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HUD’s Rental Assistance Demonstration

Program – A Role for HFAs

National Association of Local Housing Finance Agencies

April 30, 2015

Amy M. McClain, Esq.

Ballard Spahr LLP

[email protected]

2

The Need for RAD

• Address a growing backlog of public housing capital need

- Over $25 billion in deferred capital improvements

• Preserve affordable housing

- 10,000 – 15,000 units of affordable housing are lost annually

• Allow access to capital that is not otherwise available to public housing

• Uses a budget neutral approach

• Public housing units are removed from the public housing regime and converted to Section 8 units (PBV or PBRA)

3

RAD – 2012 Appropriations Act

• Public Law 112-55, adopted November 18, 2011

• Authorized through the budget process

• Addressed key concerns of Congress regarding:

- Budget neutrality

- Resident protections

- Measuring the impact of the conversions

• Component 1 authorized the conversion of up to 60,000 public housing or Moderate Rehab units to a Section 8 model (as well as Component 2 allowing for the conversion of Rent Supplement, Rental Assistance Payment and Mod Rehab contracts at the point of contract termination or expiration)

4

RAD Snapshot

• First RAD projects awarded in January 2013 to 68 housing Authorities

• 185,000 units are now authorized for conversion to Section 8 under RAD (an increase above the initial 60,000). There is now approximately 7,000 units available under the 185,000 cap.

• By comparison – HOPE VI involved the redevelopment of about 108,000 units stretching over more than a decade and a half.

CASE STUDIES: CURRENT MULTIFAMILY BOND STRUCTURES

Dan Dill, Managing Director

Stifel, Nicolaus & Company, Incorporated

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The applicability of existing 4% Tax Credit Bond Structures to RAD Financing

• RAD Conversions will likely have financing shortfalls

• The capital stack for most RAD deals will include hard debt, equity, and soft funds

• One of the most likely sources of equity is 4% Tax Credits which require Bonds

• When property operating budgets are established the financing will resemble a typical 4% tax credit deal

• The history and variety of 4% Bond structures is extensive

• RAD deal capital stacks will be similar to the 4% deals shown

CASE STUDY 1: MULTIPLE FUNDING SOURCES

Cypress Springs Apartments – 4% Tax Credits , FHA 221(d)(4) insured mortgage, multiple “soft” funds

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How do you cover shortfalls in financing Affordable Housing?

Problem

• Given rent restrictions there is not enough cash flow to provide the amount of proceeds that can be generated in traditional debt & equity structures used in market rate developments.

• 9% tax credits provide the largest equity investment for low income properties, but there are a limited amount of 9% credits available.

Solution

• 4% Low Income Housing Tax Credits facilitate a financing mechanism to provide a substantial amount of the equity needed to develop affordable housing.

• 4% Tax Credits combined with an FHA 221(d)(4) insured mortgage loan provide most but not all of the leverage and equity necessary to develop new affordable housing.

• Multiple sources of “soft” money are often needed to cover the gaps.

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: FHA

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Achieving the Lowest Interest Rate

• To receive the 4% Tax Credits, at least 50% of the Aggregate Basis of a project must be financed with Tax Exempt Bonds.

• In today’s credit market, long term conventional FHA loans charge a lower interest rate then a Tax Exempt Bond secured by a GNMA security.

• The short term collateralized bonds:

• significantly reduce negative arbitrage

• achieve the lowest cost of borrowing

• meet the requirements to receive the 4% credits.

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: FHA

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Cypress Springs Apartments


• Key Project Information:

• Location: Baton Rouge, LA approximately 15 minutes north of downtown Baton Rouge

• Units: 144

• Rent Restrictions: 100% of the units at 60% AMI

• Approximate Construction Period: 15 months

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: FHA

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• Key Participants:

• Developer: Community Development, Inc.

• Tax Credit Syndicator: WNC Associates, Inc.

• Bond Underwriter: Stifel – Merchant Capital Division

• FHA Lender: Berkadia Commercial Mortgage LLC

• Issuer: Louisiana Housing Corporation

• Bond Counsel: Foley & Judell, L.L.P.

• Borrower’s Counsel: Coats Rose

• Underwriters Counsel: Sidley Austin LLP


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: FHA

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Bond Structure

• Key Terms of the Bond Issue:

