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Notice Listing on Capital Needs Assessment

Notice Section 1.4.A.1 Capital Needs Assessment

Conversion Planning Requirements.
1. Capital Needs Assessment (CNA).⁶ Except as noted below, each project selected for award will be required to perform a detailed physical inspection to determine both short-term rehabilitation needs to be included as a Scope of Work that will be completed as part of the RAD conversion and long-term capital needs to be addressed through a Reserve for Replacement Account. A CNA must be submitted with the Financing Plan and must have been completed no earlier than 180 days prior to submission of the Financing Plan, except with HUD approval.
  - CNA eTool. The CNA eTool is required as part of any RAD Financing Plan (or application for FHA Firm Commitment), except as described below. The CNA eTool contains two major components - the narrative (the description of each component and its condition and may include an energy audit) and the financial model (the 20-year schedule and associated determination of the Initial Deposit to Replacement Reserve, or IDRR, and the Annual Deposit to Replacement Resreve, or ADRR).⁷
  - Contractor Qualifications. The CNA must be completed by a qualified, independent third-party professional as required by the MAP Guide.
  - Exemptions. HUD may exempt the transaction types set forth below from CNA requirements, provided that the proposed exemption is confirmed with HUD prior to submission of the Financing Plan and eligibility for the exampltion confirmed in HUD's review of the Financing Plan. Exemptions may apply to some or all ortions of the CNA, including the assessment of immediate needs and the portions of the CNA eTool necessary to produce the 20 Year Reserve Schedule:
    1. For non-FHA transactions, neither component of the CNA will be required as long as the Annual Deposit to the Replacement Reserve is no less than $450 per unit (or a lower amount if justified by an alternative form of CNA acceptable to HUD, typically one performed for an investor or lender), and the Project:
      1. Has been newly constructed or financed with 9% LIHTC within the last five years, as calculated from the date the final certificate of occupancy was isued, or
      2. Qualifies as new construction or will be financed with 9% LIHTC;
    2. For non-FHA transactions, the narrative will not be required where the transaction will be financed with 4% LIHTC;
    3. For non-FHA transactions, neither component of the CNA will be required wher the total assisted units (e.g., RAD units and other PBV units) at the project will constitute less than 20% of the total units at the project (or a higher percentage at HUD's discretion, taking into consideration the absolute number of RAD units at the project).
    4. For FHA transactions, PHAs should follow applicable requirements in the MAP Guide governing exemptions.
  - Utility Consumption Baseline.No utility consumption baseline analysis is necessary as part of the CNA conducted for the RAD conversion.

Documents on Capital Needs Assessment

RAD Physical Condition Assessment Statement of Work

RAD Physical Condition Assessment - Exhibit - Environment Restrictions Checklist

RAD Physical Condition Assessment - Exhibit - Summary of HUD’s Responsibility Laws

RAD Physical Condition Assessment Guide

CNA E-Tool Access Guide

*Internal HUD Use Only

Webinars on Capital Needs Assessment

Capital Needs Assessment Walkthrough and Updates (03/11/2024)

Using the eCNA Tool for PHAs (04/28/2021)

*Internal HUD Use Only

Questions on Capital Needs Assessment

Carbon Monoxide Detectors

How are carbon monoxide detectors handled in the RAD CNA?

The RAD CNA requires the contractor to confirm that items involving in Life, Health & Safety for building code compliance are being met. Consequently, to the extent smoke detectors and carbon monoxide detectors are required by local code, these items should be confirmed. Furthermore, to the extent combustible appliances are present at the property, carbon monoxide detectors should be recommended. This would include gas ranges, gas hot water heaters, gas furnaces, boilers, etc.

CNAs and COVID19

Will HUD relax its RAD Capital Needs Assessment inspection requirements for RAD conversions during this time impacted by COVID 19?

The Capital Needs Assessments are a core part of the RAD review process, as they are used to establish a basis on which to project the property’s 20-year capital needs. As such, unless constructed within the past ten years, all properties will require a complete inspection in compliance with the MAP Guide. For properties built within the last ten years, HUD may approve the inspection of only vacant or model units. The Office of Recapitalization will extend milestones and deadlines on a case-by-case basis if the capital needs inspection cannot be completed at this time due to COVID-19. Recap is also considering other approaches to avoid delays caused by inspectors having more limited access to sites at this time.

Energy Audit

Under RAD Notice Revision 4, when is an Energy Audit required for RAD conversions?

The energy audit is still required as part of the full CNA. If the Notice says that the narrative is not required or that both components are not required, then the energy audit is also not required.

Revising RPCA Based on Current Unit Condition

In the time since the housing authority received the RPCA and now, a single family unit in the project had a fire resulting in extensive damage. The housing authority is working with the insurance company to get proceeds to rebuild the unit, but the timeline for dispersal of funds in not yet known. Should the housing authority revise the RPCA to include the fire repair or keep the repair work separate? They do not want to have to wait until a RAD closing to start the repair work, but they also do not want to wait until all of the repair work is finished before converting to RAD.

