Transcript Should My HA Go RAD?

AZ NAHRO
JASON ISRAEL & KIMBERLY TAYNTON, Paragon Mortgage
Corporation
IRMA HOLLAMBY, Administrator, Housing Authority of
Maricopa County
Contact Information
JASON ISRAEL, Vice President
Paragon Mortgage Corporation
1130 East Missouri Avenue, Suite 204
Phoenix, AZ 85014
Phone: 602-347-6726
Email: [email protected]
IRMA HOLLAMBY, MPA
Administrator
Housing Authority of Maricopa County
8910 North 78th Avenue
Peoria, AZ 85345
KIMBERLY TAYNTON
MAP Underwriter
Paragon Mortgage Corporation
Phone: 602-347-6718
Email: [email protected]
Office: 602-744-4541
Email:
[email protected]
Should My Housing Authority Go RAD?
An Arizona
RAD / 221(d)(4)
Transaction Case Study
What is RAD?
• The Rental Assistance Demonstration (RAD) is a
voluntary program of the Department of Housing
and Urban Development (HUD). RAD seeks to
preserve public housing by providing Public
Housing Agencies (PHAs) with access to more
stable funding to make needed improvements to
properties.
• Public housing units across the country need more
than $26 billion in repairs. HUD refers to these
repair costs as capital needs.
• New Capital is infused: immediate repairs can be
made, or substantial rehabilitation can be pursued.
• Private equity sources are available to benefit
projects.
Housing Preservation
RAD preserves affordable housing.
• Allows for major improvements to the aging public
housing stock.
• Makes it easier for PHAs to borrow money and use low income
housing tax credits (LIHTCs) as well as other forms equity.
• HUD-insured financing is applicable and available.
• Section 221(d)(4) for substantial rehabilitation cases – up to
40-year mortgage term.
• Section 223(f) for cases with fewer capital needs – up to 35year mortgage term.
• Non-recourse
• Don’t forget! Developer’s Fees are ALLOWED up to 15% of Total
Development Costs.
BENEFITS of RAD
More $$$$ - Better Housing
Pre-RAD / Post-RAD
REVENUE/EXPENSE CHANGES
• Pre-RAD:
• Revenue is not enough to keep up with physical plant aging
and ongoing repair needs.
• Based on HUD-determined formula
• Central office costs are allocated to the properties
• Post-RAD
• Revenue increases.
• Don’t forget those OCAF adjustments!
• Property expenses decrease after repairs/rehab, and perhaps
the addition of experienced Section 8 management, if desired.
• Central office costs are no longer allocated to the properties.
Pre-RAD / Post-RAD
MORTGAGE PAYMENT
Pre-RAD:
• Typically no existing debt on public housing
• May have some debt – talk to your lender about early pay-off
or refi as part of conversion.
Post-RAD:
• With repairs/rehab, financing likely to be involved with a
resulting mortgage payment.
• Tax credit equity can lower the amount of mortgage debt.
• Secondary Financing Allowed (and it is helpful!)
• Seller / PHA Carry-back notes are also allowed
Pre-RAD / Post-RAD
VACANCY LOSS/ALLOWANCES:
• Pre-RAD – Budget typically based on AMP’s vacancy
history from year to year.
• Post-RAD
• RAD proforma requires the greater of the last 3-year property
historical average or 3%.
• If FHA loan is used, income (CHAP rents) can be underwritten
up to 97% occupancy (3% vacancy), if supported by
comparable Section 8 projects.
Pre-RAD / Post-RAD
TENANT SERVICES:
• Pre-RAD:
• Sky is the limit with social/tenant services
• Public housing tenant governance structure
• Tenant committee/tenant council, resident association, etc.
• Post-RAD:
• $25 PUPA is the regulatory minimum expense allocation for a
Resident Association Fee. Can add up to a lot of $$ for
services.
• Project can contract with various providers as needed, based
on best service, price, needs
• Requirements for tenant services tend to fluctuate from year to
year
Pre-RAD / Post-RAD
OTHER THINGS TO CONSIDER:
• Management Fees:
• Pre-RAD – Property Management Fee, Bookkeeping Fee,
Asset Management Fee.
• Post-RAD – Fees based on multifamily allowable
local/regional standard % of effective gross income (EGI).
• Tax Exemption: Are your HA properties currently tax exempt?
• Reserves:
• Pre-RAD – Generated by the AMP from year to year.
• Post-RAD – Calculation of Replacement Reserve derived
from HUD’s required RPCA or a 20-year R4R analysis.
• Standard established deposit amount per year.
RAD / FHA
General Loan Underwriting Overview
Project Overview
• Detailed Project Information
• Current configuration / proposed improvements / new
configuration if changes are being made.
