public housing restrictions have been removed from the property. The participating jurisdiction providing the HOME funds is responsible for ensuring that both the RAD project and the specific use of the HOME funds meet the requirements of 24 CFR Part 92. Eligible costs that may be paid with HOME funds are established at 24 CFR § 92.206. However, PHAs and participating jurisdictions should be aware of the statutory prohibition on using HOME funds for public housing and must ensure that HOME funds are not expended for any cost that may be associated with public housing.19
- Public Housing Capital and Operating Program Funds. PHAs are permitted under the Demonstration to use available public housing funding, including Operating Reserves (as defined in PIH Notice 2011-55) and unobligated Capital Funds, as a source of capital to support conversion (see Section 1.5 of this Notice for more details). With written HUD approval, PHAs may also use Section 18 disposition proceeds upon confirmation that the proposed use meets the Section 18 requirements. MTW agencies may use their block grant as an additional source of capital to support conversion. These funds, either as a source of debt or equity (grant), must be identified in the Financing Plan. Financing proceeds in excess of transaction costs will not be allowed when public housing Capital, Operating, or MTW block grant funds are contributed to the project conversion. However, in the case of a PHA that is converting all of its ACC units, there is no restriction on the amount of public housing funds that may be contributed to the Covered Project(s) at Closing; the PHA may convey all program funds to the Covered Project(s).
- Existing PHA Indebtedness and Contractual Obligations. A PHA must disclose in its application and address in its Financing Plan the amount of project debt associated with the Converting Project prior to conversion, including energy performance contracts, Capital Fund Financing (CFFP), Operating Fund Financing, Public Housing Mortgage Program, program debt (including ongoing repayment agreements related to audits or compliance reviews), or other debt. The PHA may refinance existing debt obligations as part of conversion. Conversion alone does not relieve the PHA of these or other obligations. RAD does not constitute a waiver of any CFFP requirements and is not treated as a CFFP ACC Amendment, including any provisions restricting the removal of units from the inventory that would affect the debt service coverage ratio through diminished Capital Funding or requiring defeasance or prepayment, arising from program regulations or contractual relationship with the secured party. PHAs should be aware that any new first mortgage lender, to the extent permissible within the existing financing documents, may require that existing indebtedness be paid off or subordinated in connection with the refinancing and conversion of the Covered Project.
- Federal Housing Administration (FHA) Insured Financing. FHA mortgage insurance provides high leverage and long-term, fully amortizing fixed-rate financing at competitive interest rates. For more information, PHAs should contact an approved FHA Multifamily Lender: http://portal.hud.gov/hudportal/documents/huddoc?id=aprvlend.pdf.
Some properties converting under RAD may qualify for financing under section 223(f) of the National Housing Act, which provides mortgage insurance for a permanent financing and may include project repairs. If the scope of required property repairs indicates “substantial rehabilitation,” as defined by the FHA Multifamily Mortgage Insurance Program in the Multifamily Accelerated Processing (MAP) Guide, the appropriate FHA-insured financing may instead be section 221(d)(4) of the National Housing Act. FHA has released separate guidance detailing how HUD has modified the policy and processing of FHA insurance programs to accommodate RAD conversions and minimize duplicative requirements (See Notice H 2012-20, “Underwriting Instructions for Projects Converting Assistance as part of the Rental Assistance Demonstration (RAD) Program”).
Risk sharing programs offered by state housing financing agencies, Freddie Mac, and/or Fannie Mae should be considered. Secondary financing, tax credits, and other public sources can be used in conjunction with FHA-insured financing and risk- sharing programs. All of the above financing options may be used to credit-enhance tax-exempt bonds.
- Low-Income Housing Tax Credits (LIHTCs). Applicants are encouraged to use LIHTCs and, if eligible, historic preservation tax credits, to support recapitalization. Covered Projects may be eligible for HUD’s Multifamily Low Income Housing Tax Credit Pilot Program (Notice H 2012-1), which offers a distinct application platform and a separate processing track under the FHA Section 223(f) program described above.20 RAD does not prohibit excess equity proceeds from being used to support other Affordable Housing Purposes.
Many states face excessive demand on an annual basis for allocations of 9% LIHTCs and routinely do not fully allocate their supply of 4% as-of-right credits coupled with tax-exempt bond financing allowed under their annual Private Activity Bond Volume Cap. Applicants are encouraged to assess local demand and supply considerations if proposing to utilize LIHTCs and to discuss their interest in applying for LIHTCs as soon as possible with state or local tax credit issuing agencies to obtain guidance on how to compete for awards most effectively.
While the applicant must indicate in its application if it intends to use tax credits, there is no requirement to have secured these credits prior to submitting an application. Note that, for 9% credits, there are special application requirements that are described in Section 1.9 of this Notice.
- Grant Funding. In addition to equity from investors in LIHTC transactions, there are numerous additional sources of equity or grant funding, including local, state, and federal grants.21 State and local CDBG and HOME funds may be utilized as “gap” grants for affordable housing developments.22 Numerous state and local governments offer other grant funds that can be used as an equity contribution in financing plans, particularly if a scope of work includes “green retrofitting” or weatherization components. In many localities, utility companies and appliance manufacturers offer grants related to energy-saving retrofit components (http://www.dsireusa.org/ is one source of information on incentives and policies state by state). Several private foundations and corporate social investment funds offer grant funding in support of affordable housing development. Finally, the Federal Home Loan Bank’s “Affordable Housing Program” has been a significant source of grants for gap funding in affordable housing projects, including many public housing mixed-finance and HOPE VI developments, and may prove a generally-available source of gap funding for properties converting under RAD. Note that in LIHTC transactions, these grants are often restructured as debt.
- Acquisition Proceeds. For transactions involving the transfer of ownership to a new entity, a PHA is permitted to receive cash acquisition proceeds in excess of any seller take-back financing. Such proceeds must be used for Affordable Housing Purposes. The PHA must escrow the acquisition proceeds received at closing or during any construction period associated with the RAD conversion (i.e., prior to cost certification) in a bank account covered by a General Depository Agreement (HUD 51999)23 until they are disbursed for Affordable Housing Purposes.
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