- 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.
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PHA has a CFFP and/or EPC loanIf my PHA has a CFFP* and/or EPC loan, what do I need to do before submitting my application and what are the implications for applying for RAD if I have a CFFP loan? *Under the Capital Fund Financing Program (CFFP), a PHA may borrow private capital to make improvements and pledge, subject to the availability of appropriations, a portion of its future yaer annual Capital Funds to make debt service payments for either a bond or conventional bank loan transaction. An EPC loan is generally undertaken under 24 CFR 990.185, wherein energy conservation measures are financed by a third-party based on projected energy savings.
At the time of application, you will need to indicate how you plan to address the current obligation, e.g., by repaying the loan. Once you receive an award, you will then have six months to provide a Financing Plan that explains precisely how these obligations will be handled. As a result, you should have early conversations with your CFFP or EPC lender. Generally, debt service payments under the CFFP program cannot exceed 33% of a PHA’s annual Capital Fund award. For this reason, the CFFP program restricts PHAs from reducing their public housing inventory by more than 5% (any reduction in inventory affects a PHA’s Capital Fund formula grant). Under RAD, a PHA will be removing units from inventory and, therefore, eliminating the Capital Funds generated by that project’s formula characteristics. There are a number of possible solutions: • If the PHA has added public housing units to its stock since the CFFP loan closing, the PHA may be able to remove the RAD conversion units without exceeding the 5% rule. • It may be possible for the PHA to pay off the CFFP loan with proceeds from the RAD financing. • For larger PHAs, a change of 5% in the number of ACC units (and related capital funds) may be sufficient to cover the RAD project being considered for conversion. For example, if a PHA has 3,000 ACC units, it could convert a 150-unit project without tripping the 5% restriction. • Finally, PHAs may request an exemption from HUD to exceed either the 5% restriction or the limitation that not more than 33% of Capital Funds be used for debt service. PHAs will need to work directly with their lenders and investors to seek approval and make any needed changes in their respective documents. [See Final RAD Notice Reference: Paragraph 1.4, B-3]
Capital Fund Financing ProgramMy PHA is considering RAD but we have an existing Capital Fund Financing Program (CFFP) obligation. Can my PHA still apply for RAD?
Yes, any PHA with a CFFP obligation may apply for RAD. Some CFFP debt will not require any change in the structure or form of the CFFP obligation. In other instances, HUD will work with the PHA, following CHAP issuance, to attempt to develop a payment strategy to discharge either all or a portion of CFPP debt with eligible sources of pre-payment funds, which could include Capital Funds, Operating Funds, or funds proceeds from the RAD transaction, if structured appropriately. (Upated: 10/19/2012)
CFFP Loan, Partial ConversionSince my PHA has a CFFP loan, I see that the PHA cannot reduce its PHA inventory by more than 5%, or in this PHA’s case, 60 units. At their priority development there are 12 buildings with a total of 97 units. The PHA would like to convert 51 units within only 6 of the buildings. The remaining 46 units would not be converted or otherwise improved at this time. Is this allowed?
You may be able to carry out a full conversion of the 97 units; please see existing Q&A WEB10082012_2_09100 regarding the 5% limitation. Assuming the CFFP lender agrees, no reasonable proposal to HUD to exempt the PHA from the 5% limitation (and the corresponding 33% of annual Capital Fund grant for debt service) will be denied. It is definitely permissible to convert a part of an AMP (provided there is a sound business reason and that it makes sense from financing/management perspective). Indicate in Section 2 of the Application the mix of units you intend to convert. Explain in Section 3 (Reduction in Unit Count) that you are proposing a partial conversion (see row 69). You may also need to make corrections to the three year historical information in Section 8 (Operating Expenses) because you are converting only part of the AMP.
Energy Performance Contract after RAD ClosingCan a RAD project take on an Energy Performance Contract (EPC) after RAD closing?
After the RAD closing, the project will no longer be public housing, and the public housing EPC program would not be applicable. However, many PHAs are finding that RAD allows them, essentially, to create their own EPC. By locking in the current funding under RAD, the PHA will benefit from utility savings.
Existing EPC Incentives Under New RAD Section 8 RentAre the existing EPC incentives maintained under the new RAD Section 8 rent?
Yes. The RAD rents for each public housing project incorporate any existing Frozen Rolling Base (FRB), Add-On Subisdy (AOS), and Rate Reduction Incentive associated with an existing EPC that were in place at the time of each project’s “RAD rent base year” – FY 2012 for properties awarded under the original 60,000 unit cap or FY 2014 for properties awarded as a result of the increase of the cap to 185,000 units. The methodology for calculating RAD rents includes the Operating Subsidy Utility Expense Level (UEL) and Energy Add-on so that projects retain the value of existing EPC incentives when they convert through RAD. The PHA should consider the impact of essentially switching from the AOS to the Frozen Rolling Base incentive as part of its RAD conversion. However, due to incomplete administrative data, HUD did not incorporate the Resident Paid Utility Incentive (RPU) into the rent levels posted in the RAD Application and Tool. As a result, for projects proposed for RAD conversion with an existing EPC using the RPU, HUD will allow an amendment to the posted RAD rent to add the Per Unit Month (PUM) EPC Resident Paid Utility Incentive. If the PHA has the RPU incentive, they should notify their Transaction Manager who will work with PIH to determine an accurate incentive amount. For additional details on the specific line items utilized in calculating the posted RAD rents, see Attachment 1C in PIH Notice 2012-32 REV 2.
