- Ownership and Control. Except where permitted to facilitate the use of tax credits, during both the initial term and all renewal terms of the HAP Contract, HUD will require ownership or control of the Covered Project by a public or non-profit entity. Subject to HUD review to ensure compliance with statutory requirements, public or non-profit entity ownership or control requirements may be satisfied if a public or non-profit entity (or entities), directly or through a wholly owned affiliate:14 (1) holds a fee simple interest in the real property of the Covered Project; (2) is the lessor under a ground lease with the Project Owner; (3) 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 and legal interests of the Project Owner with respect to the RAD units; (4) owns 51 percent or more of the general partner interests in a limited partnership or 51 percent or more of the managing member interests in a limited liability company with all powers of a general partner or managing member, as applicable; (5) owns a lesser percentage of the general partner or managing member interests and holds certain control rights as approved by HUD; (6) owns 51 percent or more of all ownership interests in a limited partnership or limited liability company and holds certain control rights as approved by HUD; or (7) other ownership and control arrangements approved by HUD.
If HUD, in its sole discretion, determines necessary pursuant to foreclosure, bankruptcy, or termination and transfer of assistance for material violations of, or default under, the HAP Contract, HUD will require ownership or control of assisted units in the following priority: (1) a capable public entity; and (2) a capable non- public entity (e.g., a private entity), as determined by the Secretary.
HUD may allow ownership of the project to be transferred to a tax credit entity controlled by a for-profit entity to facilitate the use of tax credits for the Covered Project, but only if HUD determined that the PHA preserves its interest in the property.15 Preservation of the PHA’s sufficient interest in a project using tax credits could include, but not be limited to, the following, if properly structured subject to HUD’s review:
- PHA, or an affiliate under its sole control, is the general partner or managing member;
- PHA retains fee ownership and leases the real estate to the tax credit entity pursuant to a long-term ground lease;
- PHA retains control over the leasing of the Covered Project, such as exclusively maintaining and administering the waiting list for the Covered Project, including performing eligibility determinations complying with the PHA Plan;
- PHA enters into a Control Agreement by which the PHA retains consent rights over certain acts of the Project Owner (including, for example, disposition of the Covered Project, leasing, selecting the management agent, setting the operating budget and making withdrawals from the reserves) and retains certain rights over the Covered Project, such as administering the waiting list; or
- Other means that HUD finds acceptable, in its sole discretion
All current and future ownership entities are subject to the eligibility requirements of Section 1.3 of this Notice, including the civil rights threshold requirements. Furthermore, if a PHA or project is subject to a VCA, conciliation agreement, consent order or consent decree, or final judicial ruling or administrative ruling or decision (hereafter referred to as “VCA and related agreements”), it must ensure that the ownership agreement or other appropriate document makes the new owner subject to the remedial provisions contained in such documents to the extent required by Federal, state, and local law. It is the PHA’s obligation to disclose such VCA and related agreements, to the prospective owner. The extent of the new owner’s responsibilities, including whether the responsibilities are appropriately limited to the development, maintenance, or operation of the particular RAD project, must be appropriately documented. The PHA will follow any requirements for the modification of such VCA or related agreements. If HUD is a party to the VCA and related agreements, the RAD project will not close without HUD’s express approval of the transfer of obligations to the new owner.
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Community Spaces and Common Areas after RAD ConversionWe are converting almost all of our public housing through RAD. What happens to the community centers during this conversion, maintenance buildings, central office, etc.? All are non-Residential units but are there to support the residential units.
These are decisions that you will need to make. First, any non-dwelling structures that are on the same footprint of a converting project will become defederalized with the RAD conversion (assuming they do not receive any special federal funding). HUD expects that, in your situation, you will be operating a central office cost center after the RAD conversions. If you will be providing property management, the central office cost center would receive property management fees. The central office cost center would also receive cash flow distributions. From those revenues, the central office cost center would bear the expenses of providing property management services and of being the owner. If you follow this approach, most likely your central office would be retained by the PHA (not transferred to any RAD project) and used to house the central office cost center. Most likely, community centers and maintenance buildings that fall within the 'footprint' of a RAD project would be transferred to the RAD project along with the residential buildings. You would want to talk with your legal and financial advisors regarding a central community center (serving multiple properties) and regarding a central maintenance facility (serving multiple properties); the best option for these types of central facilities will vary depending on your specific circumstances.