The PHA can start the fire restoration work whenever they are ready. If the PHA is ready to begin rior to the RAD closing date, the PHA will need to satisfy any applicable public housing requirements (the unit will still be public housing at that point). If the insurance proceeds are not expected to be sufficient to cover all of the repairs, the PHA will need additional funds in their RAD budget. Regarding the RPCA, the PHA should edit the RPCA to account for this. The Transaction Manager can show the PHA how to do this. The Scope of Work and list of repairs are Exhibits to the RAD Conversion Commitment so it is important that the information in the RPCA is correct.

Fannie Mae End of Useful Life (EUL) Categories

If a component does not fall into a category for which the Fannie Mae Physical Needs Assessment Guidance to the Property Evaluator lists an EUL, can it be excluded from the RAD Report?

No, the component cannot be excluded. HUD relies on RPCA contractors to be aware of appropriate sources of information for EULs in this situation.

RPCA Requirement for Units Being Removed Under De Minimis Reduction

Is the RPCA required to include units that will not be converted to RAD because of the allowable de minimis reduction?

No. If the units are being reduced as part of the allowable de minimis reduction, they do not need to be included in the RPCA because they are not converting to RAD.

Market Rate Units and the RPCA

My firm was engaged by a property owner to complete a RPCA for a mixed income property. Some of the units within the development are market rate and are public housing.

The 25% sample requirement refers to all units not just the units being converted under RAD.

CNA for Entire Project or Just Public Housing Units at Project

If you have a multi-unit community with buildings that have a mix of public housing and non-public housing apartments, should the Capital Needs Section on page 3 of the RAD application include the capital needs for ALL of the units (both public housing and non-public housing) OR just the public housing units and their pro rata share of capital improvement costs for common areas?

The RAD PCA must cover all units in the project, not just the units being converted under RAD.

Units to Include in RPCA for Mod Rehab SRO

We are pursuing a RAD conversion under the second component. Our current Section 8 SRO Mod Rehab contract covers only a portion of the housing units in our building. Do we need to complete a PCA for the entire building, or just for the units included in our contract?

The requirement for the assessment of the physical condition of the property proposed for RAD conversion is contacted in Notice, PIH-2012-32 (HA), REV-2, Section 2.4.A., on page 136. The RAD conversion is intended to place the SRO units on a sound financial, physical, and managerial footing for the long-term HAP contract that will replace the Mod Rehab contract. If the ownership of the SRO units also owns the remaining units in the building, then the CNA (HUD’s name for the PCA) must cover the entire building. If the ownership of the SRO units is different than the entity owning the remaining units in the building, then the CNA must only cover the SRO units.

RPCA Requirement for New Construction or Substanital Renovation RAD Conversions (non-FHA Financing)

Is a RAD Property Condition Assessment (RPCA) required on a new construction or substantial renovation transaction?

A RPCA is required for all RAD transactions, except the following: 1) New Construction; 2) Gut Rehab (essentially, down to the stud); or 3) Recently modernized or constructed buildings (based on the recommendation of the HUD RAD Transaction Manager and approval by the RAD Team Lead). However, the RPCA Excel tool is still required to size the reserve for replacement deposit on all sub-rehab transactions, with the exception of “gut rehabs”. “Gut rehabilitation” is defined as “removal/replacement of all or substantially all interior finished surfaces”.

Completing Accessibility Repairs Identified in the RPCA

If a PHA has accessibility improvements identified in the PCA, can it perform that work post-closing as part of the scope of immediate repairs?

Critical repairs are repairs that must be done on an accelerated schedule, including health and safety issues (such as an improperly vented gas appliance). Note that identified accessibility modifications that pose imminent health and safety risks, may be considered critical repairs. All critical repairs must be completed prior to the RAD closing. If your property has a critical repair that you believe cannot be completed prior to RAD closing due to time constraints, please discuss this with your RAD Transaction Manager who may permit the repair to be moved into rehab as long as it can be demonstrated that doing so does not present an immediate health or safety hazard to residents. Rehab items also must be done, but the schedule is governed by the rehab provisions of the RAD Conversion Commitment. Year One items typically reflect systems or components that were functioning at the time of the inspection and are anticipated to require replacement in the first year. Whether and when these are done will be up to the property owner. A typical example would be a 20 year roof that is not leaking but that either has reached 20 years of age or will reach 20 years of age within the first year after the closing. The Reserve for Replacement would contain sufficient funds to pay for the roof replacement, and the timing of the roof replacement would be up to the owner.

RPCA Requirement

When is the RPCA required?

The RPCA is required in all instances, except the following: 1) New Construction; 2) Gut Rehab (essentially, down to the stud); 3) Recently modernized or constructed buildings (based on the recommendation of your RAD Transaction Manager and approval by the RAD Team Lead); or 4) Any FHA 221(d)(4) transaction.