Satisfying EPC ObligationsIf I have a RAD award and my project is covered under an existing EPC, what are the options available in terms of satisfying that EPC obligation?
Essentially, there are two basic options: Option A: Pay off the EPC debt, either with proceeds from the RAD conversion (say, mortgage proceeds or tax credit equity) or through other eligible uses, e.g., existing Operating or Capital Fund accounts. Some EPC contracts require EPC lender approval to pay off (or pay down) any debt. Or Option B: Assume the debt and continue to make the EPC debt payments post-conversion with projects or other proceeds. If the converting project will assume the debt, the lender will have to agree to subordinate all interests to the RAD Use Agreement. Further, if, in addition to assuming the EPC debt, you plan on taking on new debt as part of the RAD conversion, the EPC lender and the non-EPC lender will need to negotiate over which position each will take, which often pushes the PHA towards paying off the EPC debt. Sometimes, a PHA will assume the obligation of the existing EPC debt but with non-program and non-project funds, depending on the existing EPC contractual provisions, Either of these options must be reflected in a PHA’s Financing Plan submission. Where the debt will be paid down or paid off, the debt would be included in the development budget. Where the debt will be assumed, HUD will underwrite the transaction to ensure there is adequate cash flow to continue debt service payments. HUD recommends a PHA consult with legal and financial advisors, the EPC lender and the new first mortgage lender (if applicable), to determine which approach will work best for the PHA and the project. HUD also encourages PHAs to work with ESCos ealy in the process to develop options and reach out to the OFO Energy Center at OFOEnergyCenter@hud.gov for comment.
Submission Requirements Under EPCWhat do I need to submit to HUD if I am converting a property covered under an EPC?
Where the PHA will pay-off or assume all of the EPC debt as part of the conversion, the PHA will need to notify of its intent. The PHA will draft a letter from the Executive Director to the Field Office (copying the Transaction Manager and Energy Center) formally requesting HUD to end the EPC incentives at the time of conversion and describing the PHA plan to address EPC debt (i.e. Pay off or assume). After conversion, the Field Office will finanlize the cessation of EPC incentives through a letter to the PHA Executive Director. However, where a portion of the EPC will remain following the conversion, HUD will need to amend the EPC approval letter. To do this, the PHA must propose the amount to be paid off or assumed so as to ensure that the project’s conversion does not increase the risk of default on the remaining EPC loan and, for partial AMP conversions, determine the appropriate updates to the project’s Operating Subsidy forms (HUD 52722, 52723). This information will be submitted to the Energy Center, in the format requested, along with the supporting documents delineated in Appendix A, the PHA is highly encouraged to engage their ESCo in developing this submission. The Energy Center will review the submission and if it determines the PHA proposal to be accurate, the Energy Center will create a draft approval letter, which PHAs must submit with their Financing Plan. After closing, HUD will finalize the amendment to the EPC approval letter.
Paying a Project's EPC DebtWhere I am converting a project that is part of a larger EPC, and I am proposing to pay down the project’s EPC debt, how will I determine the proportionate amount that must be addressed as part of the conversion?
HUD’s primary interest is to ensure that a converting property addresses, at a minimum, the debt proportionate with the amount of savings the project had been projected to achieve in the original EPC approval so that once the property is converted and removed from the public housing inventory, the PHA’s remaining EPC remains financially viable. Accordingly, the information that PHAs must submit must clearly show the savings that were projected for the converting project, especially when it is not adequately presented in the EPC approval letter. HUD reserves the right to require additional debt treatment in the event that the remaining EPC would fail to meet the EPC statutory and regulatory standards. Note that the EPC lender is likely to also evaluate the debt that should be addressed as part of the conversion and may require a different amount than HUD calculates. Notwithstanding the requirements of an EPC lender, PHAs must comply with HUD’s requirements.
ESCo GuaranteeHow is the ESCo guarantee impacted when an EPC is amended as a result of a conversion of a portion of units covered under an EPC?
Any changes to an ESCo guarantee are to be determined between the PHA and their ESCo. ESCO guarantees are not required for an EPC so if changes to it do occur they do not affect the conversion process. HUD is committed to providing PHAs with ongoing assistance in understanding RAD’s intersection with green and energy efficiency objectives. As additional best practices, success stories, and helpful decision frameworks are identified, HUD will maintain those resources on the RAD web site for interested parties. HUD also strongly encourages PHAs and partners to discuss creative ideas around maximizing energy and water efficient improvements through RAD. We look forward to continued dialogue with partners around this and other related issues. For questions or additional feedback, please contact us at the RAD mailbox at RAD@hud.gov, or at the EPC Policy mailbox at PHI_EPC_Policy@hud.gov.