Mixed-Finance Development Programs Converting and Preserving Public - - PowerPoint PPT Presentation

Leveraging Affordable Housing HUD Financing: RAD and Other Mixed-Finance Development Programs

Converting and Preserving Public Housing Through Public-Private Partnerships

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Presenting a live 90-minute webinar with interactive Q&A Delphine G. Carnes, Partner, Crenshaw Ware & Martin, Norfolk, Va. Antoinette M. Jackson, Partner, Jones Walker, Houston Julie S. McGovern, Member, Reno & Cavanaugh, Washington, D.C.

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LEVERAGING AFFORDABLE HOUSING HUD FINANCING:

RAD AND OTHER MIXED-FINANCE DEVELOPMENT PROGRAMS Converting and Preserving Public Housing Through Public-Private Partnerships

Rental Assistance Demonstration “RAD” Program

Presenters & Contact Information

Julie McGovern Reno & Cavanaugh, PLLC jmcgovern@renocavanaugh.com

6

• RAD Basics
• Conversion Mechanics
• RAD In Action
• Key RAD Provisions Affecting Residents
• Deal Structure Options
• Sample Deals

Agenda

7

RAD Basics

8

• GOAL
• Preserve vulnerable federally-assisted projects by converting existing

subsidies to long-term Section 8 to leverage debt/equity

• PREMISE
• Converting from public housing assistance allows PHAs to finance

properties at higher rents than Mixed Finance

• AUTHORITY
• FY 2012 HUD Appropriations Act
• Notice PIH 2012-32, REV-1 (July 2, 2013)
• 1ST COMPONENT
• Public Housing & Mod Rehab
• Unit cap at 1850,000 – all units have been assigned
• 2ND COMPONENT
• Mod Rehab, Rent Supp & RAP; no unit cap
• Subject to availability of Tenant Protection Vouchers (TPVs)

RAD Overview

9

Conversion Mechanics

10

Overview of Closing Process for RAD Transactions

• Initial commitment made via Commitment to enter

into a Housing Assistance Payment (“CHAP”) that sets out project milestones

• PHA submits Financing Plan (or FHA firm

commitment application for projects with FHA financing)

• HUD issues RAD Conversion Commitment

(“RCC”) that outlines closing requirements

• Closing occurs

11

RAD Milestones

• Within 30 days - Lender commitment and developer team capacity
• Within 60 days
• Significant amendment to Annual/Five Year plan
• Election to convert to PBV or PBRA
• Within 90 days - Submit Physical Condition Assessment (PCA)

Within 150 days

• All funding applications have been submitted
• For FHA-insured deals, this is the Firm Commitment Application
• Within 180 days – Submit Financing Plan
• Within 320 days - Submit firm commitments for all financing
• Within 360 days - Financial closing
• Within 12-18 months after issuance of HAP - Completion of work.

12

Comparison to Other Programs

Program FHA Mixed Finance RAD Initial Application Application for Firm Commitment Mixed Finance Proposal RAD Application/CHAP Presentation of Transaction Details Submission for Invitation for Firm Commitment Rental Term Sheet Financing Plan HUD Preliminary Approval (with Conditions) Firm Commitment Mixed Finance ACC Amendment RCC Closing Requirements Special Conditions in Firm Commitment Owner’s Consolidated Certifications HUD Final Approval HUB Closing Approval Letter Issued by HQ Execution of Use Agreement by HQ

13

CHAP

• Effectively the HUD RAD award letter
• If selected and awarded a CHAP, PHA must move

quickly to secure lender and investor to satisfy required milestones

• In addition to milestones, CHAP sets forth

information about transaction, including units to be converted, size, and contract rents

• For LIHTC deals, milestones begin at award of

LIHTC funding

14

Financing Plan

Key Elements:

• Type of conversion (PBV or PBRA)
• Physical Condition Assessment
• Scope of Work (for rehab or new construction)
• Completed Environmental Review
• Relocation Plan
• Development Budget
• Development Team (including 2530 clearance of PBRA

conversion)

