- 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.
Excess ProceedsMy RAD transaction is expected to generate $500,000 of excess proceeds, which the PHA understands must be used to further its mission. Will any additional HUD requirements apply to these funds (e.g., would these funds have to be considered PHA Reserve funds)?
No additional HUD requirements would apply. As indicated, those funds must be used for purposes consistent with the PHA's mission, state-enabling legislation, and any local laws, if applicable.
Lender and Investor Concerns Regarding ForeclosureHow is RAD responding to concerns of commercial lenders and Low-Income Housing Tax Credit (LIHTC) investors with regard to foreclosure matters and continued rental assistance?
HUD has posted a standard rider to the public housing conversion RAD HAP contracts to address the concerns LIHTC investors have raised while also protecting the long term affordability of properties converting under RAD, and adhering to the statutory provisions for ownership and control. These riders document and set forth conditions for: providing notice to LIHTC investors; accepting the investor’s offer to cure on behalf of a defaulted owner; providing HUD consent to the transfer of the investor’s interest in the ownership; and pre-approving replacement of the general partner or managing member with the special limited partner or similar entity for a limited period of time in order to facilitate an acceptable permanent replacement. To access these riders, go to www.radresource.net > Contracts & Closing Documents. HUD is also in the process of drafting standard riders to the Use Agreement and the public housing conversion RAD HAP contracts to clarify that HUD will not assert an interest to prohibit a lender from foreclosing when there is cause, but that the Use Agreement -- which establishes affordability requirements -- survives foreclosure by its terms and that continuation of HAP assistance requires HUD consent. It is also HUD’s goal through these riders to provide for a limited continuation of HAP assistance if the lender or its designee comes into ownership of the project in accordance with its rights under the loan documents. When final, these riders will be published on the RAD website. Until these riders are finalized, HUD has developed several provisions that can be provided by the RAD Closing Coordinator to assist with transactions currently moving into the closing phase. These provisions address lender concerns while also protecting the long term affordability of properties converting under RAD, and adhering to the statutory provisions for ownership and control. Importantly, neither rider changes RAD statutory and RAD notice requirements around ownership and control. The RAD Use agreement and RAD HAP contract – two means through which long-term affordability for residents are secured – survive foreclosure, leaving current and future residents protected.
How to Underwrite Income from Cell Tower LeaseHow would cell tower income be underwritten?
As with all other sources of income, HUD would review past history and supporting documentation (e.g., long-term cell tower lease), with reasonable allowance for loss/bad debt.
Use of Section 8 Administrative Fee Reserves as a Funding SourceOur authority has section 8 admin fee reserves as well as section 8 project based new construction reserves. Can these be used toward a RAD transaction? Does it make a difference whether the RAD transaction is PBV or PBRA?
Yes. Admin fee reserves from the Section 8 program can be used to support a RAD transaction.
Use of HOME Funds for Predevelopment CostsAre HOME funds eligible for pre-development costs during RAD conversion? For example, can HOME funds be used to pay for the CNA and repairs identified in the CNA? If so, can the funds be drawn down before closing?
What you propose would not be a problem from a RAD standpoint. You should check with the HOME Participating Jurisdiction to see if what you propose would be acceptable from a HOME program standpoint. For example, the HOME PJ would need to satisfy itself that the particular costs to be funded are HOME-eligible. Similarly, the HOME PJ would decide when HOME funds could be advanced.
Operating Pro Forma Feasibility Requirements for DSCRAttachment 1A of the RAD Notice Rev-2 states, "For leveraged transactions, the debt-coverage ratio should not be less than 1.11 over a ten year period using 2% growth in revenue and 3% growth in expenses." Will HUD be only reviewing the DCR for the first 10 years of a property? In effect, do we only need to submit a proforma with cash flow projections for 10 years? If so, is that also true for non-leveraged transactions?
HUD requires an operating pro forma that projects out for the length of the initial HAP contract (either 15 or 20 years) for both leveraged and non-leveraged projects. Although we require that you submit a pro-forma for the 15 or 20 year period of the HAP, for purposes of analyzing the project’s feasibility, if it’s a self-financed deal (no debt), then we only test the first 10 years for DSCR and net cash flow. Please note that in the revised Notice, HUD has instructions that say that the Financing Plan will be reviewed and evaluated as a whole.
Tenant Repayment AgreementsHow should PHAs handle existing tenant repayment agreements through a RAD conversion? Must the repayment agreement stay with the PHA?
