HUD has published Rev-4 of the RAD Notice (“Rev-4”) on its website (now renumbered as Notice H-2019-09 / PIH-2019-23(HA)). Rev-4 sets forth the eagerly-anticipated final guidance on “RAD for PRAC,” implementing the authority to convert Section 202 PRAC projects through RAD to long-term Section 8 contracts. (Rev-4 also updates guidance on the other RAD components that convert public housing, Mod Rehab, Rent Supp and RAP properties – for more information, see Parts 1, 2 and 3 of this blog post.)
Rev-4’s final RAD for PRAC guidance largely tracks the draft guidance published in February 2019. Some highlights of Rev-4 include:
1. Rents? Questions remain on rent-setting provisions. Initial contract rents are limited to the lesser of (a) “approved PRAC rents” or (b) 120% of FMR for PBRA projects (110% of FMR for PBV projects). Rev-4 maintains the potential rent adjustment provisions set forth in the draft guidance: (i) Projects can use capital needs assessments (CNAs) to support rent increases at their annual PRAC renewal. (Although a recent rush on requests for rent increases caused HUD to impose a 5% limit on rent increases, HUD remains hopeful that future appropriations will not require such limiting measures – We expect advocacy organizations to take this up with Congress in the coming session.) (ii) Owners can “rent bundle” to pool and share subsidy among several projects, presumably with some common ownership among the new project owners. (iii) HUD reserves the right to modify PRAC rents at conversion to support an approved project budget, subject to the availability of appropriations.
2. Use of Proceeds allowed, limited. Use of proceeds from a sale or refinancing is restricted for the length of the original Capital Advance. As with the draft guidance, Rev-4 allows full use of proceeds for affordable housing purposes (for the benefit of the project, its residents or other low-income housing). Additionally, Rev-4 allows sellers in third-party sales to use proceeds for transaction costs (including taxes, fees, broker fees and legal costs), for limited withdrawal of equity (increasing the longer the project has operated) and for limited repayment of identity-of-interest loans. Project owners are also allowed to take distributions from surplus cash if a minimum operating reserve balance is met.
3. PBV conversions are super complicated. Because of budgeting and re-apportionment quirks, RAD for PRAC conversions choosing PBV face additional challenges over those choosing PBRA. Among these complexities, PBV projects will need to be timed to correspond with the PRAC’s expiration and will need to close in escrow for 90 days while funding is reallocated. PBRA conversions will be much simpler to implement.
4. Davis-Bacon requirements apply to previously unassisted units. In the draft guidance, Davis-Bacon wage requirements did not apply to PBRA conversions but applied to PBV conversions. In the final guidance, Davis-Bacon applies in both PBV and PBRA for housing units that did not previously receive rental assistance, but does not apply for existing housing that was previously assisted.
Some key features of the guidance that didn’t change but are worth noting include:
5. Capital Advance use restrictions and debt terminated and replaced. Upon conversion, all existing Capital Advance debt and use restrictions are terminated. A new Elderly Housing Use Agreement will be in effect for the remaining term of the Capital Advance Use Agreement plus 20 years.
6. Social Services required. The conversion plan must account for the provision of social services.
7. Non-profit involvement required, but flexible. Non-profits must participate in project ownership, but requirements are more flexible than current Section 202 loan prepayment requirements. Rev-4 allows LLC owners and for for-profit joint ventures with a non-profit controlling 51% of a general partner or managing member interest.
8. Other common RAD requirements apply. Common RAD features apply, including the Uniform Relocation Act, a 20-year CNA, site and neighborhood standards and environmental review. Interested parties must first provide some basic project information in a letter of interest and conduct resident consultations before submitting a full conversion plan.