• Proposed Financing
• Operating Pro Forma

HUD’s Approval of Financial Plan: Triggers closing process

15

• Follows approval of Financing Plan
• Triggers invitation to submit documents and assignment
• f field counsel
• Sets forth legal requirements related to conversion/rehab,

including:

• Effective Date of HAP (executed by HUD, but held in

escrow)

• Scope of Work
• Timeline for Work
• Key terms of financing, replacement reserve funding, and
• ther special conditions

RCC

16

Closing

• Closing checklists available on HUD website
• www.radresource.net/closing.cfm
• Documents submitted to HUD
• HQ closing manager reviews documents for

consistency with RCC

• Field counsel reviews title/survey, opinions and

new owner’s organizational documents

• No approval letter; execution of Use Agreement is

HUD’s final step

17

RAD Form Documents

• Financing Plan
• Conversion Commitment
• Use Agreement and Lender Rider
• PBV HAP+ RAD, Lender & Investor Riders
• No AHAP in 1st Component
• HAP Executed Before Construction
• PBRA HAP – Lender &Investor Riders
• RAD Checklists – periodically updated

18

RAD Issues

19

Portfolio Awards

• PHA may reserve RAD conversion authority for a set of

projects and lock in the current year’s contract rent

• Requires:
• A list of all projects proposed for a Portfolio Award, including units

to be converted, total estimated capital needs, and the major anticipated financing sources, where applicable, for each project; and

• RAD Applications for at least 50% of the projects identified in the

portfolio (PHA has 1 year to submit application for other projects)

• Upon Approval - HUD issues a Portfolio Award Letter covering the

remaining projects within the proposed portfolio

• HUD may revoke RAD conversion authority for all projects

that have not yet received CHAPs if HUD determines the PHA is not making sufficient progress.

20

Rent Bundling Under RAD

• PHAs may “bundle” or adjust current allocations of

Capital and Operating funds in setting initial contract rents across multiple projects

• Must submit applications for at least 2 projects
• No limit on number of projects PHA may bundle
• The combined subsidy for “bundled” projects may not

exceed the aggregate funding for all of the projects the PHA is proposing to bundle

21

Long-Term Affordability

• Initial Contract Terms: 20 (PBRA) and 15 (PBV) years
• Contract Renewal: Secretary must offer, and PHA must

accept

• Use Agreement: Long-term use agreement extended

with each contract renewal

22

PHA Requirements I

• Significant Amendment to PHA Plan
• Must be done within 60 days after the CHAP is issued.
• Requires 45-day notice, broad public outreach, and tenant

consultation

• Use of Public Housing Funds
• PHA may use current public housing funds, including

reserves, for predevelopment costs and construction.

• Future Public Housing Funding
• RAD units not eligible for Asset Repositioning Fee (ARF) or

Replacement Housing Factor (RHF) funds.

• Public Housing Cap
• A PHA’s “Faircloth cap” reduced by number of RAD units.

23

Other Requirements II

• Davis-Bacon
• Applies to all initial repairs identified in Financing Plan even if

Davis Bacon would not otherwise apply.

• Demo/Dispo - Section 18
• Not apply unless number of assisted units would be reduced

by more than a de minimis amount.

• Previously demolished units eligible for RAD if still receiving

subsidy

• Allows transfer of subsidy for off-site replacement
• Existing Debt – CFFP and EPC
• Address reduced loan coverage with current lender
• Can prepay in whole or in part with RAD proceeds

24

Operating Proforma

• Must project for term of initial PBV or PBRA contract
• Rents must be set in accordance with RAD rules (incorporate

OCAF into projections)

• Vacancy and bad debt set at not less than greater of: (i) average of

past three years; or (ii) 3% for vacancy and 2% for bad debt (or stricter lender requirements)

• Real Estate taxes set at most recent actual tax bill amount
• Note: Continuation of PILOT requires legal opinion
• Other operating expenses set at no less than 85% of most recent

three year average (unless HUD waives based on reasonable justification)

25

Developer and Other Fees

• For non-LIHTC, developer fee up to 10% of development

budget (less dev fee, reserves, and related party acq. costs)

• Payout limits: 33% at closing, 33% at 50% rehab completion; and

remainder at 100% rehab completion (and certification of HUD’s inspector)