As with any other assets/liabilities of a property, the PHA and new owner must determine whether to transfer the repayment agreement with the property at conversion or to retain the repayment agreement on the PHA's books. Once determined, it is the responsibility of the PHA or Owner to maintain the terms of the repayment agreement and tenant rights.
Opportunity Zone Rent Increase EligibilityWhat converting projects are eligible for the Opportunity Zone Rent Increase provision?
A project, as defined in the RAD Notice and which equates to a single transaction or phase, must meet all of the following criteria. The project must: • Be converting to a Project Based Rental Assistance (PBRA) HAP contract • Be located in a designated Opportunity Zone • Propose in its Financing Plan to be newly constructed or substantially rehabilitated • Require the rent increase in order to achieve viability of the transaction
Rent Increase Needed for ViabilityFor the Opportunity Zone Rent Increase, how will HUD determine whether the rent increase is necessary for the viability for the transaction?
PHAs may request an increase to the rents in their CHAPs by up to $100 per unit per month. Generally, HUD will take the following approach to determining whether the rent increase is necessary for the viability of the transaction: 1) HUD will consider the total revenue for the property, including any other adjustments to the CHAP rents and other revenue producing units at the site. 2) The transaction must utilize “hard,” must-pay financing. 3) Using a trending rate of 2% for revenue and 3% for expenses, the transaction must maintain a debt coverage ratio that is no greater than 1.35 over a 20-year pro forma. 4) The transaction cannot include any cash-out financing or net acquisition proceeds to the PHA. 5) For transactions with more than 50 units, the transaction must defer or exclude at least 25% of the maximum allowable developer fee that would be allowable under the state Qualified Allocation Plan. As a result of these tests, HUD may deny the rent increase or reduce the amount from what was requested. HUD reserves the right to consider other unique factors in the analysis of individual transactions.
Definition of Substantial RehabFor Opportunity Zone rent increases, how is “substantial rehabilitation” defined and what can be included in the RAD Scope of Work to measure against Housing Construction Costs?
Substantial rehabilitation is defined here as a proposed RAD scope of work where the hard construction costs, including general requirements, overhead and profit, and payment and performance bonds, exceed of 60% of the “Housing Construction Costs.” Housing Construction Costs for a given market area can be found at https://www.hud.gov/sites/dfiles/PIH/documents/TDC.pdf We have also developed a tool available on the RAD Resource Desk that PHAs can use to check to quickly assess whether proposed rehab level meet this threshold. For purposes of calculating aggregate construction costs vis-à-vis the 60% threshold, HUD will consider the combined construction costs of the overall development. The development may include a mixture of new construction and rehabilitation and may include other units besides the converting units (e.g., through the development of new units).
Opportunity Zone LocationsHow can I determine if a project is in a designated Opportunity Zone?
Each state has designated certain census tracts as Opportunity Zones. HUD has created a national map where users can identify whether a project is situated within a designated Opportunity Zone. See opportunityzones.hud.gov/
Requesting an Opportunity Zone Rent IncreaseWhen may a PHA make the request for an Opportunity Zone Rent Increase and how will HUD document approval?
PHAs may make an initial request for the rent increase up to six months prior to submission of the Financing Plan and will make the final request when the Financing Plan is submitted. The PHA’s initial request should affirm that the project: Is converting to a Project Based Rental Assistance (PBRA) HAP contract Is located in a designated Opportunity Zone Will be newly constructed or substantially rehabilitated Requires the rent increase in order to achieve viability of the transaction Unless the project is not converting to PBRA or if it is located outside of an Opportunity Zone, HUD will issue a CHAP addendum that will provide a modified rent schedule conditioned on 1) submission of a complete and acceptable Financing Plan within six months of the date of the addendum and 2) HUD’s verification at the time of Financing Plan that the transaction meets the criteria for the rent increase as described above. The PHA can use the CHAP addendum to support lender and investor underwriting. Please note that while HUD anticipates being able to fund most requests, HUD may need to delay issuance of a CHAP addendum if there is inadequate funding available to support the request. If a complete and acceptable Financing Plan is not submitted within six months of the date of the CHAP addendum is issued, the CHAP addendum will expire. HUD will not provide extensions. The PHA may submit a subsequent request for the rent increase, which HUD will consider subject to the availability of funding. In reviewing the submitted Financing Plan, HUD will confirm that the project meets all criteria to be eligible for the increase and confirm that the amount of the rent increase is necessary for the viability of the transaction. Once confirmed, HUD will amend the CHAP to fully incorporate the increased rents.