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Notice Section 1.4.B Financing Requirements and Consideration

Notice Section 1.4.B.1 Debt Financing

Notice Section 1.4.B.2 Public Housing Capital and Operating Program Funds

Notice Section 1.4.B.3 Existing PHA Indebtedness and Contractual Obligations

Notice Section 1.4.B.4 Federal Housing Administration (FHA) Insured Financing

Notice Section 1.4.B.5 Low-Income Housing Tax Credits (LIHTCs), Historic Tax Credits (HTCs), and Opportunity Zones

Notice Section 1.4.B.6 Grant Funding Or Cash Flow Financing

Notice Section 1.4.B.7 Acquisition Proceeds

Opportunity Zone Rent Increase for PBRA Conversions - FAQs

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DDTF and ARF for RAD/Section 18 Blends

Is the PHA eligible to receive Demolition Disposition Transition Funding (DDTF) and Asset Repositioning Fee (ARF) for the units that will be removed through Section 18?

PHAs are eligible to receive DDTF, but only for those units transitioning under Section 18, not the RAD units, and only in accordance with 24 CFR part 905. The PHA may use the DDTF for any eligible purposes, including for augmenting the RAD rents of a future RAD conversion (see RAD Notice Section 1.6.B.5 and 1.7.A.5). DDTF is an add-on of Capital Funds in the year following the removal of the Section 18 units. See also Public Housing Funds and Repositioning document and DDTF/ARF summary chart for more information, including eligible uses of DDTF (Capital Funds) once all units are removed from ACC. PHAs may be eligible to receive ARF.ARF is part of Operating Funds as described in 24 CFR 990.190(h). ARF eligibility shall be in accordance with 24 CFR part 990. PHAs are eligible for ARF for units with Section 18 approval for an entire building. If units do not meet this criterion (i.e., because the RAD and Section 18 units are in the same building), the PHA is not eligible for ARF for the units removed under Section 18. Within a “converting project”, the RAD and Section 18 units do not need to be in separate buildings. It will be up to the PHA to determine which units within a blend are removed through Section 18 and which units are converted through RAD. However, the selection of units to be removed through Section 18 may impact the PHA’s eligibility for ARF. ARF will be incorporated into the Operating Fund subsidy calculation for the PHA for the period described in 990.190(h). See also Public Housing Funds and Repositioning document and DDTF/ARF summary chart for more information, including eligible uses of ARF (Operating Funds) once all units are removed from ACC.

Multiple SLRs

In a RAD for PHA conversion in which a PHA is project basing its own vouchers at the RAD project as part of the conversion, including as part of a RAD/Section 18 blend, is a separate HUD subsidy layering review required?

No. Attachment 1A, Section F.6 of the RAD Notice states, “A separate SLR will not be conducted by HUD if there is non-RAD PBV or another HUD subsidy at the time of conversion; the SLR performed as part of the RAD conversion will satisfy the requirements under section 102(d) of the HUD Reform Act.” Non-RAD PBV HAPs for existing housing do not trigger an SLR, although the project as a whole will still be subject to RAD SLR requirements. Executing an AHAP does trigger an SLR (see 85 Fed. Reg. 12001 (Feb. 28, 2020)) and if the AHAP is being executed in conjunction with the RAD closing and the units will be located at the RAD project, the RAD SLR satisfies the voucher program SLR requirement. The PHA must ensure that the non-RAD PBV units are accounted for in the RAD Transaction Log as part of the Financing Plan submission.

Requesting an Opportunity Zone Rent Increase

When 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.

Opportunity Zone Locations

How 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/

Definition of Substantial Rehab

For 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).

Rent Increase Needed for Viability

For 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.

Opportunity Zone Rent Increase Eligibility

What 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

ROSS Grant Eligibility

I am about to apply for RAD but am also in the process of applying for a Resident Opportunities and Self-Sufficiency (ROSS) grant. The ROSS grant regulations state that HA’s cannot apply for a ROSS grant if they have received a CHAP at the time of the application due date. Would I have any issues applying for a ROSS grant while waiting for my CHAP award?

As long as you don't have a CHAP by the application due date, you are eligible to apply for the ROSS grant. You can continue to use the grant until it has expired, even if the AMP converts under RAD.

Tenant Repayment Agreements

How 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.

Operating Pro Forma Feasibility Requirements for DSCR

Attachment 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.

Use of HOME Funds for Predevelopment Costs

Are 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.

Use of Section 8 Administrative Fee Reserves as a Funding Source

Our 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.