• For LIHTC deals, developer fee lesser of: i) 15%; or ii) state

LIHTC agency limits

• Other potential PHA fees:
• Ground lease payments
• Seller financing (i.e. acquisition note)
• Financing fees
• Cash flow
• RAD fees earned by PHAs are unrestricted, non-federal

funds

26

Permanent Debt Terms

HUD requirements:

• Fixed interest rate
• Fixed term
• Fully amortizing over no more than 40 years
• Maturity date or balloon no earlier than 18 years

(except loans in PBV deals may be coterminous with PBV HAP)

• DSC cannot be less than 1.11 or lender

requirements

27

RAD In Practice I

• RAD requirements can conflict with LIHTC program

requirements in regards to resident income

• Demolition/Disposition 1:1 replacement requirements
• Asking HUD for flexibility to allow diminimis reductions
• Lender issues with Use Agreement and HAP Contracts
• Foreclosure
• Investor issues with HAP Contracts
• Transfer of LP interest
• Replacement of general partner
• PCA (Physical Condition Assessment) for rehabs
• Replacement Reserve - set based on capital needs

(minimum balance of 5% of total aggregate capital needs)

28

RAD In Practice II

• Resident Relocation
• Follow Uniform Relocation Act AND
• Provide right to return (more later)
• No relocation until Use Agreement is recorded at closing
• Notice H 2014-09 and Notice PIH 2014-17
• Eligibility for URA relocation assistance is generally effective
• n the date of initiation of negotiations (ION)
• RAD ION date is issuance of the RAD Conversion

Commitment (RCC).

• No demolition or land transfer until closing
• Site and Neighborhood standards review by HUD

FHEO for any transfer of assistance to a new site

• Coordinating different departments of HUD with

varying approaches and requirements

• Public housing, Office of Recapitalization, and (if applicable) FHA

29

Key RAD Provisions Affecting Residents

30

Enhanced Tenant Protections for Pre-Conversion Residents

• Right to Return
• Tenants may waive
• Households that do not want to transition to new program

can be offered transfer to other public housing as available

• Review Relocation Notice for procedures
• No rescreening
• Even for income eligibility of new financing
• I.e, residents with income between 60% and 80% of AMI

must be offered a unit in a project refinanced with tax credit

• Phased Rent Increases
• Three to five year phase in of any rent increases of more

than 10% or $25.00

31

Tenant Protections Prior to Termination

• Notice Of Termination

Owner must provide a notice of termination

• “Reasonable period of time” up to 30 days if: (i) the health or safety of
• ther tenants, management, PHA employees, or persons residing in

the immediate vicinity of the premises is threatened; or (b) in the event

• f any drug-related or violent criminal activity or any felony

conviction.

• At least 14 days for non-payment of rent
• At least 30 days notice is required for any other case, except that any

shorter notice period established by a State or local law applies.

• Informal Hearing
• Owner must provide access to an informal hearing that is similar to

the public housing grievance process under 24 C.F.R 966

• Include in PBV Tenant Lease or PBRA House

Rules

32

CHOICE MOBILITY

• Defined
• Option to obtain a HCV from a PHA after a defined period of residency
• PBV – RAD adheres to current program rules
• Minimum residency: 1 year
• Waitlist priority if tenant-based assistance is not immediately available
• RAD PBRA – RAD adds requirements not in PBRA
• Minimum residency: 2 years
• Limits
• PHA may limit Choice-Mobility vouchers to 1/3 of turnover vouchers, or

moves to 15% of the project’s assisted units

• Owner must keep a list of requests in order submitted
• Exemptions
• HUD may exempt up to 10% of converted units if no vouchers available

33

B Y D E L P H I N E G . C A R N E S C R E N S H A W , W A R E & M A R T I N , P . L . C .

