On September 5, 2019, HUD published Rental Assistance Demonstration- Final Implementation, Revision 4. This most recent version of the RAD Notice includes a newly added Section IV under the Notice’s Second Component. Section IV provides instructions to owners of Section 202 PRAC properties seeking to convert their Project Rental Assistance Contracts (PRACs) to either Section 8 Project Based Rental Assistance (PBRA) or Project Based Vouchers (PBVs), enabling owners to access private financing to preserve their properties.
- Release from 202/PRAC Obligations and New Elderly Housing Use Agreement: At the time of conversion, converting projects will be released from any outstanding obligations under the Capital Advance Agreement, the Capital Advance Mortgage Note, the Capital Advance Program Regulatory Agreement, the Capital Advance Program Use Agreement, and related or collateral documents associated with the PRAC and the foregoing documents and will enter into an Elderly Housing Use Agreement, which will be recorded as a restrictive covenant in first position on the covered project. The Elderly Housing Use Agreement will have a term of 20 years plus the balance of the term left on the Capital Advance Program Use Agreement at the time of conversion.
- A RAD for PRAC conversion can be pursued either alone or in conjunction with a refinance, based on each property’s needs. Each converting project is required to have a Capital Needs Assessment (CNA) completed to demonstrate that both short-term and long-term capital needs can be addressed through the replacement reserve account and/or through financing, as appropriate.
- If the CNA identifies repairs as critical, immediate or required within the first two years following conversion and the total of such repairs exceeds an average of $5,000 per unit, if HUD determines that immediate repairs are necessary based on REAC scores of 59 or less or referrals to the Department Enforcement Center (DEC) related to physical conditions, or if there is outstanding noncompliance with accessibility requirements identified by the CNA, the Project Owner must demonstrate as a condition of closing that it has secured financing sources to address such needs and must agree to address such needs within a prescribed period following the conversion as part of the Work.
- Establishment of Operating Reserve: As a part of the RAD for PRAC conversion, project owners are required to establish and maintain an Operating Reserve. This account is separate and distinct from the property’s Replacement Reserve account. The Operating Reserve must be used for the benefit of the project, including to provide working capital, to cover unexpected operating or capital expenses, to bridge periods of financial instability, to cover budget deficiencies arising from time to time as a result of delinquent receivables or other contingencies, or for other similar purposes determined by the project owner as beneficial to preserve the financial or physical stability of the Project. HUD will monitor the balance in the operating reserve when reviewing the project owner’s annual financial statements. An operating reserve required by a third-party source of financing (e.g., a lender or a LIHTC-motivated equity investor) that meets or exceeds $250 per unit satisfies the requirements of this Operating Reserve.
- Rent Bundling: When project owners in mutual agreement submit RAD for PRAC Conversion Plans for two or more projects, they may “bundle” their rents to result in level initial contract rent amounts across multiple properties. This is permissible as long as the project owners do not exceed the aggregate subsidy for all of the projects the project owners have submitted for conversion under RAD and the rents do not exceed PBV or PBRA allowable levels.
- Supportive Services - Each project will be required to demonstrate that the needs of residents are adequately met through a full or part time Service Coordinator. Project owners must further describe how the identified supportive services will be provided or otherwise made available on a consistent, long-term basis to support residents. These commitments will be incorporated into terms of the Elderly Housing Use Agreement and/or HAP Contract at closing. Under RAD for PRAC, the allowable amount for the provision of services has been increased from $15 per unit, per month to $27 per unit, per month.
- Off-Cycle Budget Adjustments Prior to RAD for PRAC Conversion: HUD may, in limited circumstances, modify the PRAC rents separate from the annual contract renewal process and prior to conversion, given the project budget, and subject to the availability of funding in the Housing for the Elderly account. For example, if a CNA was not available at the time of the most recent PRAC renewal, a rent adjustment to appropriately update reserve for replacement deposits could be requested in the middle of the contract year, ahead of conversion.
- Owner must be in good standing with HUD and certify that it will comply with all fair housing and civil rights requirements including but not limited to those at 24 CFR § 5.105(a).
- A property is eligible for conversion if the property is currently receiving assistance through a PRAC that is in its renewal term.
- For PBRA conversions, unless project plans address all physical deficiencies identified in the most recent REAC Inspection report, the project must have a REAC score of 60 or above.
- Through the term of the converting project’s Capital Advance Use Agreement, HUD will require ownership or control of the covered project by a non-profit entity.
