HUD issued new guidance to the owners of Section 202 properties with Project Rental Assistance Contracts (“PRAC”) through a memo dated March 12, 2020, resuming normal processing of Budget Based Rent Increases (“BBRI”). Since the summer of 2019, BBRI’s had been limited to 5% and account executives could not take replacement reserve needs into account. The new guidance does not directly address the 5% cap, but announces that HUD has “resumed routine processing,” presumably lifting the 5% cap, and allowing account executives to consider replacement reserve needs. The memo also announces alternate procedures for projects converting assistance through the Rental Assistance Demonstration (“RAD”), involving the Office of Recapitalization (“Recap”) at HUD headquarters instead of processing entirely in the field.
Last fall HUD released the much-anticipated Rev-4 of the RAD Notice (“Rev-4”), which set forth guidance for converting Section 202 PRAC projects to long term Section 8 contracts (“RAD for PRAC”). Rev-4 limits RAD for PRAC rents to the lower of the “approved” PRAC rents or 120% of FMR for PBRA projects (110% of FMR for PBV projects). Future debt service cannot be taken into account in establishing PRAC rents, but replacement reserves can. Therefore, Rev-4 allows PRAC owners to submit a Capital Needs Assessment (“CNA”) to demonstrate the need for increasing replacement reserve deposits to pay for needed rehabilitation as part of their BBRIs. The hope is that the resulting increase in rents would be sufficient to support debt service after conversion. However, the rush by PRAC owners to apply for these BBRIs led to a faster than normal depletion of HUD’s funding for rent increases, leading HUD to cap BBRIs for PRAC projects to 5% in late 2019.
By announcing that routing processing has resumed, HUD’s March 12, 2020 memo to PRAC owners presumably signals that the 5% cap has been lifted. Although it is not entirely clear from the memo, it seems that this lifting of the 5% cap will apply across the board, not only to PRAC owners planning to convert their properties under RAD. Core costs, such as changes in utilities, taxes and routine maintenance, remain additional consideration factors in BBRIs.
However, the memo also provides valuable guidance for PRAC owners wishing to undertake a RAD conversion. HUD has adopted clearer standards for evaluating CNAs in the context of BBRIs and that new protocols have been put in place to coordinate between field office staff and Recap on the processing of these RAD BBRI’s. Typically BBRI’s are processed by the local HUD field office, while RAD transactions are handled by Recap, so these BBRI’s in association with RAD cross over both the local and Recap offices, which could lead to confusion and delays in processing. To make sure that their BBRI is processed appropriately and these new protocols are followed, PRAC owners must make it clear in the cover letter to their BBRI that they intend to apply for the RAD program within the next year.
PRAC owners who previously submitted a BBRI during the period of time when the 5% cap was in place are advised to consult with their Account Executive regarding their options to have HUD reassess their request. Finally, HUD advises that large rent increases will often require additional processing prior to approval, so PRAC owners must submit their BBRI request in a timely fashion, i.e., at least 120 days prior to their annual contract renewal date.
In addition to the guidance regarding Section 202 PRAC’s and budget based rent increases, the memo also notes that the President’s Budget released on February 10, 2020, includes the expansion of the RAD program to also cover Section 811 PRAC’s, something which many in the industry have long anticipated, as this is a portfolio of buildings also in need of extensive rehabilitation.