RAD Program: Converting Subsidies to Long-Term Section 8

1. Rental Assistance Demonstration “RAD” Program LHC www.renocavanaugh.com

2. Presenter and Contact Information Efrem Levyelevy@renocavanaugh.com www.renocavanaugh.com

3. RAD Overview • Goal: Preserve vulnerable federally-assisted projects by converting existing subsidies to long-term Section 8 to leverage debt/equity • Background: PHA “conversions” through demo/dispo with replacement vouchers • Authority: (1) FY 2012 HUD Appropriations Act (2) Notice PIH 2012-32 (July 26, 2012) • 1st Component: Public Housing & Mod Rehab: • Competitive Round Closed (12,000 Units) • Second Round Open • 60,000 Unit Cap (HUD intends 98% of these to be public housing conversions) • 2nd Component: Mod Rehab, Rent Supp & RAP: • Non-Competitive • No Unit Cap

4. Policy Rationale • Public Housing: • $25 Billion Backlog • $25,000/Unit, but wide range from new Mixed-Finance to Demo/Replacement • Declining Appropriations • Losing >10,000 Units/Year • Deregulation • Mod Rehab, Rent Supp & RAP: • No Good Renewal Options • Section 8 -More Stable Platform • Funding & Regs • Allows Leveraging (Debt & LIHTC)

5. RAD – 1st Component • May Convert to Project-Based Rental Assistance (PBRA) or Project-Based Vouchers (PBV) • Contract Term: • PBRA = 20 Years • PBV = 15 or 20 Years • Mandatory Renewals • Use Agreement: • 1st Priority • Term Concurrent with HAP • Automatic Renewal

6. RAD – 1st Component • Ownership/Control by Public or Nonprofit Entity • Ownership. Public or non-profit entity has legal title to the real property. • Control. Public or non-profit entity has the direct or indirect legal authority (via contract, partnership share or agreement of an equity partnership, voting rights, or otherwise) to direct the financial, legal, beneficial or other interests of the owner of a project or has 51 percent or more interest of the general partner share in a limited partnership. • Exceptions • LIHTC: Control via Ground Lease, ROFR, PHA Subordinate Debt • Foreclosure, Bankruptcy, Termination or Transfer of Assistance • Priority for capable public entity • If none, then capable private entity

7. RAD – 1st Component • Current Funding Cap per Statute • Contract Rents: • PBRA = Lower of Current Funding or 120% FMR (But exception rents available in some cases) • PBV = Lower of Current Funding, 110% of FMR, or Reasonable Rent • Rent Adjustments = Annual Operating Cost Adjustment Factor (OCAF) • PBV Waivers on Inventory Cap, Income Mixing (up to 50%) and Competitive Selection

8. RAD – 2nd Component • Mod Rehab, Rent Supp and RAP Projects • Conversion of TPVs to PBVs • Standard PBV rules for Contract Term, Rents, Rent Adjustments, and Renewals • Waivers of PBV rules for Inventory Cap, Income Mixing (up to 50%), and Competitive Selection. Other exceptions still available for seniors and support services • Two types of conversions: prospective (through 9/30/13) and retroactive (back to 10/1/2006)

9. RAD 2nd Component (con’t)

10. Other RAD Requirements for PHAs • PHA Plan. RAD conversion requires a “significant amendment” to PHA Plan, along with any necessary changes to ACOP and Section 8 Administrative Plan. • Use of Public Housing Funds. PHA may use current public housing funds, including CFP and operating reserves, for predevelopment costs and in RAD Financing Plan • Effect on Public Housing Funding and Unit Cap. For a project converted under RAD, PHA will not be eligible for Asset Repositioning Fee (ARF) or Replacement Housing Factor (RHF). Also, PHA’s “Faircloth cap” will be reduced by number of units converted RAD. • Davis-Bacon. Requirements apply to all initial repairs identified in Financing Plan to the extent they would qualify as construction or rehabilitation, regardless of whether the project qualifies as “existing housing” under standard PBV rules. • Demo/Dispo. Section 18 does not apply to RAD conversions unless the number of assisted units would be reduced by more than a de minimis amount. (Essentially, a 1-for-1 replacement requirement). HUD will approve demolition or disposition as part of RAD review/approval; not subject to HUD SAC review/approval.