• Closing Date: February 25th, 2015

• Maturity Date: September 1, 2016

• Optional Prepayment: 12 months at Par

• Rating: S&P A-1+ eligible

• Interest Rate: 70bps

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: FHA

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Sources & Uses

SOURCES Total

Tax Exempt Bonds (FHA Loan) $ 8,533,200

Tax Exempt Bonds (Home Funds) (Louisiana Housing) 716,800

Home Funds (Louisiana Housing) 858,680

Foundation for Louisiana Grant 250,000

Baton Rouge Redevelopment Agency Loan 1,000,000

AHP Grant (Federal Home Loan Bank of Chicago) 500,000

4% LIHTC Equity (WNC & Associates) 6,184,692

Deferred Developer Fee 830,564

Total $ 19,123,750

USES

Land Cost & Site Work $ 586,940

Direct Construction Costs 12,692,000

Capitalized Interest (FHA Loan) 265,000

FHA Mortgage Costs 393,999

Bond and LIHTC Financing Costs 457,105

Other Financing Costs (Subordinate Debt) 385,021

Architectural Fees 545,000

Building Permit and Impact Fees 215,308

General Transaction Costs 698,924

HUD Required Reserves 724,639

Development Fee 1,910,000

Total $ 19,123,750

Total Tax Exmpet Bonds: 9,250,000$

CASE STUDY 2: ACQUISITION REHAB

WHPC Southern Bond Pool – 4% Tax Credits, 9 Properties, Fannie Mae Guaranteed Loan

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ITS How do you acquire and rehabilitate small properties?

Problem

• Properties that have a smaller number of units or have relatively low values can be difficult to finance using 4% LIHTC and tax exempt bonds because of the high fixed costs.

• Tax Credit syndicators usually do not have interest unless the potential equity investment is off a sufficient size.

Solution

• In a pooled structure legal fees and other fixed costs are typically lower than if the properties were financed individually.

• By creating a portfolio of smaller properties, the size of the equity investment is sufficient to attract investor interest.

• The loan is structured with one mortgage (as opposed to 9 separate mortgages). This structured allowed for one tax credit partnership and significantly decreased reporting requirements and costs.

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ITS WHPC Southern Bond Pool


• Location: Multiple locations throughout southern Wisconsin

• Number of Properties: 9

• Units: 537

• Rent Subsidy: Approximately 78% of the units are covered by Section 8

• Rent Restrictions: Varies by property

• Construction Period: Approximately 9 months

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ITS WHPC Southern Bond Pool


• Developer: Wisconsin Housing Preservation Corp

• Tax Credit Syndicator: Boston Capital


• Fannie Mae Lender: Centerline Capital

• Issuer: Public Finance Authority

• Bond Counsel: Jones Walker LLP

• Underwriters Counsel: Sidley Austin LLP

• Issuer Counsel: Eichner Norris & Neumann PLLC

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ITS Bond Structure

• Key Terms of the Bond Issue:

• Closing Date: April 30th, 2014

• Maturity Date: April 1, 2017

• Initial Mandatory Tender Date: April 1, 2015

• Optional Prepayment: 6 months at Par

• Rating: S&P A-1+

• Interest Rate: 35bps

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ITS Key Loan Terms

• Key Terms of the Fannie Mae Loan:

• Term: 192 months (16 years)

• Amortization: 35 year

• Interest Rate: 5.19%

• Maximum LTV: 90%

• Minimum DSC: 1.15x

• The loan is structured with one mortgage (as opposed to 9 separate mortgages). This structured allowed for one tax credit partnership and significantly decreased reporting requirements and costs.

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ITS Sources & Uses

SOURCES Total

Tax Exempt Bonds (FNMA Loan) 20,400,000.00$

Tax Exempt Bonds (Equity Bridge Loan) 460,000.00

LIHTC Equity 11,075,282.00

Related Party Loan + Accrued Interest WHPC Debt 11,821,607.00

Funds from Project Operations 1,208,314.00

Existing RR and Insurance Escrow 163,163.64

Equity Bridge Loan 5,539,780.00

Deferred Developer Fee -

Accrued Interest -

Total 50,668,146.64$

USES

Acquisition Costs 27,888,115.34$

Rehab / New Construction Costs 9,511,104.00

Professional Fees / 3rd Party Reports 538,819.38

Capitalized R.E. Purchase & Construction Loan Costs 2,419,824.50

Financing Fees 353,900.00

Tax Credit Fees 91,370.00

Operating Deficit Reserve and Investor Asset Management Fee Reserve 983,000.00

Insurance Escrow 121,755.00

Deposit for RE Taxes 165,000.00

Net RE Tax 10,122.61

Pay off Equity Bridge Loan 5,999,780.00

Developer Fee 2,577,382.00

Accrued Interest -

Surplus / (Deficit) 7,973.81

Total 50,668,146.64$

Total Par Amount of Fannie Mae Loan: 20,400,000.00$

Total amount of the Equity Bridge Loan: 5,999,780.00$

Total Tax Exempt Bond Amount: 20,860,000.00$

CASE STUDY 3: EL PASO RAD CONVERSION

Housing Authority of the City of El Paso – 4% Tax Credits, 13 Properties, 1590 Units, Freddie Mac Guaranteed Loan

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How do you combine financing techniques to make a RAD deal work?

Problem

• Acquisition and rehabilitation of RAD Conversion Projects using 4% LIHTC and tax exempt bonds will likely result in unique one-off structures.

• Covering transaction costs and bridging the gaps will be difficult for most projects.

Solution

• In large pool projects legal fees and other fixed costs are typically lower per unit than if the properties were financed individually.

• Assemble a finance team with experience in a wide variety of deal structures to develop the best combination of creative solutions.