• Green / Sustainable Improvement Plans
• Estimated Costs – preliminary at the concept stage, and later,
detailed costs of the improvements for the final application.
• Tenant Relocation Requirements
• Will residents need to be moved during the process?
• Refer to requirements in the RAD Tenant Relocation Notice.
• Can a relocation consultant help the HA with this process?
• Accessibility – are all accessibility requirements met? Are
improvements necessary?
Development Team
• Developer – have the principals and team members tackled
similar projects before?
• New ownership entity – New organizational structure
• Architect and General Contractor, if needed for the scope of
repairs or rehabilitation.
• Management Agent with Section 8 experience
• Outside consultants and analysts
• Appraisers, market analysts, capital needs assessors,
environmental consultants, accounting firms
• Attorneys – May be several
• Look for experience with HUD requirements, organizational
documents, real estate transactions, title/survey, maybe more –
secondary financing, tax credits
• Lender – Find one who can put it all together and knows
HUD requirements. Lenders & developers can help you find
experienced providers.
Financial Needs
• First Mortgage
• Tax Credit Equity – LIHTCs, Historic, etc.
• Bridge Loan?
• Secondary Financing Sources are Allowed &
Encouraged!
•
•
•
•
•
Government Sources – CDBG, HOME funds, etc.
Bank Sources – Affordable Housing Programs
Seller Carryback Notes
What are the conditions of financing, and restrictions?
How will funds be paid in to the project, and possibly paid
back?
• Consider availability of surplus cash to repay sources.
• RAD Use Agreement
• All sources of financing must be subordinate to the
RAD Use Agreement.
Environmental
• This has proven to be a key issue for Public Housing
projects pursuing RAD.
• Your property may need one or all of the following:
• Phase 1 Environmental Site Assessment
• Vapor Encroachment Survey (should be with Phase 1)
•
•
•
•
•
Asbestos Testing
Lead Based Paint Testing
Historic Considerations / SHPO approval required
Radon Testing
Floodplain changes or issues?
• FEMA changed many floodplain zones in October of 2013 –
might want to check your current zone.
Repair Needs / Replacement Reserves
• RAD Project Capital Needs Assessment
• Are the current and long-term repair and replacement needs being
met as part of this transaction?
• If sufficient repairs or rehab are not completed, and too many
items are already beyond their useful life, HUD may require more
rehab.
• RESERVES:
• HUD has minimum annual balance requirements.
• Full rehab projects – long-term replacement needs will be much
less.
• Monthly/annual reserve deposits required.
• Depending on replacement needs, an initial deposit to the
replacement reserve, or IDRR may be required.
• HUD requires a new PCNA with updated reserve analysis in 10
years to determine replacement needs for the next 20 years and
verify that deposit amounts are still sufficient.
Coffelt-Lamoreaux
Apartment Homes
A HUD 221(d)(4) case study
Case Study Overview
• EXISTING CONDITION:
• 1952 public housing project in need of significant
rehabilitation.
• 150 separate duplex buildings containing 296 units
(the rehab is adding 5 more units – total 301 units)
• Virtually no parking on site – some residents using
unsafe street parking along 19th Avenue.
• Inefficient evaporative cooling.
• Many other obsolete conditions
• High utility costs
• Property in poor repair – resulting in high vacancy
Case Study Overview
• GOALS:
• Convert from a traditional Public Housing
development to a long-term 20-year PBRA Housing
Assistance Payments (HAP) contract.
• Complete “gut” rehabilitation – removal of functional
obsolescence.
• Include GREEN and sustainable improvements
throughout.
• Address many of the issues cited in the Health
Impact Assessment reports.
• Provide quality low-income housing for the next 40
years.
Case Study Overview
• CHALLENGES
• Find enough $$ - Financing Sources
• Tax Credits & Master Lease Structure
•
•
•
•
•
•
•
Historic Designation
Architectural Requirements
Environmental Issues
Floodplain Issues
Construction Plan/Phasing
Tenant Relocation needs
Occupancy drawn down to accommodate level of
rehab.
• Timing
• Of course! When is timing not an issue?
More specifics
• Historic Tax Credits – required historic designation on the
National Register
• Along with all of the many architectural needs for a Substantial
Rehabilitation project, Architect had to make certain that
rehabilitation plans complied with historic requirements.
• Environmental – site is located near areas with prior
contamination
• Asbestos and Lead Based Paint – Rehabilitation includes full
abatement.
• Radon – Due to 1-story duplex configuration – All 151 buildings
required testing.
• Floodplain – October 16, 2013, FEMA issued new floodplain
determinations throughout the City of Phoenix – Coffelt was
changed to a flood risk zone.