Post Closing OperationsWhat accounting/book-keeping measures must be instituted if only a portion of our properties participate in RAD (some remain traditional PHA properties receiving funds from HUD while others convert)? As a part of that financial question, can staff be allocated to each program or will separate staff need to be used?
Be sure to talk to each of your funders. First mortgage lenders, in particular, are likely to have accounting / bookkeeping requirements. RAD itself has very few such requirements: a) All RAD conversions are subject to a requirement to provide access to records (including project financial statements and operating data), if HUD so requests. b) RAD PBRA conversions must submit annual financial statements electronically to HUD; see the REAC-FASS website at http://www.hud.gov/offices/reac/products/prodmf.cfm. c) RAD projects that utilize FHA-insured first mortgage financing will be subject to FHA's accounting and bookkeeping requirements; contact your FHA multifamily lender. Your question concerning whether it is acceptable to allocate staff costs to the RAD project should be posed to your first mortgage lender. If you will be using FHA-insured financing, HUD recommends that before adopting any allocations, you consult with accountants, property managers, or other experts who are very familiar with applicable FHA requirements.
Inclusion of Excess Personal Property in RAD ConversionIf a PHA owns excess personal property (i.e., vehicles) not currently considered part of any one AMP, may it include the property in its RAD conversion?
Yes, provided that either: (A) the PHA is converting its entire public housing portfolio; or (B) there is a sufficient nexus between the property and the proposed conversion (i.e., the vehicle will serve the project).
Use of PHA Staff to operate RAD-Converted PropertyIf a PHA converts a complex or AMP to RAD, is the property still maintained by the PHA’s maintenance staff and office staff?
Under RAD, the project owner (in this case, the PHA) would be free to implement any property management approach that is acceptable under the HAP and that is acceptable to lenders and other funders. If you convert to PBRA, and you self-manage, you will be required to complete a Management Agent Certification, HUD Form 9839.
Formation of New Entities for Project OwnershipOur PHA is pursuing a RAD conversion. In what situations must we create a new entity to own the converted project?
If the conversion will use PBVs, and the PHA itself will administer the PBVs, HUD rules that prohibit the PHA from signing a HAP with itself. Consequently, the PHA will either need to create a single-purpose entity to own the PBV units (typically, through a related non-profit) or the PHA may want to form a separate company to serve as the leasing agent or management agent for the PBV program. But other than this requirement in the PBV program that the PBV administrator and the PBV owner cannot be the same entity, which is actually a PBV program requirement and not a unique RAD requirement, there is no RAD requirement for creating of new ownership entities. That said, in almost all situations where the PHA is seeking private financing, the lender or investor will the property be owned by a “single asset entity” (usually a limited liability company or a limited partnership but sometimes a corporation, that owns nothing other than the property). FHA requires a single asset entity if FHA multifamily mortgage insurance is being utilized. Another common example is Low Income Housing Tax Credits, which necessarily entail sale of the property, and the tax credit investor is almost certain to require a single asset entity.
Separate Board of Directors for New Single Asset EntityOur PHA is pursuing a RAD conversion, and we will be transferring the property to a new single asset entity. Does the new entity have to have a separate board of directors?
There is no RAD requirement that a new single asset entity have a separate board of directors. Check with your financing partners (and your local legal counsel) to see if they have any requirements. Outside the public housing community, it is common for nonprofit housing owner-developers to have a single board of directors governing the nonprofit itself and all of its 100% owned single asset entities.
Advantages to Creating a Single Asset Entity When Converting to PBRAOur PHA is pursuing a RAD conversion. We are converting to PBRA, we are not using tax credits, and we do not plan on taking out a first mortgage loan. Accordingly, there is no requirement that we transfer the property to a single asset entity. However, the RAD Notice strongly encourages a single asset entity. Why is that?
