RAD First Component – Eligibility, Conversion Requirements, and Financing Considerations

On September 5, 2019, HUD issued Notice H-2019-09, PIH-2019-23 (HA), Rental Assistance Demonstration – Final Implementation, Revision 4. This revised notice provides program instructions for the Rental Assistance Demonstration (RAD) Program, including eligibility and selection criteria.

Background

The RAD program was created by Congress in 2011 and provides the opportunity to test the conversion of public housing and other HUD-assisted properties to long-term, project-based Section 8 rental assistance to achieve certain goals, including the preservation and upgrading of these properties by enabling Public Housing Agencies (PHAs) to access private and public debt and equity to address immediate and long-term capital needs. RAD is also designed to test the extent to which residents have increased housing choices after the conversion, and the overall impact on the properties.

RAD has two components:

• First Component: The First Component allows projects funded under the public housing (Section 9) program to convert their assistance to long-term, project-based Section 8 rental assistance contracts. PHAs may choose between two forms of Section 8 Housing Assistance Payment (HAP) Contracts: project-based vouchers (PBVs) or project-based rental assistance (PBRA). PHAs will convert assistance at current subsidy levels and there will be no increase in funding. The law authorizes the conversion of up to 455,000 public housing units under this component. Section I of the Notice provides instructions for PHAs applying for conversion under the First Component.
  • While the RAD statute authorizes HUD to convert Section 8 Moderate Rehabilitation Projects (Mod Rehab) under the First Component, HUD is exercising its discretion to prioritize public housing conversions under the competitive requirements of the First Component. The demand for public housing conversions is extremely high and significantly exceeded the initial limitation on the number of units that could be converted under the First Component.  Consequently, Mod Rehab conversions will be processed exclusively under the Second Component of RAD, which is non-competitive.
• Second Component: The Second Component allows owners of projects funded under the Rent Supplement (Rent Supp), Rental Assistance Payment (RAP), and Mod Rehab programs to convert to PBV or PBRA contracts upon contract expiration or termination occurring after October 1, 2006. The Second Component further allows owners of projects funded under the Project Rental Assistance Contracts (PRAC) under the Section 202 program to convert to PBV or PBRA contracts.

The purpose of this article is to review the basic RAD elements of the First Component relative to eligibility, conversion requirements, and financing considerations.

As noted above, under the First Component of RAD, PHAs may choose between two forms of Section 8 Housing Assistance Payment (HAP) Contracts; project-based vouchers (PBVs) or project-based rental assistance (PBRA). No incremental funds are authorized for this component. As such, initial contract rents are established based on public housing funding levels and are subject to applicable program rent caps. Applications may be submitted for a specific project or a PHA-defined portfolio of projects. If a PHA applies for a portfolio award, HUD will reserve RAD conversion authority for the number of units covered by the award, and the PHA will be required to submit a RAD application for each individual project. After HUD approval, a project will receive a long-term Section 8 HAP Contract.

PBV Conversions

Where the PHA converts assistance of a public housing project to Section 8 PBVs, the HAP contract will be administered by the agency with which HUD has entered into the applicable Voucher ACC, which is usually the same agency that is converting assistance. Contract rents will be established and will be adjusted annually by HUD’s published OCAF on each anniversary of the HAP Contract subject to appropriations and the rent reasonableness requirement. The initial contract will be for a period of at least 15-years (but may be up to 20-years). At or prior to the expiration of the initial contract and each renewal contract thereafter, the Voucher Agency shall offer, and the Project Owner shall accept, a renewal contract for the prescribed number and mix of units, either at the site of the project subject to the expiring contract, or upon request of the Project Owner and subject to PHA and HUD approval, at another site through a future transfer of assistance.

PBRA Conversions

Where the PHA converts assistance of a public housing project to Section 8 PBRA, the HAP Contract will generally be administered by HUD’s Office of Housing, unless later assigned to a PHA that is under ACC with HUD for the purpose of administering project-based Section 8 HAP Contracts. Contract rents will be established and will be adjusted annually by HUD’s published OCAF at each anniversary of the HAP Contract. The initial contract will be for a period of 20 years and will be subject to annual appropriations. At expiration of the initial contract and each renewal contract, HUD shall offer, and the project owner shall accept, a renewal contract for the prescribed number and mix of units, either on the site of the project subject to the expiring contract, or upon request of the Project Owner and subject to HUD approval, at another site through a future transfer of assistance.