LEVERAGING AFFORDABLE HOUSING HUD FINANCING: RAD AND OTHER MIXED-FINANCE DEVELOPMENT PROGRAMS

Converting and Preserving Public Housing Through Public-Private Partnerships

Using Low Income Housing Tax Credits (LIHTC) with RAD

Strafford Publications, Inc. June 4, 2015

ADDING LIHTC TO THE RAD PROCESS

• LIHTC is a key component if substantial rehabilitation is needed
• The property may not qualify for a large enough loan/may not be

able to generate enough cash flow for debt service

• If the existing units have low contract rents/high expenses and

need substantial rehab, 9% LIHTC may be the only way to finance the renovation

• Opportunity to earn a developer fee

35

LIHTC PROGRAM OVERVIEW

• Established by the Tax Reform Act of 1986 to encourage private

investment in affordable housing

• Program administered by state housing finance agencies
• States receive tax credits based on population, therefore the amount of

available 9% credits is limited. Selection priorities and procedures vary in each state and are outlined in a Qualified Allocation Plan (“QAP”)

• Dollar for dollar reduction of federal tax liability for the owner of the

qualified project

• Credits claimed over a 10 year period
• Restrictions in place for 15 years
• Many states extend the restrictions for a longer period

36

TYPES OF LIHTC

• 9% LIHTC are the best you can get
• More equity – 70% present value
• But much more competitive because limited amount in each State
• 4% LIHTC with Tax-Exempt Bonds
• Less equity – 30% present value
• Easier to obtain (bonds are competitive but 4% credits are automatic

and not subject to the per capita limit)

• More complex financing structure
• Higher closing costs
• Rates change monthly as published by the IRS

37

LIHTC PROGRAM REQUIREMENTS

• Occupancy/Income Requirements

Either 20% of units occupied by households with incomes at or below 50% of AMI, adjusted for family size (“20/50”) Or 40% of units occupied by households with incomes at or below 60% of AMI, adjusted for family size (“40/60”) The set-aside election is made on IRS Form 8609 The requirements of the minimum set-aside must be met no later than the close of the first year of the credit period and must continue throughout the compliance period Tenant income must be reviewed and documented at least annually throughout the compliance period

• Rent Requirements

The gross rent for a LIHTC unit may not exceed 30% of the imputed income limit applicable to such unit size

• Maintain habitability standards
• Operate under the occupancy/income and rent restrictions for at least 15 years (30 or

more years in many States pursuant to Extended Use Agreements)

38

CREDIT CALCULATION

• Credits based on Eligible Basis, not total development costs. The

determination of a building’s Eligible basis is the starting point for the computation of the credit

Most costs, minus non-depreciable items (Eligible basis includes rehabilitation costs, reasonable developer fee) Examples of non-eligible costs: land, syndication costs, financing costs, legal fees related to the acquisition of land, costs of surveys, federal grants

• Qualified basis

The qualified basis of a building is that portion of the building’s eligible basis that is attributable to low-income tenants

• The credit is calculated to provide a yield over a 10 year period

equal to 70 percent or 30 percent, as applicable, of the building’s qualified basis

39

CREDIT CALCULATION

• Eligible basis x percent qualified units x applicable

percentage x 10 years = total tax credits

• Total tax credits x price per credit = investor total

equity

• Note that most of the investor’s equity will not be

contributed to the owner entity until the project is completed

40

RECAPTURE

• 10 year credit period / 15 year compliance period means the

credits are “accelerated”, i.e. claimed faster than they are earned

• Recapture percentage depends on year in which recapture event
• ccurs. Only the accelerated portion of the credit is recaptured.
• Recapture events - Recapture occurs if there is a decrease in

qualified basis:

Nonqualified unit: for example, a unit not occupied by a qualified tenant,

• r a unit for which the owner charges above limit rent

Building disposition through sale or foreclosure unless the building is expected to continue to be operated as a low income building Unit not suitable for occupancy (casualty loss or dilapidated unit)

41

RECAPTURE, continued

• Opportunities to cure issues that could lead to Recapture

Compliance issues corrected before year end do not lead to recapture Units affected by a casualty event can be repaired/placed back in service

• Recapture amount calculated based on the decrease in

qualified basis / new applicable fraction, plus interest

42

RAD AND LIHTC THE TAX CREDIT “FAST TRACK”

• HUD Process created in 2014 for RAD conversions using 9% or

4% LIHTC with conventional/non-FHA financing

• Traditional RAD Milestones are consolidated
• Financing Plan due 60 days after LIHTC award
• Requirements listed at www.radresource.net (see Fast Track