• Structure the financing to maximize every resource available (i.e. real estate tax abatement (land lease), use of seller financing to maximize eligible basis, combine projects for economies of scale, explore all sources of soft debt, find lowest cost permanent debt, partner with an experienced tax credit developer, etc.)

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El Paso RAD Conversion


• Location: Multiple locations throughout the City of El Paso

• Number of Properties: 13

• Units: 1,590

• Rent Subsidy: 100% of the units are covered by a HAP contract

• Construction Period: Approximately 24 months

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El Paso RAD Conversion


• Developer: Hunt Development Group LLC

• Borrower: El Paso RAD I, Ltd.

• Developer’s Counsel: Ballard Spahr LLP

• Tax Credit Syndicator: Hunt Capital Group


• Freddie Mac Lender: Hunt Mortgage Group

• Lender’s Counsel: Ballard Spahr LLP

• Issuer: Alamito Public Facilities Authority

• Bond Counsel: Bracewell & Guiliani LLP

• Underwriters Counsel: Jones Walker LLP

• Issuer Counsel: Mendel Blumenfeld, PLLC

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Bond Structure

• Key Terms of the Collateralized Bond Issue:


• Maturity Date: October 1, 2018

• Initial Mandatory Tender Date: April 1, 2018

• Optional Prepayment: October 1, 2015 at Par

• Rating: S&P AA

• Interest Rate: 1%

• Bond Proceeds Investments – US Treasury Securities

• Key Terms of the Freddie Mac Bonds


• Maturity: 18 years

• Amortization: 35 years

• Interest Rate: 4.28%

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Sources and Uses

SOURCES

Series A Tax Exempt Bonds 59,625,000$

Series B Tax Exempt Bonds 65,375,000

Tax Credit Equity 75,533,429

Project Income 10,836,696

Seller Note and Deferred Interest Note 77,007,731

Gap Loan 18,008,345

Total 306,386,200$

USES

Project Acquisition 77,080,000$

Construction Costs 115,194,860

Other Developments Costs 2,753,208

Bond Cost of Issuance & LIHTC Costs 2,325,337

Other Financing Costs 1,643,132

Resident Relocation Expenses 3,745,500

Developer Fee 19,058,490

Reserves 5,750,000

Interest Expense 7,028,516

Seller Note Interest Expense 6,432,158

Series B Bond Collateral 65,375,000

Surplus / (Deficit) -

Total 306,386,200$

Total Bond Amount 125,000,000.00$

OTHER FINANCING OPTIONS

Private Placements

S&P Rated Transactions

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Private Placement

• Stifel has placed bonds with multiple private placement bond purchasers. We would typically solicit proposals/term sheets from 3 to 6 potential private placement purchasers.

• Underwriting parameters include

• 1.15x to 1.25x debt service coverage

• 75% to 85% loan to value

• 35 to 40 year amortization (possibly with a shorter term)

• Non-recourse loans

• Standard Replacement Reserves (approximately $300 per unit)

• Debt Service Reserves – Zero to one year (depending on purchaser)

• Operating Deficit Reserves (30 to 90 days)

• Construction Letter of Credit may be required

• Variable rate bonds during construction may be possible

• Draw down bonds may be possible

• Up to 3 years interest only

• Interest rates in the 5% to 6% range

• Can close in 120 to 180 days

S&P

RA

TED Standard & Poor’s Rated Transactions

• Standard & Poor’s currently rates unenhanced affordable housing projects investment grade, typically in the “A” category.

• Underwriting assumptions include:

• 1.20x DSC (HAP properties); 1.40x DSC (non-HAP properties)

• Vacancy loss based on historical trends

• Standard & Poor’s will underwrite Section 8 rent “overhang”

• Operating expense savings accepted, but must be validated

• Repair and replacement reserves based on capital needs assessment report

• No minimum rehab per unit

S&P

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TED Standard & Poor’s Rated Transactions

Financing observations include:

• No credit enhancement or mortgage insurance

• 35-year amortization

• 35-year term

• 10-year par call

• 35-year interest rate currently approximately 4.55%

• Financial disclosures include annual audit and occupancy data

• 75-90 days for closing

• 100% loan-to-value

• Non-recourse

CONTACT INFORMATION

Dan Dill, Managing Director

[email protected]

425-455-8122

HUD’s Rental Assistance Demonstration (RAD) Program:

A role for HFAs?