11. RAD - Procurement • May spend up to $100,000 in public housing funds for predevelopment costs without HUD approval • However, must follow public housing procurement rules (small purchase procedures) • If predevelopments costs exceed $100,000, then either: i) obtain good-cause waiver; or ii) use non-public housing funds • Post-conversion, a PHA can only contribute public housing funds pursuant to HUD approved financing plan • HUD-approved post-conversion funding does not trigger 24 CFR part 85 • Still need to comply with state/local procurement requirements

12. Resident Rights • Consultation. Resident consultation before RAD application and following award is important and required • Resident Displacement/Right to Return. No permanent involuntary displacement may result from RAD conversion, including as a result of changes in bedroom distribution, reduction of units, or reconfiguration. Any resident temporarily relocated has right to return • URA. Any temporary relocation must comply with Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970 • Waiting List. If project-specific waiting list exists, it must be used after conversion. Otherwise, one must be established consistent with public housing rules which provide access from PHA’s community-wide list. Thereafter, waiting list managed under Section 8 rules • No Rescreening. Current public housing residents are not subject to rescreening, income eligibility, or income targeting provisions • PBV Lease Renewal. Unlike standard PBV program, a resident’s lease must be renewed unless cause exists • Tenant Rent Increases. If tenant’s rent would increase more than greater of 10% or $25, then increase phased in over 3-5 years • Procedural Rights. RAD statute requires certain rights of public housing residents be retained for converted projects, including requirements for adequate written notice of lease termination and access to grievance process.

13. Choice Mobility • HUD Goal: Provide residents of all covered projects with portable tenant-based vouchers after initial occupancy • PBV: standard rules – voucher after 1 year • PBRA: more flexibility – 2 years; turnover & project caps • Vouchers from turnover or another PHA

14. HUD Process • Commitment to enter a Housing Assistance Payment (“CHAP”) – effectively this is the HUD RAD award letter • CHAP sets forth units to be converted, size, and contract rents as well as “Milestones” that must be met after issuance of the CHAP • For LIHTC deals, milestones begin at award of LIHTC funding

15. RAD Milestones • Within 30 days: a) lender engagement or commitment; and b) statement of capacity of development team • Within 60 days: a) significant amendment to Annual/Five Year plan; and b) election to convert to PBV or PBRA • Within 90 days: a certification from PHA that all lender due diligence – including a physical condition assessment and environmental reports – has been completed; and the PCA must be submitted to HUD • Within 150 days: a certification from PHA that all applications for firm commitments have been submitted (note: for FHA-insured deals, this is the Firm Commitment Application) • Within 180 days: the Financing Plan must be submitted to HUD • Within 320 days: submit a firm commitments for all financing • Within 360 days: financial closing • Within 12-18 months: after issuance of HAP, completion of work.

16. RAD Financing Plan • Key elements of Financing Plan are: • Identify 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 (all principals must have Previous Participation Certification in APPS – i.e. Form 2530 clearances) • Proposed Financing (including consent of first mortgage lender to Use Agreement) • Other items: Operating Pro Forma, Market Study, and Construction Management

17. RAD Conversion Commitment • The RCC will include key conditions to conversion such as: • Effective Date of HAP (to be held in escrow) • Scope of Work • Timeline for Work • Key terms of financing, replacement reserve funding, and other special conditions

18. RAD Form Documents • Financing Plan • Conversion Commitment • Use Agreement (and Release of DOT) • PBV HAP and Rider • PBRA HAP • RAD Closing Package and Checklist – under development

