HUD RAD (Rental Assistance Demonstration) Overview

HUD RAD (Rental Assistance Demonstration) Overview

Who is? Company formed in 1991 Headquartered in Bedford, N.H. with 5 offices nationwide, family owned Approved We have recapitalized to finance Apartment, over 1,500 Healthcare, affordable housing and Hospital units in loans the past decade Management averages 30 years commercial experience Maintains HUD highest designations MAP and LEAN Approved Direct HUD Lender, RAD experienced Closed over $2 billion in loans 2

Affordable Housing Difference Due to our small but experienced staff, we frequently finance and find solutions for affordable housing projects that are too complex, small, or poorly capitalized for other lenders to work with. We are a direct lender, not a broker or intermediary. Many times we act as consultants (at no cost) to assist with paperwork and provide guidance before the HUD loan process starts. In one instance we worked with a client for over three years before moving forward with their loan request. We find this approach builds long term relationships and trust with all parties. 3

RAD Overview Rental Assistance Demonstration (RAD) is a voluntary program that allows public housing authorities (PHAs) and owners of other HUD-assisted properties to convert units from formula-driven operating and capital funding to long-term (minimum 15 years), project-based Section 8 contracts. The primary benefit of RAD is that properties that convert under this process are no longer restricted from securing private sources of financing, and the owners are therefore able to address deferred maintenance issues that have caused Public Housing and other HUD rental stock to deteriorate nationwide. 4

RAD Overview (con t) Like public housing, RAD is a platform created and entirely operated by HUD. RAD is the most popular and widely used recapitalization tool for public housing today. In 2018, RAD hit a milestone of 100,000 rehabilitated units, totaling $5.7 billion in construction investment. 108,000 jobs were created as part of these construction efforts, many of which employed low-income residents. Asbestos, lead, and accessibility hazards were also mitigated as part of the repair work and new energy efficient systems and appliances were installed which will improve future cash flow. 5

RAD Program Structure The RAD program has two components. Component 1 Convert public housing units to long-term, project-based Section 8 contracts (PBV or PBRA). The vast majority of RAD conversions are done with this component. Component 2 Legacy projects with Rent Supp, RAP, and Mod Rehab can convert their units to long-term, project based Section 8 contracts (PBV or PBRA). There is no cap on the number of units that can convert under Component 2. Component 1 has a waiting list up to 455,000 units can convert per year per the FY 2017 Omnibus bill. Currently the waiting list is not at capacity and requests are being processed quickly. can assist with the waiting list process. 6

Why is RAD needed? Per HUD: Public housing units across the country need more than $26 billion in repairs. Congress has not provided enough funding for PHAs to keep up with these capital needs. As a result, PHAs have had to make tough choices between things like repairing roofs and replacing plumbing or worse, demolishing public housing. RAD provides PHAs a way to rehabilitate, or repair, units without depending on additional money from Congress. 7

RAD PHA Benefits 8

RAD Government Funding As seen in this image by Novogradac, RAD is revenue neutral for Congress, it simply transfers rental subsidies to the Section 8 platform which allows for longer, more stable funding. 9

Ownership A RAD conversion does not require a Housing Authority to give up any ownership percentage of any projects to a private developer or partner, and you can retain full management control (and administrative fees). We often see consultants try to secure an ownership percentage in a project or portion of the management fee in return for helping navigate the RAD process. This is not necessary. The current Board of Directors is also retained, and some administrative burden can be alleviated once public housing units are converted and the Housing Authority is no longer subject to the documentation and regulation of public housing funding. 10

PBRA vs PBV Contracts When a Housing Authority converts their public housing to Section 8 under RAD, the new HAP contract issued provides two project-based subsidy types for rental income: project-based rental assistance (PBRA) and project based vouchers (PBVs). RAD offers tools to determine which program works best for your conversion. PBRA is administrated by HUD and requires reporting through the HUD Multifamily Financial Assessment Subsystem (FASSUB). PBRA was created in 1974. PBV is a hybrid between Housing Choice Vouchers and PBRA. PBV was created in 1998. When a tenant moves out, rather than the subsidy going with the tenant, it stays with the property. PBV funding through RAD passes through the Choice Voucher Program, which allows administrative fees to remain (or increase with more units converted) which can provide a significant source of revenue for Housing Authorities. 11

Tenant Protections Tenant rents are unlikely to have rent increases as part of a RAD conversion, as project-based Section 8 programs also set resident rents at 30% of adjusted income like public housing. The RAD process mandates tenant involvement and notification before any formal steps are taken to convert units or apply for new financing. Tenants are involved in the process and work together with housing authorities to help with the conversion through mandatory meetings and notification events. 12

Tenant Protections (con t) No tenant will be rescreened or lose housing assistance because of a RAD conversion. Any relocation required during repairs is subject to the Uniform Relocation Act, and all tenants have the right to return to their housing when construction is complete. In our experience, even for substantial rehabilitation, tenant displacement is limited to a matter of days as units are fully renovated individually before the next is started. Image courtesy of HUD. 13

Financing Structure Because a RAD conversion allows a Housing Authority to leverage private capital, most use HUD financing to fund their improvements and repairs as it provides the highest leverage, longest term, non-recourse financing available. 14