N a t i o n a l A s s o c i a t i o n o f L o c a l H o u s i n g

F i n a n c e A g e n c i e s

A p r i l 3 0 , 2 0 1 5

R E N T A L A S S I S T A N C E D E M O N S T R A T I O N P R O G R A M

• ~ 1.15 million units across 3,100+ PHAs • Capital repair needs in excess of $25.6B across portfolio

($23,365/unit) • Section 9 funding platform unreliable (pro-rations,

appropriation cuts), limited access to debt/equity capital (declaration of trust)

• Losing 10,000-15,000 hard units/year

• Provides housing subsidies for 27,997 residents

• 5,372 Public Housing Units

• Average household income: $14,639

• Average monthly rent based on tenant income is $312


• Aging building stock in need of repair

• Over $270 million in immediate needs across the portfolio

• Over $15 million in additional need accrues annually

• HUD capital funding addresses only 3.5% of annual needs

• SFHA has less than $5 million per year to meet needs

• Fixing the elevators in 9 buildings exceeds the annual

budget for the full portfolio


$23,769,500 $21,759,475 $16,246,274 $17,693,653 $12,341,434 $14,089,111 $13,568,787 $11,176,035 $10,097,741

$143,209,824

$170,370,528

$183,950,880 $197,531,232

$224,691,936

$245,062,467

$254,864,965 $264,667,463

$270,868,000

$0

$50,000,000

$100,000,000

$150,000,000

$200,000,000

$250,000,000

$300,000,000

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Needs vs Funding

HUD CFP FUNDING IMMEDIATE CAPITAL NEEDS


• December 2012: San Francisco Housing Authority was declared “troubled” by HUD

• Mayor Lee called for a “Re-Envisioning” process for Public Housing to protect its current and future residents

4 months of intensive study of SFHA and its operations 72 organizations and over 100 participants 18 public meetings



Consequences of Inaction: • Buildings continue to decline • Buildings fail HUD physical condition requirements • Units taken out of service • SFHA loses HUD subsidy • HUD initiates receivership • Loss of public housing in San Francisco

Doing nothing is not an option.


• Central component of HUD’s rental housing preservation strategy

• Provides a stable source of long term operating subsidies • Allows leveraged financing through private development

partners • RAD initial “cap” was 60,000 units nationwide; but HUD

received over 1,400 applications for 176,000 units • Coordinated national effort successful in “lifting the cap”

to 185,000 units.


• RAD is challenging to implement in high-cost areas where RAD rents are well below FMR or payment standard

• RAD rents $703-$1218 • Payment standard $1,381(studio)-$3040 (4 br.) • Additional resources must be contributed to make RAD

projects “pencil” • San Francisco applied for a portfolio of 4,584 units in

September; HUD approved in January 2014 • SFHA selected developer teams (including nonprofit

partners) in Spring 2014


• SF approach: combine HUD programs

Rental Assistance Demonstration (RAD) +

Section 18 /Tenant Protection Vouchers


• The San Francisco “RAD Portfolio” includes

o 28 projects in 8 neighborhood clusters o 3,495 units o 2 phases

• SFHA selected 8 local developer teams (including nonprofit partners) to develop “clusters” of buildings for Phase 1.

• No Better Alternative

• No displacement

• No loss of assisted units

• SFHA is repositioning entire portfolio

• SFHA is trouble agency and RAD is part of recovery plan

• Waivers consistent with RAD statutory purposes

• Unusual need for project based assistance in city with highest

housing costs.


• SFHA may dispose 8 project under Section 18 (SFHA Placement

Projects).

• SFHA may project-based TPV as part of the larger portfolio

repositioning.

• SF RAD projects shall have the ability to exceed 20% Project-Basing

Limit and will not be counted against project basing authority.

• SF RAD and SFHA Placement project families will be treated

similarly.


• RAD vouchers will be combined across the portfolio with

Section 18 (Tenant Protection) vouchers

• Long-term affordability guaranteed through public land-

trust model/ 99 year ground lease from SFHA

• RAD projects will have new ownership, property

management, and service structure

• Tenant protections established and codified


Developed with the Housing Rights Committee, National

Housing Law Project, and Enterprise.

• No change in rent calculation (30% household income)

• No re-screening

• No demolition – rehabilitation only

• No displacement: any resident temporarily relocated

will have a right to return to a unit at the same

development once repairs are completed


• April 2015: Board of Supervisors authorizes funding application for

bonds

• May 2015: Lender/Investor selected

• June 2015: Financing commitments from SFHA and MOHCD

approved

• June- July 2015: Financing applications submitted (4% tax credits

and bonds)

• September 2015: Board of Supervisors authorizes issuance of

bonds

• October 2015: All projects close and rehabilitation work begins.



•Result:

• $1.5 Billion in Total Development Cost • $500 MM in low income housing tax credit equity

and $250 MM in permanent tax-exempt debt • $500 MM is SFHA carry back loans and $50 MM in

local soft loans • More than $500MM in rehabilitation hard costs • Higher net operating income = more services

• Substantial rehabilitation of units

• Better building management

• Better resident services

• Preserved affordability


HUD’s Rental Assistance Demonstration

Program – A Role for HFAs

National Association of Local Housing Finance Agencies

April 30, 2015

Amy M. McClain, Esq.