RPCA Utility Baseline Occupancy Adjustment

Could you further explain the Occupancy adjustment factor and how it’s calculated?

The utility usage should be adjusted when there are vacancies that impacted utility usage so that the consumption represents 100% occupancy. For example, if your property was 90% occupied during the year, and vacant units consume half as much electricity as occupied units, then the actual consumption represents about 95% of the amount of electricity that the property would have consumed if all units had been occupied for the full year. HUD does not dictate how the occupancy adjustment is made but does ask that you explain how you made your calculation in the narrative portion of the utility baseline.

Additional Roles for RPCA Contractor

Are there any restrictions on what functions an RPCA contracting firm can perform in addition to completing the RPCA? Can they perform the work and serve as a GC?

The RAD Notice does not impose any requirements.

How long is the RPCA good?

Is there any restriction on how early the RPCA can be done? We have a project where we would like go ahead and order the RPCA before we submit the application. The project will be funded entirely with Housing Authority funds, so there is no issue with having the RPCA provider approved by a lender. Is this acceptable?

Obviously the more current the RPCA, the better it is for the Owner, HUD, and all funding partners to understand the property and what repair and replacement needs have to be addressed. Typically HUD uses an RPCA for 12 months after which time, it will have to be updated if the RAD transaction has not closed. It is also important to document significant replacements that are made and changes made to the property after the RPCA has been completed and while HUD is reviewing the RAD transaction. However, if the transaction is using FHA insurance, the RPCA can be no more than 6 months old at the time of Firm Commitment issuance, otherwise it will need to be updated. Please keep your HUD Transaction Manager apprised of these significant changes. [Updated 2.14.14]

Applicability of Public Housing GPNA Requirement to RAD Transactions

All public housing agencies are required to conduct a Green Physical Needs Assessment using the HUD GPNA Tool. The final rule is projected to be published in March. Agencies with a December 31 fiscal year must submit the GPNA to HUD on September 1, 2013. My question is if a project is converting all units to RAD, does the project need to complete the GPNA? And, if a project is only converting some of the units to RAD and the remaining will stay in public housing, will the RAD units need to be part of the GPNA?

The public housing GPNA requirement will not become effective until the publication of its final rule. PHAs that have entered RAD and whose converted units are no longer recorded as ACC units in PIC as of their GPNA submission due date (and are reflected in the PIC data set provided by HUD for import into the GPNA tool) are not required to make the PNA submission from the GPNA tool for that portion of their inventory that has left public housing for RAD. PHAs that have been awarded a Commitment to Enter into a HAP (CHAP) under RAD as of the due date of their public housing GPNA will be required to make the PNA submission from the GPNA tool accounting for the entire inventory of units remaining in public housing (and remaining reflected in the PIC data set provided by HUD for import into the GPNA tool) but recording “0” needs for that portion under the CHAP. If the entire inventory of any AMP is under a CHAP as of the GPNA due date, no submission will be required as it will be considered likely that the entire AMP will be leaving public housing. Should public housing inventory under a CHAP not ultimately convert to RAD and remain in public housing, a GPNA submission will become required. Any subsequently required submission must be made from the automated reporting feature of the GPNA tool. Information from a RAD PCA may be used for the submission but it must be migrated to the GPNA tool.

PCA Required if no Improvements Anticipated

We are working with a housing authority that is: 1) planning to convert their entire conventional public housing portfolio (under 1,000 units) to PBRA, and 2) contemplating NO additional improvements / financing associated with this RAD conversion. Will HUD still require a detailed Physical Conditions Assessment for that portfolio?

Yes, even if you’re not contemplating any improvements or financing, you will be required to complete a PCA following CHAP issuance and prior to conversion. We want to make sure that the project is viable over the long-term. It is fine that the PHA is not contemplating any improvements at the time of conversion, if that’s what the PCA shows, but then we want to make sure that the reserve deposits are sufficient for work in the out-years,

Replacement Reserve Funding

Is it acceptable to fund some or all of the required 20 year Replacement Reserve funding in the form of an initial Replacement Reserve deposit , with only a small annual Replacement Reserve deposit or with no annual Replcacement Reserve deposit?

Attachment 1A-1 specifies that the initial and annual reserve deposits must be sufficient to cover all capital needs arising during the first 20 years. HUD recognizes that this requirement can be met through a relatively high initial deposit and a relatively low annual deposit. Please note, however, that an approach that utilizes a high initial deposit and low or zero on-going deposit will result in the Replacement Reserve funding being inadequate after year 20, which may present underwriting concerns for your lender and other funding partners. In a financing involving LIHTCs, the investor will likely want all anticipated rehabilitation completed in the initial financing which should result in a relatively low need for ongoing replacement reserve funding. Contact your lender (and LIHTC investor, if applicable) to determine whether this approach will be acceptable (for FHA financing, your Replacement Reserve approach must meet all FHA requirements as well as RAD requirements). HUD is open to considering this approach as part of your Financing Plan if your funding partners are agreeable.