How to Underwrite Income from Cell Tower Lease

How 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.

Lender and Investor Concerns Regarding Foreclosure

How 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.

Capital Fund Reporting

When a PHA contributes Capital Fund grants to a RAD development budget, are those funds treated as both obligated and expended at closing?

Yes. A PHA should withdraw those funds from LOCCS and deposit into the escrow account at closing, which will then also serve to obligate and expend the funds under the Capital Fund program.

Sale Proceeds as a Source of Financing

Can housing authorities use sale proceeds from public housing units as a source for financing in a RAD development?

Yes; indeed, such proceeds are a common source of funding in RAD applications.

Capital Fund Obligation Deadline Extension Request

A PHA will be using their 2012 funds for RAD and want to make sure they meet the obligation deadline. What is the process for doing this?

The PHA should send an extension request (to extend the obligation deadline) to the Capital Fund Office, attention: Alan Kaufmann and Ivan Pour. [Updated 5.13.15]

Use of Capital Funds in a RAD Conversion

How do Capital Funds become part of a RAD conversion?

A PHA wishing to use Capital Funds in its conversion should include the Capital Funds in the Sources & Uses section of their RAD Financing Plan. Upon closing, a PHA including Capital Funds into a conversion will transfer the Capital Funds into a rehab escrow.

Extending Obligation & Expenditure Dates of Capital Funds

How do I submit a request to extend the obligation and expenditure dates of my capital funds?

Section 1.5A of the revised Notice (page 27) contains the following new language: "If the PHA requests, in accordance with section 9(j)(2)(A)((ii) of the United States Housing Act of 1937 and the relevant HUD Appropriation Acts, HUD will extend the obligation end date for Capital Funds used in the conversion for up to five years from the point when Capital Funds became available to the PHA for obligation. By extending the obligation end dates, the expenditure end dates will correspondingly be also extended. Such extensions will prevent PHAs from otherwise losing its unobligated Capital Funds prior to conversion." The PHA should send a request to the Office of Capital Improvements, to the attention of Jeff Riddell, with copies to the RAD Transaction Manager and the local PIH field office.

Limits on Deferred Developer Fee Amount

Is there any limit on how much of the developer fee can be deferred to finance a RAD conversion, assuming all project financing will be from Housing Authority sources?

While in tax credit deals only a certain amount of deferred developer fee can be counted towards basis, there’s no such rule outside of that context. As a general principle, the RAD team generally wants a material amount of non-deferred developer fee because it acts as an additional contingency (if there are cost overruns, the developer can defer more fee without having to invest more cash in the deal). Additionally, funding requirements may change based on the findings from the completed RAD Physical Condition Assessment (RPCA).

Replacement Housing Funding

For purposes of Replacement Housing Funding (funds are permitted to be used 'for development'), are construction costs considered 'development'?

Yes. Under RAD, RHF funds may be used for renovation (of the converting site) or new construction. [Updated 7.29.13]

Subsidy Phase-Down Payments

Are Housing Authorities eligible to receive subsidy phase-down payments for units converted under RAD?

No. Housing Authorities are not eligible to receive subsidy phase-down payments for units converted under RAD, or what, under the public housing program, is referred to as "Asset Repositioning Fee." Nor will PHAs, under RAD, be eligible for Replacement Housing Factor (RHF) funds for units that convert. Essentially, the act of conversion makes the PHA "whole" in terms of assisted units.

Retaining Public Housing Reserves for Other Affordable Housing Development

We will be converting a large portion of our public housing units through RAD. Will we be able to retain the current reserves and use them for affordable housing development?

If a PHA converts all of its units under RAD, it may bring all of its capital funds and operating reserves without restriction. However, if the PHA will have have projects remaining in the public housing program, aside from a safe harbor of Operating Reserves (the average the project has maintained over the past three years), the PHA may only contribute to the project what is needed for the projects rehabilitation and ongoing viability. HUD will perform a subsidy layering review in such cases to ensure that the project is not being excessively subsidized. As a result, a PHA will not be able to contribute public housing funds that will not be used on the project.

PBV Vacancy Loss and Damage Claims

Is RAD PBV eligible for vacancy loss and damages claim?

For the PBV program, vacancy loss is governed by 24 CFR 983.352; we did not change the rules for vacancy payments.

Replacement Housing Funds

When you convert a project under RAD, are the converted units eligible for RHF funds?

No, but if you have existing RHF funds, you can use those to help pay for the conversion.

Excess Proceeds

My 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.