Ballard Spahr LLP

[email protected]

51

The Need for RAD

• Address a growing backlog of public housing capital need

- Over $25 billion in deferred capital improvements

• Preserve affordable housing

- 10,000 – 15,000 units of affordable housing are lost annually

• Allow access to capital that is not otherwise available to public housing

• Uses a budget neutral approach

• Public housing units are removed from the public housing regime and converted to Section 8 units (PBV or PBRA)

52

RAD – 2012 Appropriations Act

• Public Law 112-55, adopted November 18, 2011

• Authorized through the budget process

• Addressed key concerns of Congress regarding:

- Budget neutrality

- Resident protections

- Measuring the impact of the conversions

• Component 1 authorized the conversion of up to 60,000 public housing or Moderate Rehab units to a Section 8 model (as well as Component 2 allowing for the conversion of Rent Supplement, Rental Assistance Payment and Mod Rehab contracts at the point of contract termination or expiration)

53

RAD Snapshot

• First RAD projects awarded in January 2013 to 68 housing Authorities

• 185,000 units are now authorized for conversion to Section 8 under RAD (an increase above the initial 60,000). There is now approximately 7,000 units available under the 185,000 cap.

• By comparison – HOPE VI involved the redevelopment of about 108,000 units stretching over more than a decade and a half.

54

Potential Conversion Scenarios

• Straight Conversion of property with no significant capital needs, benefitting the property by:

- reducing expenses,

- relying on a potentially stronger subsidy stream,

- eliminating the regulatory scheme attached to public housing

• Conversion with investment of loan funds to make modest capital improvements and carry the same benefits as with a straight conversion

• Conversion with investment of loan and LIHTC equity proceeds – carrying same benefits as above with ability to undertake a broader scope of improvements

55

Creative Deployment of RAD

• Provides a strategy for long-term vacant units

• Consolidation/disposition of scattered site properties to a more efficient model

• Combine with disposition of additional units through Section 18 to generate tenant protection vouchers

• Shift some units off-site to create a true mixed-income community including some unsubsidized units

• Use of Replacement Housing Factor funds to boost initial investment and to supplement rents for the near future

56

Key Underwriting Considerations

• Do the rents work?

- Easier in low-rent markets. Rural locations may be more attractive than urban deals.

- Can the rents be supplemented initially with PHA resources?

• Control of the RAD Use Agreement

• Resident protections, including a right of return without rescreening

- May impact the number of LIHTC units to accommodate those with incomes above 60% of AMI

• It is a Demonstration (i.e., HUD is identifying policy objectives and procedures as deals progress)

• RAD subsidies go to the Owner; no holdback by PHA permitted as in the mixed-finance context

57

Working with HUD

• Confirmation of the financing structure

- How is the loan security structured? HUD concerned about cross-default

- HUD will scrutinize deals using additional housing authority resources and treat returns on such expenditures as program income

• Confirmation of future use of any land from which assistance is transferred off-site

- HUD recently began imposing additional limitations

• Confirmation of unit counts, contract rents and utility allowances

• Broad waiver authority, but rarely used (e.g., San Francisco waiver)

58

Impact on Lender/Investor Review

• Ensure the Lender and Investor are on board with the RAD limitations when the deal term letters are signed; don’t wait.

• They will be most interested in:

- Confirming what subsidy is available during construction

• Logistics of making “Rehab Assistance Payments” from PHA sources during the remainder of the first calendar year under the HAP

- Confirming RAD rents

- Confirming approvals of reserve amounts and withdrawal procedures

• An issue primarily in the PBRA context that may require sub-reserve or additional guaranties to protect against HUD delay in approving replacement reserve draws

• HUD accommodations through Riders to HAP and Use Agreement

59

Two Types of Section 8 Assistance

Element Project-Based Voucher HAP Project-Based Rental Assistance HAP

Contract Term 15 years, but may obtain voucher administering agency approval for a 20 year term

20 years

Mandatory Contract Renewal Project must be offered, and PHA must accept, a contract renewal

Project must be offered, and PHA must accept, a contract renewal

Administrator PHA HUD (for the time being) or other HUD-approved contract administrator

Contract Rents Lower of current funding, reasonable rent or 110% of FMR (minus utility allowance)

Lower of current public housing funding or 120% of FMR (minus utility allowance), except if the current funding is below market, in which case the current funding cannot exceed 150% of FMR if supported by a rent comparability study

Rent Adjustments Adjusted by the Operating Cost Adjustment Factor, subject to appropriations and limited to reasonable rents charged by comparable unassisted units in the private market; Section 8(o)(13)(I) of the Housing Act and 24 CFR §§ 983.301 and 983.302 are N/A

Adjusted by the Operating Cost Adjustment Factor, subject to appropriations; Section 8(c)(2) of the Housing Act and 24 CFR § 880.609 are N/A

Fees to PHA Asset management fee may be paid to the PHA either as a "must pay" operating expense or from cash flow; for the remainder of the calendar year following conversion, a PHA will not receive any administrative fees under the HAP; such fees may be paid after the remainder of the first calendar year has expired

Asset management fee may be paid from cash flow

60

Two Types of Section 8 Assistance, cont.

Element Project-Based Voucher HAP Project-Based Rental Assistance HAP Resident Choice Mobility Resident may move after one year of

residency, using the first available Housing Choice Voucher in accordance with Section 8(o)(13(E) of the U.S. Housing Act of 1937; the choice mobility requirement cannot be waived.