Submission Checklist) Underwriting Documents Administrative Program Requirements

• If you apply but do not receive tax credits, you have 90 days to

come up with a feasible alternative financing plan or your CHAP may be revoked

43

OWNERSHIP STRUCTURE IN LIHTC/RAD TRANSACTIONS

• Owner of the units is a for-profit entity (limited partnership)
• Tax credit investor is the limited partner and typically owns

99.99% of the entity

• General Partner typically owns 0.01% and oversees
• perations
• PHA must have some control over the limited partnership

44

Limited Partnership General Partner PHA

Member

Limited Partner OWNERSHIP CHART for LIHTC/RAD TRANSACTION

0.01% 99.99%

45

POTENTIAL ROLES FOR THE PHA

• PHA can maintain ownership of the land. Ground lease to the

limited partnership

Ground Lease Payments

• PHA can sell the land to the limited partnership

Seller financing

• PHA can provide subordinate financing, secured by a lien on

the units

Financing fees/debt service

• PHA can serve as sole developer, or co-developer

Opportunity to earn a developer fee

46

POTENTIAL ROLES FOR THE PHA, continued

• PHA will generally be a member (or the sole member) of the

general partner entity

Cash flow

• PHA can serve as property manager

Opportunity to earn a property management fee

• Right of first refusal for sale of the property
• Fees earned by the PHA are unrestricted funds (NOT program

income)

47

PARTIES TO THE TRANSACTION

• Developer
• Lender
• LIHTC investor
• State Housing Finance Agency
• Residents
• Consultant, General Contractor, Architect, Engineer, Surveyor,

Title Company, Locality, Attorneys, Accountants

48

INVESTOR CONSIDERATIONS

• Price per credit matters, but is not the only concern
• Investor familiarity with PHAs
• Guaranties (construction completion, operating deficit and

recapture)

• Investors tend to require a developer with LIHTC experience
• Investors/their counsel will review all contracts and loan
• documents. May require Riders

49

CHOOSING A LENDER

• Experience with PHAs
• Familiarity with HUD and with RAD. Lack of familiarity with the process

may result in delays and increased costs

• Underwriting, DSCR requirements and due diligence
• Timeline
• Costs involved (lender’s legal fees, third party reports such as

environmental reviews)

• Investor will want to approve the loan structure and loan documents
• Note: FHA financing can be used in conjunction with RAD (Section

223(f) for refinancing or acquisition with minor repairs; Section 221(d)(4) for substantial rehab; Section 223(f) LIHTC Pilot Program for rehab up to $40,000 per unit). This presentation does not focus on FHA financing

50

CHOOSING A CONTRACTOR

• Price matters but is not the only concern
• Low bidder may be a company that submits a plethora of

change orders

• Experience with PHAs
• Experience with LIHTC process and ownership structure
• Investor will want some input on the contractor selection,

construction contract and insurance coverage

51

RESIDENT RIGHTS

• Any displacement of existing residents for more than 1 year requires

compliance with the Uniform Relocation Act

• Existing residents who are temporarily relocated during construction must

have the right to return

• Rehab Assistance payments provided by HUD to assist with relocation costs
• RAD does not allow screening of existing residents who have a right to

return

• Investor will review and approve the form of lease
• Owner entity must sign Consolidated Owner Certification stating that

residents had 30 days advance notice

• New leases for existing residents must be signed prior to the effective date
• f the HAP contract

52

CONCLUSION

• RAD can be a good tool, combined with LIHTC, to help finance

substantial rehabilitation

• Complete re-do or “gut rehab” and new construction will

necessitate higher debt

• RAD does not always work, even with LIHTC. Run the numbers

carefully

• Use all funding sources available: Replacement Housing Factor

(RHF) Funds, reserves, HOME, CDBG, AHP, grants, senior and subordinated debt . . .