HUD Financing Key Benefits Features Fixed Rate for Entire Term (35 or 40 Years) Benefits Preserve a project s long term affordability in a rising interest rate environment. Footprint and Loan Size Nationwide with no limitation on loan size or project type. can finance RAD conversions for scattered site projects, traditional garden style, row houses, etc. Leverage (LTV) Fully subsidized projects qualify for a minimum of 90% LTV/C leverage, which can be increased with grants or other equity sources to exceed 100% of costs. Bedford Compensation We do not get paid until closing, so there is no reason to protract process if a transaction is not feasible. 15

Other Benefits of Combining RAD with HUD The HUD loan can fund a large Replacement Reserve deposit. RAD conversions with HUD are eligible for a Developer s Fee up to 10% of the total development budget. Consultant fees (if necessary) can be mortgaged. Can be combined with LIHTC 4% and 9% if needed depending on the scope of repair work required. Can be combined with grant sources such as AHP or HOME funds. Corp 16

First Step One of the first required steps in the RAD process is to determine the scope of repairs needed for a property through a property condition report. The report will determine immediate and future repair needs over the next 20 years. and RAD will assist with this process. Once a budget is determined, the overall financing structure (including potential use of tax credits) can be determined. 17

Is Construction Required? Although RAD is typically used in combination with repair or rehab work, there is no requirement or minimum amount of repairs required to utilize the program. For projects with no deferred maintenance or repairs (which is further supported with a property condition report), RAD can be used simply to convert the rental subsidy type without taking on any form of debt. 18

RAD Process Step 1 Housing Authority researches RAD program and requirements, including discussion with HUD s Office of Recapitalization. Step 2 Commission a property condition needs assessment to determine scope of work, will assist and begin preliminary stages of HUD process/pre-qualification. Step 3 Apply for your spot on the RAD waitlist ( https://www.hud.gov/sites/documents/radguid_ltr_instr_031517.pdf ) Step 4 Before a formal RAD application is submitted, tenants should be notified with at least two meetings and a written response for their questions. Step 5 Upon notification, PHA completes simplified RAD Application ( https://www.hud.gov/rad/application-materials ) and can begin HUD underwriting process. 19

RAD Process (con t) Step 6 Receive application approval from HUD and a commitment to enter in a housing assistance payment (CHAP) which will detail the new project rents. Step 7 Submit Financing Plan to HUD which details the scope of work, development team, proposed financing, etc. This is typically submitted at the same time as our formal HUD underwriting submission. Step 8 Received RAD Conversion Commitment (RCC) which is HUD s approval of the finance plan and outlines conditions of closing. Step 9 RAD and HUD closing. 20

RAD Experience was one of the first HUD lenders to be involved in the RAD program, and has successfully funded small transactions with projects requiring minimal capital repairs, to large $20,000,000+ rehabilitation transactions. In 2018, became the first HUD lender in the country to combine the Section 18 Demo/Dispo program with RAD as part of a rehabilitation loan. The combination allowed 25% of the units to secure vouchers with higher rents than anticipated, which reduced the borrower s equity contribution by over $1.5mm. We bring this type of strategy and creativity to every transaction and client we work with. 21

Examples of BLC RAD / Affordable Housing Closings 22

40 Unit RAD Conversion provided a permanent 35 year fixed rate, HUD loan for an affordable housing project in the Northeast. The property was refinanced as part of a RAD conversion which allowed all of its public housing units to convert to long-term Project Based Rental Assistance. The owners secured a 10% Developer's Fee, funded over $500,000 in capital improvements, and established a replacement reserve account with over $475,000. 23

RAD Conversion & LIHTC Refinance provided a permanent 35 year fixed rate, HUD loan for a LIHTC property in the Southwest. The property was refinanced as part of a RAD conversion. paid off the existing debt, including almost $700,000 in outstanding Partnership debt, and lowered the interest rate significantly. The owners also secured a 10% Developer's Fee, funded $150,000 in capital improvements, and established a replacement reserve account with over $200,000. 24

Section 202 Refinance provided a $6.5mm permanent 35 year fixed rate, HUD loan for a Section 202 property in the South. paid off the existing debt, and funded over $2.2mm in capital improvements, including many energy efficiency measures which will result in significant annual savings. The owners also secured a 15% Developer's Fee and funded a large replacement reserve deposit. 25

$2,500,000 RAD conversion Secured PBRA and converted Housing Choice Vouchers to PBVs to increase income, which allowed property to be refinanced and complete $200,000 in capital improvements, and secure $400,000 cash out for owners to deploy to other affordable housing properties in their portfolio. 26

Section 202 Refinances Berlin, NH Center Sandwich, NH Manchester, NH Norwich, VT Northumberland, NH Philips, ME 27

In Conclusion If you are interested in learning more, we invite you to contact us for a discussion and overview about the benefits of RAD and HUD financing. We can complete unlimited complementary analyses (even for hypothetical transactions) for your current public housing projects to help educate and inform you about the HUD program, how RAD works, and what type of repairs can be supported as part of the new loan. 28

Contact Information Kyle Jean, Managing Director kylej@bedfordlending.com 40 South River Road, Bedford, N.H. 03110 Ph: 603.647.4646 29