Resident may move with a Housing Choice Voucher upon the later of (a) 24 months from the date of the execution of the HAP; or (b) 24 months after the tenant's move-in date. The PHA providing the vouchers need not provide more than one-third of its turnover vouchers to the residents of covered RAD PBRA projects. On a project-basis, a PHA may limit Choice Mobility moves to no more than 15% of the assisted units within the project.

Cap on Number of Assisted Units As permitted by a RAD waiver of Section 8(o)(13)(D), 24 CFR 983.56(a), up to 50% of the units may be assisted with PBV (or up to 100% for elderly, disabled and family units offered supportive services, noting that the leases for households which decline services will not be terminated)

No cap

Environmental Review Required; completed environmental review must be submitted with the financing plan

Required; completed environmental review must be submitted with the financing plan

a) Management and Occupancy Review (MORs), b) REAC UPCS Inspections; c) REAC Annual Financial Statements

None are applicable All are applicable

Cash Flow No restrictions No restrictions

61

CHAP Award and Milestones

Number of Days from CHAP Issuance

Milestones applicable to FHA financed deals or deals that do not involve LIHTC; LIHTC deals w/o FHA financing use a compressed timeline of submission of all items within 60 days of LIHTC award.

30 days Accepted lender engagement or commitment letter – must include the HUD-required language indicating the lender is aware of all relevant RAD policies including the RAD Use Agreement and the ongoing requirements upon a foreclosure or bankruptcy. Letter must identify the proposed loan amount, key business terms for the loan and a pro forma sources and uses and cash flow.

Statement of development team capacity, identifying and providing evidence of proposed development team members capacity with work similar to that involved with the RAD project.

60 days Significant Amendment to Annual and Five Year Plans including: a decision about conversion of assistance to PBV or PBRA.

90 days Due diligence certification from the PHA confirming that all industry-standard due diligence has been performed for and received by the lender and/or other financing provider. Due diligence must include the physical condition assessment (PCA) and the necessary environmental reports, as well as other lender-required items (e.g., appraisal, survey, pro forma title insurance policy).

150 days A certification from the PHA confirming that all firm commitments for firm financing have been applied for.

180 days Financing Plan submission to HUD (note if the RAD financing involves an FHA insured loan, this milestone is satisfied with the FHA firm commitment submitted at 150 days following CHAP issuance).

320 days (and no later than 40 days prior to closing)

PHA submits evidence of firm commitment for financing.

360 days Closing 12-18 months General timeframe for completion of all rehabilitation items, as approved by HUD depending on the

scope of work funded with closing.

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Financing Plan Review

• Escorted through the review process by the HUD senior transaction manager

- Prepares a transaction memo

- Reviewed by HUD “loan committee”

• Upon approval, HUD issues a signed RAD Conversion Commitment (form RCC available at www.radresourcenet./closing.cfm)

• Closing process begins

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RAD Conversion Commitment (RCC)

• Main Elements

- “Applicable HUD Regulations and Requirements” – a broad set of rules applied to RAD deals and to which all transaction documents must be subject

• The main body of the RCC will be attached to the RAD Use Agreement and recorded among the land records

- Must be countersigned by HA and Owner within 30 days of issuance and closing to occur within 90 days of issuance

- Any modifications to RCC must be set forth in an amendment to RCC

- Unlikely HUD will include a written approval of transaction documents, but approval is implied

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RCC, cont.

• Identifies Section 8 Rents

• Confirms milestones

• Sets out scope of repairs

• Contains a series of exhibits – RAD Use Agreement, HAP, Sources & Uses of Funds, Key Business Terms, List of Repairs or New Construction, Critical Repair Items (required prior to conversion), Cert re: Accounts Payable, Excess Obligations

• Rehabilitation escrow required for projects that do not involve LIHTC or conventional financing

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RAD Use Agreement

• Establishes a 20 year use restriction, automatically renewed for an additional 20 years with the renewal of the HAP

• Limits the HAP-assisted units to use as rental housing for income eligible tenants

• Income restrictions continue after termination of the HAP

- Section 3 -- “In the case that the HAP Contract is terminated (due to, e.g.: breach, or non-compliance), new tenants must have incomes at or below 80 percent of the average median income (AMI) at the time of admission for the remainder of the term of the Agreement, applicable to all units previously covered under the HAP contract. Additionally, rents must not exceed 30% of 80% of median income for an appropriate sized unit. “

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RAD Use Agreement, cont.