The short answer is that single asset entities are the industry standard form of ownership for apartment properties, single asset entities facilitate accurate accounting and management reporting, and single asset entities make it easier for management and the board to understand trends in the portfolio.
Ownership/Control of RAD ProjectFor conversions where the PHA is transferring ownership to a non-profit or public entity, must the PHA also evidence “ownership or control” of the units?
No. The RAD statute requires that, unless to facilitate tax credits, converting properties either be owned by public or non-profit entities or controlled by the PHA. As such, transfer of ownership to these entities is permitted as-of-right. The PHA must still submit to the HUD closing attorney the organizational documents, but the review of these documents is only to ascertain that the entity has the legal authority to own the units
Treatment of Materials & Equipment with New Ownership EntityHow should materials and equipment inventory should be handled when the PHA is transferring project ownership as part of RAD conversion? Should the PHA should retain ownership of them or transfer to the LLC and lease them?
HUD expects that when a public housing project will be transferred as part of a RAD transaction, the transfer will include all assets and records associated with the project, so that the post-RAD ownership entity is in a position to operate the property going forward. Unless a compelling transaction-specific case can be made that some different approach is in the interest of the project and tenants, HUD expects that the PHA would not retain ownership of materials, equipment or any other assets associated with the project being transferred under RAD.
Impact of Conversion on PHA StaffAfter my RAD conversion, I am considering assigning property management responsibilities to the new third-party ownership entity. Are there any considerations for addressing the potential impact on PHA staff?
In the Conference Report on the 2015 Appropriations Act, Congress noted, “[This] agreement encourages housing authorities that participate in the rental assistance demonstration program to grant current workers whose employment positions are eliminated during conversion the right of first refusal for new employment openings for which they are qualified.”
Management Agent SelectionDoes RAD impose any requirements regarding the type of Management Agent utilized after RAD conversion? Can the PHA serve in this role or does RAD require that the properties be managed by a company in the private sector?
The RAD program does not have any requirement to hire a private management company; it is up to the Owner to select an appropriate organization to serve in that role. Many RAD projects have utilized the PHA as the management agent. If the RAD One transaction utilizes PBVs, the proposed management agent must meet all applicable requirements of the PBV HAP. If the RAD One transaction utilizes PBRA, the proposed management agent must be approved by HUD-Multifamily under applicable requirements of HUD Handbook 4381.5. If your RAD One transaction includes non-RAD funding, the proposed management agent must be acceptable to all non-RAD funders. For example, if your RAD One transaction includes Low Income Housing Tax Credits, it is likely that the tax credit syndicator / investor will have approval requirements for the proposed management agent.
PBV HAP Contract AdministrationHow can a PHA own a property covered under a PBV contract that it will administer?
Under the PBV program, the Contract Administrator and the Owner listed on the contract cannot be the same legal entity (i.e., the PHA cannot execute a contract with itself). To avoid this situation, the PHA may either: 1) Transfer the ownership of the project to a non-profit affiliate or instrumentality of the PHA (including to a “single-purpose entity” that owns nothing other than the property, which will typically be a requirement of a lender or investor) or 2) The PHA can form a related entity that is responsible for management and leasing and can serve as the owner for purposes of the Section 8 HAP contract; in this scenario, the HAP is then executed between the PHA (as the Contract Administrator) and the PHA’s related entity (as the Owner for HAP contract purposes). Note that in the second scenario, both the PHA and the entity serving as the Owner for HAP contract purposes will be required to sign the RAD Use Agreement. Additionally, where the PHA owns a property covered under the PBV contract, the PHA must utilize an independent entity, approved by HUD, to perform the HQS inspections and rent reasonableness (24 CFR 983.59). The independent entity that performs these tasks can be the unit of general local government for the PHA jurisdiction (unless the PHA it itself the unit of general local government or an agency of such government), or any other HUD-approved public or private independent entity.