• Select your partners carefully

53

Delphine G. Carnes

dcarnes@cwm-law.com CRENSHAW, WARE & MARTIN, P.L.C. 150 W. Main Street ▪ Suite 1500 ▪ Norfolk, VA 23510 T (757) 623-3000 | F (757) 623-5735

June 4, 2015

www.cwm-law.com

54

Mixed Finance Program and Converting Mixed Finance to RAD

LEVERAGING AFFORDABLE HOUSING HUD FINANCING: RAD AND OTHER MIXED-FINANCE DEVELOPMENT PROGRAMS

Presented for Strafford Publications, Inc.

June 4, 2015

Presented by:

Antoinette M. “Toni” Jackson Jones Walker 1001 Fannin St., Suite 2450 Houston, TX 77002 (713) 437-1888 tjackson@joneswalker.com

56

Mixed Finance Public Housing

According to the HUD website, mixed- finance public housing allows HUD to mix public, private and nonprofit funds to develop and operate housing developments

57

Mixed financed developments bring additional resources to a transaction which better leverages the HUD funds within the

• transaction. Traditional mixed-financed

developments have been with Capital Funds, HOPE VI funds or PHAs including public housing units in LIHTC developments.

58

• Mixed-finance projects are subject to a

Mixed-Finance Amendment to the Annual Contributions Contract (“ACC”).

• The Annual Contributions Contract is a

contract between HUD and the PHA

• bligating HUD to provide capital funds

and operating subsidy to the public housing units

59

The Process

Mixed finance submission process to HUD requires various steps of the HUD review: Rental Term Sheet Mixed Finance Evidentiary Package

60

• Rental Term Sheet

– sets out an overview of the development

• number of units, bedroom mix, income mix
• financing of the development
• ownership structure
• describes the guaranty structure
• describes the ownership and control of the reserves and how

they are released

• describes the cash flow
• describes the developer fees
• overall timeline through construction

61

• The review of the Rental Term Sheet

goes to a HUD committee similar to a bank’s underwriting committee. HUD may come back with questions to clarify information or can direct the PHA to proceed with the evidentiary submission.

62

• Evidentiary Submission

– review of the legal documents for the transaction – formerly this submission was a comprehensive review of all of the documents related to the transaction including the ownership documents, set of all financing documents, HUD restriction documents and title and survey

63

– HUD has recently abbreviated the number

• f documents required for the evidentiary

submission – submission is made to HUD headquarters with a local review of title/survey and recording documents

64

Other Sources Used in Mixed Finance

• CDBG-Disaster Recovery Funds
• HOME funds
• Tax Increment Financing
• Tax Exempt Bonds
• Historic Tax Credits

65

Mixed finance developments eligible for RAD conversion

– developments that did not use HOPE VI funds – developments with HOPE VI that have been in service for greater than 10 years – developments with HOPE VI that have been in service for less than 10 years and evidence 3 years of financial distress

66

If there are operational shortfalls, the PHA must show HUD its plan to address these issues with its private partners prior to being approved for the RAD conversion

67

A PHA converting a mixed-finance development to RAD cannot benefit from the HAP contract by taking fees off the top

68

In structuring the RAD conversion, the PHA can negotiate a change in the terms

• f the transaction such as the ground

lease payment, cashflow waterfall and developer fee split

69

Legal Documents Eliminated

• the Regulatory and Operating

Agreement is eliminated

• the Mixed Finance Proposal and

Agreement is eliminated

70

Legal Documents Modified

• the partnership agreement is modified
• the loan documents are modified
• the management documents are

modified

• any tax credit or other financing

covenants are modified

• any existing guarantees are modified
• the legal opinions are modified

71

Legal Documents Executed

• RAD HAP Contract is executed
• Termination of Mixed-Finance

Amendment to Annual Contributions Contract is executed

72

Mechanics of the RAD Conversion of a Mixed Finance Development

• The PHA must execute a Termination of

Mixed-Finance Amendment to Annual Contributions Contract

• The PHA executes a RAD HAP Contract

to evidence the conversion of the public housing units to RAD HAP units

• The Mixed-Finance ACC is replaced by

the RAD Restrictive Covenant

73

Conclusion

While making a decision to convert straight public housing to RAD may be an easy decision for some agencies, PHAs must consider the overall goals of its agency when determining whether to convert a mixed-finance development with public housing units to RAD units

74