Eligibility

To be eligible for RAD, a PHA must:

1. Have public housing units under an ACC;
2. Be classified as a Standard or High Performer under the Public Housing Assessment System (PHAS). If classified as “troubled,” the PHA may still be eligible if the PHA is making substantial progress under its Recovery Agreement, Action Plan, Corrective Action Plan (CAP) or Memorandum of Agreement (MOA) or proposes a revision to such agreement or plan that incorporates conversion under RAD and that is acceptable to HUD.
3. Be classified as a Standard or High Performer under the Section 8 Management Assessment Program (SEMAP) if the PHA will be administering the PBV contract under RAD. If classified as Troubled, the PHA must be making substantial progress under the CAP and HUD must have determined that the factors resulting in the PHA’s Troubled status will not affect its capacity to carry out a successful conversion under RAD;
4. Be in substantial compliance with HUD reporting and programmatic requirements and/or satisfactorily in compliance with any CAP or MOA related to any (1) program finding or (2) failure to carry out, to the satisfaction of HUD, management decisions relating to an audit by the OIG;
5. Not have a debarment, suspension, or Limited Denial of Participation (LDP) in Federal programs lodged against the applicant, PHA Executive Director, Board members, or affiliates, unless HUD has determined that the RAD conversion is likely to place the property under the control of a more capable entity;
6. Submit a completed application that complies with all RAD application instructions; and
7. Resolve to HUD’s satisfaction any outstanding civil rights matters prior to conversion.

Project Conversion Requirements and Financing Considerations

HUD expects that the majority of projects undergoing conversion of assistance through RAD will do at least some rehabilitation or reconstruction. The following include requirements related to conversion plans more broadly, including those involving rehab and construction:

Conversion Planning Requirements

1. Capital Needs Assessment (CNA). Except as noted below, each project selected for award will be required to perform a detailed physical inspection to determine both short-term rehab needs and long-term capital needs. Short term needs will be included in the RAD scope of work conversion and long-term needs will be addressed through a Reserve for Replacement Account. A CNA must be submitted with the Financing Plan and must have been completed no earlier than 180 days prior to submission of the Financing Plan, unless HUD approves otherwise.
   1. The CNA must be completed by a qualified, independent third-party professional.
   1. HUD may exempt the following transaction types from a CNA:
      1. For non-FHA transactions, neither component of the CNA will be required as long as the annual deposit to the Replacement Reserve is no less than $450 per unit, and the Project:
         1. Has been newly constructed for financed with 9% LIHTC within the last five years, as calculated from the date the final certificate or occupancy was issued, or
         1. Qualifies as new construction of will be financed with 9% LIHTC;
      1. For non-FHA transactions, the narrative will not be required where the transaction will be financed with 4% LIHTC;
      1. For non-FHA transactions, neither component of the CNA will be required where the total assisted units at the project will constitute less than 20% of the total units at the project.
   1. No utility consumption baseline analysis is necessary as part of the CNA conducted for the RAD conversion.
2. Healthy Housing & Energy Efficiency. For all projects retrofitted under a RAD conversion, if systems and appliances are being replaced as part of the Work identified in the approved Financing Plan, PHAs shall utilize the most energy and water efficient options that are financially feasible and that are found to be cost effective by the CNA. Where a project is planning to use a RAD conversion in conjunction with new construction, projects shall at a minimum meet or exceed the 2009 International Energy Conservation Code (IECC) for single family or low-rise multifamily properties or the ASHRAE 90.1-2007 standard for mid- or high-rise multifamily projects.
3. Environmental Review. Proposed RAD projects are subject to environmental review and environmental documents are required to be submitted no later than the submission of the Financing Plan.
4. Substantial Conversion of Assistance. Conversions may not result in a reduction of the number of assisted units, except by a de minimis amount. A de minimis reduction of units may include any of the following:
   1. The greater of five units or the number of units (rounded to the nearest whole number) corresponding to five percent of the number of ACC units in the Project immediately prior to conversion;
   1. Any unit that has been vacant for more than 24 months at the time of RAD Application; and
   1. Units that, if removed from assistance, will allow the PHA to more effectively or efficiently serve assisted households through: (1) reconfiguring apartments; or (2) facilitating social service delivery, subject to HUD approval.

The de minimis allowance may be calculated across portfolio conversions but the number of de minimis units allowed must be calculated based on the RAD conversions closed prior to or simultaneous with the execution of the de minimis reduction. For example, a PHA that is converting 200 units across three properties is permitted to replace 190 RAD-assisted units (i.e., 95% of 200) across its portfolio and apply the unit reduction to a single property.

However, the property that would have ten fewer units assisted under a RAD HAP Contract must convert simultaneous with or after the first two properties – not before.

A PHA must demonstrate that any reduction in units better serves residents, the Covered Project, or the operating viability of the PHA’s RAD or public housing portfolio, will not result in the involuntary  permanent displacement of any tenant family, and will not result in discrimination based on federally protected characteristics.