PBV vs. PBRA
- Initial Contract Rents: To be set at the lower of: (a) the approved PRAC rents determined by HUD; (b) the reasonable rent (as defined under 24 CFR § 983.303); (c) an amount determined by the PHA, not to exceed 110% of the applicable FMR (or applicable exception payment standard, or rent cap approved in an MTW Plan), minus any utility allowance; or (d) the rent requested by the project owner.
- Annual Rent Adjustments: The project owner may request an increase in rent at the anniversary date of the HAP contract by written notice to the PHA in accordance with 24 CFR §983.301(b)(2). Under the PBV regulations, a project owner may request an adjusted rent level as long as it is below the PBV rent caps. In addition, as a condition of converting to PBV under RAD, the project owner agrees to never request a rent increase in excess of the OCAF-adjusted rent.
- The Notice cautions that pursuing a PBV contract will result in added complexity and may cause unforeseen delays.
- Initial Contract Rents: The initial contract rents will be the lower of (a) the approved PRAC rents or (b) 120% of the applicable FMR (consistent with the requirements of Section 8(c)(1) of the Act), less any utility allowances. A project owner may request that HUD use the SAFMR in place of the FMR in the computation of the rent cap.
- Annual Rent Adjustments: Contract rents will be adjusted by an OCAF at each anniversary of the HAP Contract, subject to (a) the availability of appropriations for each year of the initial term of the HAP Contract, and (b) the maximum rent. The maximum rent is the higher of 120% of FMR or SAFMR (less utility allowances) or the market rents, as demonstrated by an RCS procured and paid for by the Project Owner. Where an RCS has been used to justify an OCAF adjusted rent that exceeds 120% of the FMR, the RCS will remain valid for five years, the maximum rent will not apply for the next four annual rent adjustments, and rents will be adjusted only by the OCAF.
Conversion and Processing Requirements
- Completion of Capital Needs Assessment (CNA)
- Initial Submission of Interest to HUD- This electronic form submission must occur prior to submitting a Conversion Plan. Based on the information provided, HUD will assign a Transaction Manager and, for PBV conversions, identify a PHA willing to administer the new PBV contract.
- Budget Adjustments- Owner will submit a budget adjustment request to HUD. This request should address changes to the property’s R4R deposit in line with the results of the completed CNA, as well as changes to the Supportive Services line to reflect adequate Service Coordinator funding and/or increase the amount for provision of services from $15 to $27 per unit, per month.
- Identification of Financing- Based on the CNA and the owner’s goals for the property, the owner will determine if they will pursue a RAD for PRAC conversion with or without financing. If financing is required/desired, the owner will need to determine which financing vehicle(s) to utilize.
- Resident Notification and Consultation- The Owner must notify residents in writing of its intent to participate in RAD and hold at least two (2) meetings with residents.
- Selection of PHA (PBV conversions only)
- Submit FHA Firm Commitment Application (for projects pursuing FHA insured financing only) or comparable application for other forms of debt or equity.
- Submit RAD for PRAC Conversion Plan: The Conversion Plan is a 20-exhibit application submitted through the RAD Resource Desk. Included in the exhibits, among other items, is a narrative summary of the project, existing PRAC contract, proof of resident notification, CNA, scope of work, environmental review, financing description, development budget, and a description of supportive services and design details including how both will facilitate prolonged independent living.
- RAD Approval: Upon review and approval of the Conversion Plan submission, HUD will issue an approval letter to the project owner. The approval letter will allow 90 calendar days (from the date the approval letter is issued to the project owner) in which to close the RAD conversion transaction, unless extended by HUD.
- Closing: Upon conversion, units whose assistance has been converted pursuant to RAD will be removed from the 202 PRAC program. Converting projects will be released from any outstanding obligations under the Capital Advance Agreement, the Capital Advance Mortgage Note, the Capital Advance Program Regulatory Agreement, the Capital Advance Program Use Agreement, and related or collateral documents associated with the PRAC and the foregoing documents. The 202 PRAC will be terminated, the Section 8 HAP Contract will be executed and the Project Owner will enter into an Elderly Housing Use Agreement, which will be recorded as a restrictive covenant in first position on the Covered Project. The effective date identified in the HAP Contract is the date the Project will cease to operate as a 202 PRAC Project and begins to operate under Section 8 requirements.
Source: Rental Assistance Demonstration – Final Implementation, Revision 4. U.S. Department of Housing and Urban Development. Published September 5, 2019.