• Construction plan, phasing, tenant relocation.
• Highly coordinated planning between architect, general
contractor, PHA, developer, management agent and tenant
relocation specialist.
Financing Sources
• FHA First Mortgage – Section 221(d)(4) HUD-insured
loan
• Allowed for 40-year amortization with non-recourse loan
• 4% Low-Income Housing Tax Credits (LIHTCs) and Tax
Exempt Bonds
• Historic Tax Credits w/ Master Lease Structure
• Historic Tax Credit Pass-Through Agreement
•
•
•
•
•
State of Arizona Housing Trust Funds
City of Phoenix CDBG Funds
Two Seller Carryback Notes – Allowed for RAD deals
Federal Home Loan Bank – AHP Funds
All of these sources were leveraged to provide enough
capital to meet the redevelopment needs of the project.
Financing Sources
• HUD-insured financing works with RAD, tax
credits, secondary financing, etc.
• SECTION 221(d)(4)
•
•
•
•
•
New Construction or Substantial Rehabilitation
Up to 40-year loan amortization
Low fixed interest rate.
Non-recourse loan (no personal guaranties)
One-stage processing for RAD transactions!
• SECTION 223(f)
• Repairs (monetary/scope threshold is less than substantial
rehabilitation)
• Up to 35-year loan amortization
• Excess loan proceeds (if available) can be utilized to help
fund other RAD projects.
Coffelt Financing Sources Summary
• Breakdown of overall financing sources for
project costs:
Funding Sources
Section 221(d)(4) First Mortgage
ADOH Housing Trust Funds
City of Phoenix CDBG Funds
4% Low-Income Housing Tax Credits
Historic Tax Credits
Seller Carryback Notes
FHLB/AHP Funds
Total Funding Sources
31%
2%
1%
36%
12%
14%
3%
100%
The Results!
• Financing sources were found for all capital needs on
this very large sub-rehab project.
• 15% developer’s fee paid to the developer participants.
• A fully rehabilitated, practically new, affordable housing
property with a brand new 55 year shelf life.
• Happier residents who will now have washers/dryers in
every unit, modern energy efficient appliances, 2nd
bathrooms in the 3 and 4 bedroom unit types, and a
much nicer property with many other features.
• Revenue will be higher, and expenses are being
reduced significantly due to the new improvements and
rehabbed condition.
• The property will be in a much stronger position
physically, financially, and for the long term.
Getting Started
• What are the PHAs goals for this property, or the overall HA
portfolio?
• What are the repair/replacement needs of the property?
• A RAD Property Capital Needs Assessment (RPCA) should be
completed early on to determine repair needs, replacements,
expected costs.
• How much $$$ will this project need?
• Will insurance costs and requirements change after conversion to
Section 8?
• What are the residents’ needs? How will improvements help
them?
• Has a Health Impact Assessment been completed for the
property?
• Will there be enough money available to incorporate needed
improvements?
• How will recommendations from the HIA be incorporated into the
project?
Getting Started
• Does my HA have the capacity to administer the recapitalization
effort, or will we need help – a developer partnership?
• How can a developer partnership help my PHA?
• Experience: Development and Construction, Architectural
Needs, Financing, Accounting, Legal Resources
• They often have the staff capacity.
• They can coordinate the effort with lenders, team members.
• Knowledge of LIHTC industry, investor/banking relationships.
• Your HA also brings resources to the partnership
table!
• Community/Municipality/HUD Relationships – Help to find
additional funding or equity resources
• Property Needs / Area Knowledge / Resident Relationships
Other things to consider….
• Get Board, Local Government and Residents on board early
• Dedicate appropriate staff time to the RAD effort.
• Hire a reputable RPCA Consultant who has completed RAD
PCAs before.
• Make sure someone who understands the HUD
requirements reviews their work.
• Look at possible rebates with local utility providers if
upgrading the buildings and adding energy efficiencies.
• Developer’s Fees are ALLOWED up to 15% of Total
Development Costs.
Factor’s Driving HAMC’s RAD Strategy
• The physical conditions of the portfolio—
traditional shortfall of adequate cap funds to
support our needs profile
• Our strategic vision to relieve our dependency
on federal funding
• Availability of financial vehicles as adequate
funding sources
• Improve the communities we are in and
increase Maricopa County’s affordable housing
availability.
Ready. Set. Go.
• Look to your housing development plan.
• Get your intention in your PHA plan.
• RFP for a co-developer.
• Get a contractor on deck ready to perform
PNAs once you get the CHAP.
• Submit a RAD application. If you are
successful in getting a CHAP, but decide RAD
is not for you, you do not have to proceed.