• HUD may modify the restriction levels

- Section 3 – “Notwithstanding the foregoing, in the event the Owner is able to demonstrate to HUD's satisfaction that despite the Owner's good faith and diligent efforts to do so, the Owner is unable either (1) to rent a sufficient percentage of Units to Low Income Tenants or Very Low Income Tenants in order to satisfy the restrictions in this paragraph, or (2) to otherwise provide for the financial viability of the Project, HUD may, in its sole discretion, agree to reduce the percentage of units subject to the restriction under this paragraph or otherwise modify this restriction in a manner acceptable to the Owner and HUD.” (emphasis added)

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• HUD ability to transfer assistance

- Section 7 – “. . . . The Owner has constituted HUD as its attorney-in-fact to transfer the assisted PBV or PBRA units to another entity in the event of default under the HAP Contract. With HUD approval, after 10 years from the effective date of the initial term of the HAP Contract, if the Project is economically non-viable or physically obsolete, assistance may be transferred subject to this Agreement. Any such new Owner shall assume the obligations under this Agreement as a condition of any transfer. This Agreement shall be binding upon the Owners and all future successors and assigns until released by HUD. “ (emphasis added)

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• Section 12 – “Execution of Other Agreements. The Owner agrees that it has not and will not execute any other agreement with provisions contradictory of, or in opposition to, the provisions of this Agreement, and that in any event, the provisions of this Agreement are paramount and controlling as to the rights and obligations set forth and supersede any other conflicting requirements.” (emphasis added)

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RAD Use Agreement Rider

• Confirms mortgage/lien holder right to foreclose against the real property

• Requires lien holder provide HUD with written notice before declaring an event of default and concurrent notice with any written filing of foreclosure made in accordance with state law

• Concurrent notice of foreclosure must be provided to HUD at least 60 days before any foreclosure sale

• Confirms Use Agreement survival of a foreclosure

• Transfer of title may be grounds for termination of HAP assistance

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RAD Use Agreement Rider, cont.

• HUD may permit assumption of the HAP contract by new owner acquiring the property through foreclosure or allow the new owner to enter into a new HAP contract

• HAP assistance administered per the RAD requirements

• Potential purchasers can seek prior HUD approval for continuation of the HAP contract following the foreclosure sale; such request must be made in writing by the later of 10 business days after first publication of foreclosure sale or 60 days before the foreclosure sale.

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Housing Assistance Payments Contracts

• Separate forms for PBRA and PBV programs

• Governs payment of the Rehabilitation Assistance Payment (RAP) during any rehab period and the HAP subsidy following rehab and/or lease-up

• Covers operations, reserves, Operating Cost Adjustment Factor

• HUD has issued Riders for Lender and Investor issues

• Lender Rider allows a pre-approval of a designated “Lender Temporary Custodian” and new “Owner” under the HAP

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HAP - Investor Assurances

• HUD’s form of LIHTC Rider for both PBV and PBRA deals allow:

- Notice of default under the HAP with right for Investor to cure

- Ability to transfer investor interests, provided HUD is given prior written notice and copies of documents effectuating the transfer

- Ability to remove and replace the GP/MM with a named affiliate of the investor on a temporary basis, provided the permanent replacement is approved by HUD within 90 days (which may be extended 30 days by HUD)

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HAP – Lender Temporary Custodian

• Lender Temporary Custodian may continue to receive the HAP assistance for 90 days (which may be extended by HUD for 30 days or such other period approved by HUD)

• Within such 90 day period, Lender must find a permanent replacement Owner who is also “determined by HUD to be capable of abiding by the HAP Contract, Use Agreement and any and all applicable RAD program requirements.

• RAD statute imposes a preference for Owners following foreclosure to “a capable public entity, then a capable entity, as determined by the Secretary”

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HAP – Lender Temporary Custodian

• HUD can revoke prior approval of a Lender Temporary Custodian “if HUD becomes aware of any conditions or circumstances that would disqualify or compromise the ability of Lender Temporary Custodian from acting as an interim custodian of the Project pursuant to the [HAP] Contract.”

• Examples of “conditions or circumstances” are debarment, suspension or limited denial of participation

• Mortgage holder may ask HUD to pre-approve a substitute Lender Temporary Custodian

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RAD Closing Process

• PHA and new property owner (if any) must countersign the RCC within 30 days of its issuance

• PHA then submits several transaction documents to HUD regional counsel’s office and HUD closing manager for review

- Closing checklists for PBV and PBRA deals are available at www.radresource.net/doclibrary.cfm under “Contracts and Closing Documents”

• Legal review tends to focus on title and survey and RAD Use Agreement with reliance on attorney’s opinion to confirm compliance with applicable HUD regulations and requirements

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Key Closing Documents

• RAD Use Agreement

• Release of HUD Declaration of Trust/Restrictive Covenants

• Housing Assistance Payments Contract and applicable riders

- If lender takes an assignment of the HAP, HUD will execute a HUD form of “Consent to Assignment”

• Consolidated Certification

• Opinions

• Termination of any mixed-finance documents (i.e., Mixed-Finance ACC Amendment, Regulatory & Operating Agreement)

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Elements of RAD Notice 2012-32 (HA) (as revised on July 2, 2013)

• Allows use of public housing capital funds (including Replacement Housing Factor funds) and operating funds to make loans or otherwise support conversion

- Predevelopment costs

- Development costs

- Rehabilitation costs

- Establish replacement and/or operating reserves

• Lifts limit on number of units a housing authority may submit and the number of mixed-finance projects eligible for conversion

• Expands eligibility of HOPE VI projects

• Allows multi-phased and portfolio-based RAD awards

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Elements of RAD, cont.