• Relocation Requirements. The RAD Fair Housing, Civil Rights, and Relocation Notice provides guidance on relocation planning, resident right to return, relocation assistance, resident notification, initiation of relocation, and the fair housing and civil rights requirements applicable to these activities.
  • Right to Return. Any resident that may need to be temporarily relocated to facilitate rehab or construction has a right to return to an assisted unit at the Covered Project once rehab or construction is completed. Permanent involuntary displacement of residents may not occur as a result of a project’s conversion, including, but not limited to, as a result of a change in bedroom distribution, a de minimis reduction of units, the reconfiguration of efficiency apartments, or the repurposing of dwelling units in order to facilitate social service delivery. Where the transfer of assistance to a new site is warranted and approved, residents of the Converting Project will have the right to reside in an assisted unit at the new site once rehab or construction is complete.
  • Ineligibility of Tenant Protection Vouchers. Conversion of assistance is not an event that triggers the issuance of Tenant Protection Vouchers to residents of public housing projects going through a RAD conversion.
• Accessibility Requirements. Federal accessibility requirements apply to all conversions, whether they entail new construction, alterations, or existing facilities. Compliance with Section 504, the ADA, and the Fair Housing Act is required.
• Demolition. Conversion plans may include the partial or complete demolition of a project and replacement of assistance either on – site or off – site. A PHA may not demolish and/or dispose of units until after the closing of construction financing for the new project.
• Change in Unit Configuration. If a PHA is proposing to change the unit configuration as part of the conversion, the PHA must demonstrate that the change in bedroom distribution will not result in the involuntary displacement of any resident. For example, if three and four-bedroom units are replaced with one and two-bedroom units, the conversion may, but not in all cases, result in discrimination against families with children. HUD will perform an up-front review when a PHA proposes to change the unit configuration of a project.
• Ownership & Control. Except where permitted to facilitate the use of tax credits, during both the initial term and all renewal terms of the HAP Contract, HUD will require ownership or control of the project by a public or non-profit entity. HUD may allow ownership of a project to be transferred to a tax credit entity controlled by a for-profit to facilitate the use of the tax credits, but only if HUD determines that the PHA or a non-profit entity preserves an interest in the property.
• Transfer of Assistance. Approvals of a PHA or owner’s request to transfer assistance will be determined in HUD’s sole discretion considering the condition and needs of the Converting Project, the nature of the proposed Project, and the impact on the project residents. The transfer shall not place housing in neighborhoods with highly concentrated poverty based on the criteria formulated for transfers under Section 8(bb) of the Housing Act. The project to which assistance is transferred will be subject to all of the contract terms as described in the HAP Contract, RAD Conversion Commitment (RCC), and RAD Use Agreement.
• RAD Use Agreement. Pursuant to the RAD Statute, a Covered Project must have a RAD Use Agreement that will be in a form prescribed by HUD, including, but not limited to the following:
  • Be recorded in a superior position to all other liens on the property;
  • Run until the conclusion of the initial term of the HAP Contract, automatically renew upon extension or renewal of the HAP Contract for a term that coincides with the renewal term of the HAP Contract, and remain in effect even in the case of abatement or termination of the HAP Contract;
  • Provide that in the event the HAP Contract is removed due to breach, non-compliance or insufficiency of Appropriations, for all units previously covered under the HAP Contract new tenants must have incomes at or below 80% of the area median income (AMI) at the time of admission and rents may not exceed 30% of 80% of AMI for an appropriate-size unit for the remainder of the term of the RAD Use Agreement; and
  • Require compliance with all applicable fair housing and civil rights requirements, including the obligation to affirmatively further fair housing.
• Davis-Bacon Prevailing Wages. The Davis-Bacon Prevailing Wage requirements apply to all work, including any new construction, that is identified in the Financing Plan and RCC to the extent that such work qualifies as development. This includes remodeling that alters the nature or type of housing units, reconstruction, or substantial improvement and is initiated within 18 months following the effective date of the HAP Contract. Davis-Bacon applies only to projects with nine or more assisted units.
• Lead Based Paint Hazards. PHAs are required to conduct lead-based paint inspections and lead risk assessments on any pre-1978 public housing properties.

Financing Requirements & Considerations

If a PHA lacks recent experience in accessing various forms of debt and/or equity capital, it may wish to consider engaging technical assistance offered by local or national development intermediaries, professional financing advisors, consultants, and/or development partners to augment its capacities. HUD will assess the capacity of the development team.

Low-Income Housing Tax Credits (LIHTCs), Historic Tax Credits (HTCs), and Opportunity Zones

Applicants are encouraged to use LIHTCs and, if eligible, historic preservation tax credits, opportunity zones and state or local tax incentive structures, to support capitalization. Applicants are also encouraged to assess local demand and supply considerations if proposing to utilize LIHTCs and to discuss their interest in applying for LIHTCs as soon as possible with state or local tax credit issuing agencies to obtain guidance on how to compete for awards most effectively.

While the applicant must indicate in its application if it intends to use tax credits, there is no requirement to have secured those credits prior to submitting an application.

This article has dealt with the RAD project conversion basic requirements and financing considerations. The next article on the RAD Notice will focus on waivers, alternatives, and other public housing requirements.