• Allows bundling of rent levels across multiple RAD sites

• Permits setting contract rents at FY 2012 rent levels for all applications submitted by Dec. 31, 2013

• Allows Moving to Work agencies to apply for RAD and continue to use MTW block grant flexibility when two or more RAD projects are involved

• Allows joint RAD/Choice Neighborhood Initiative applications

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• Section 18 public housing disposition not applicable for de minimis reduction in units (i.e., greater of five percent or five units)

- De minimis limitation does not apply where the additional units:

• Were previously approved for demolition or disposition;

• Have been vacant for 24 months or longer; or

• The reduction of the units will allow the reconfiguration of the units (e.g., convert efficiency units to 1BR units) or the facilitation of social service delivery.

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• Existing asset repositioning fees and Replacement Housing Factor funds may be used to support the conversion (although the units that are converted through RAD do not generate additional ARF or RHF funds)

• Faircloth Limit is permanently reduced, thus further limiting the number of public housing units an HA may develop following conversion

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• HUD will forgive any HUD-held debt as part of the conversion

• ROSS-SC and PH FSS programs still apply to former public housing residents following conversion

• PHAS scoring process does not apply to projects that have been issued a CHAP – but must undergo a physical condition assessment similar to the Mark-to-Market program

• Section 33 Required Conversion Review Process is not applicable to sites covered by a CHAP

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• Significant Amendment to PHA Annual Plan

• Green Building and Energy Efficiency Standards

- Rehab -- Energy Star, WaterSense or Federal Energy Management Program

- New Construction – 2006 International Energy Conservation Code or ASHRAE 90.1-2004 standard

• Section 504 of the Rehabilitation Act of 1973 applies to substantial rehabilitation;

- For new construction, at least 5% of the dwelling units must be “readily accessible to and usable by individuals with mobility impairments”

- Fair Housing Act design and construction requirements also apply to new construction

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• Site selection and neighborhood standards per the Fair Housing Act and Title VI of the Civil Rights Act

• HUD access to records (“any reasonable HUD request for data to support program evaluation”)

• Ongoing PHA Board monitoring and annual approval of operating budgets

• Davis Bacon and Section 3 applies to all RAD projects

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Elements of RAD, cont. - Wait Lists

• Waiting lists – residents on a project-specific wait list retain their position on the list; if assistance is transferred to another site and the existing site uses a project-specific wait list, the residents on the project-specific site will be allowed to apply to the new site and be provided a priority ranking based on date and time of application

• If no wait list previously existed, the PHA must establish a waiting list

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Elements of RAD, cont. - Insurance Coverage

• No prescribed specific levels of insurance

• Must always maintain “commercially available property and liability insurance”

• To the extent there are sufficient insurance proceeds, “promptly restore, reconstruct, and/or repair any damaged or destroyed property of a project” unless HUD provides written approval of an alternative approach

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Elements of RAD, cont. - Future Refinancing

• Any refinancing or restructuring of permanent debt during HAP term requires HUD approval

• HUD seeks to ensure financing supports the long-term preservation of affordable housing

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Resident Protections

• No re-screening of tenants upon conversion

- Not subject to rescreening, income eligibility or income targeting

• Thus a household with income in excess of 60% of AMI will not generate low-income housing tax credits and cannot be required to relocate

• Right to return

- existing residents have the right to return following rehabilitation work or to occupy an assisted unit at a new site if the assistance is transferred to such a site

• Phase-in of tenant rent increases

- Any rent increase by the greater of 10% or $25 shall be phased in over three or five years (subject to HA discretion as described at Sections 1.16.C.4 and 1.7.B.3 of the RAD Notice)

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Resident Protections, cont.

• Public housing family self sufficiency and resident opportunities and self sufficiency service coordinator programs

• Resident organization formations and funding

• Resident procedural rights

- Upon conversion, residents are afforded additional termination notification and grievance procedure protections

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Resident Protections, cont.

• Earned Income Disregard

- Those who receive the EID exclusion at conversion will continue to receive it following conversion (typically the Housing Choice Voucher program only grants the EID exclusion to persons with disabilities)

- Once the pre-existing EID rights expire or cease, rents will adjust to the appropriate rent level based on the resident’s income without the benefit of the rent phase-in provisions

• Capital Fund Education and Training Community Facilities (CFCF)

- Community facilities built with CFCF grant funds are required to serve public housing residents “[t]o the greatest extent possible”.

- HUD will consider the residents of a RAD converted site to continue to qualify as “PHA residents” to satisfy the CFCF requirements.

- The facility must otherwise continue to be available to public housing residents.

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For Questions and Additional Information

Amy M. McClain

Ballard Spahr LLP

300 E. Lombard Street, 18th Floor

Baltimore, Maryland 21202

410.528.5592

[email protected]