19. PHA Development Methods

20. RAD Initial Awards Characteristics

21. 30-Day Competitive Initial Awards–Public Housing & Mod Rehab Awards Initial Public Housing Awards Initial Mod-Rehab Awards

22. Public Housing Initial Awards – Key Characteristics PHA Size* • 32% Small (<250 Units in Inventory) • 52% Medium (251-1,249 Units in Inventory) • 16% Large (1,250+ Units in Inventory) * Based on 68 awarded PHAs

23. Public Housing Initial Awards – Key Characteristics Capital Needs • 22% New Construction • 78% Rehab • 24% proposed Greater than $50K in Rehab • 23% proposed $30K – 50K in Rehab • 21% proposed $10K – 30K in Rehab • 32% proposed Less than $10K in Rehab

24. Public Housing Initial Awards – Key Characteristics Type of Section 8 Subsidy (by Project) • 54% Project Based Vouchers (PBV) • 46% Project Based Rental Assistance (PBRA) Type of Section 8 Subsidy (by Unit) • 44% Project Based Vouchers (PBV) • 56% Project Based Rental Assistance (PBRA)

25. Public Housing Initial Awards – Key Characteristics $ 977 Million in Total Financing Sources • $74 million PHA Supplied • $257 million 1st Mortgage • $409 million in 4% & 9% LIHTC • $237 million in Secondary Financing

26. Public Housing Initial Awards – Key Characteristics PHA Objectives • Modernize aging family & elderly properties • Sub rehab of deteriorated properties • Thin densities/mix-incomes via PBVs & transfer authority • Demolish/replace severely distressed/obsolete properties • Portfolio streamlining

27. Public Housing Initial Awards – Key Characteristics 9,470 Jobs from $650 million in leverage* • 4,895 Direct (construction, etc.) • 1,565 Indirect (materials, etc.) • 3,010 Induced (resultant consumer spending) * Does not include PHA supplied funds or secondary financing sources

28. Initial Conversion Awards– 2nd Component Rent Supp/RAP & MR Awards to Date

29. Current-Future PHA Choices

30. Tale of the Curves—Section 9 Public Housing capital repair needs are in excess of $25.6 Billion

31. Tale of the Curves—Section 9 Graph does not include $4billion in 2009 to Cap Fund through ARRA

32. Some Reasonable Workarounds Over the Years…. • Mixed Finance & H6 married to ACC Op Fund levels & R&O, DoT • Section 8 PBVs married to Mixed Finance, H6, now CNI • Section 18 Demo/Dispo for TPVs but $75 million doesn’t go far • Section 22 Conversions not heavily used • CFFP at 3:1 collateralization & static inventory controls • OFFP not heavily used • EPCs, but what about the rest of the place? • MtW good for 38 PHAs, but what about the other 3060+? • ARRA re-investment bump • Limited NSP for vacant properties ...but:

33. State of the PH Inventory Not so Good • ~ 1.15 million units across 3100+ PHAs • Plus ~ 2.2 million HCVs, of which ~ 69,000 PBVs • By comparison: ~ 1.5 million project-based MF units (Sections 8, 202, 811, 236, etc) • Capital repair needs in excess of $25.6B across portfolio ($23,365/unit) • Section 9 funding platform unreliable (pro-rations, appropriation cuts), limited access to debt/equity capital (Declaration of Trust) • Losing 10,000-15,000 hard units/year

34. Tale of the Curves—Section 8 PBRA OCAF ~4% per year Graph does not include $2billion in 2009 to PBRA through ARRA

35. Where Do PHAs Go from Here? Remain primarily Section 9-oriented & continue to… • Hope for bending the Op & Cap funding curves to full (& catch-up) funding levels at an enterprise level? • Subject to pro-rations, limitations on ability to maintain agency-level reserves and...? • Work around the DoT, with limited ability to access full value of assets or leverage cash flows? • Have limited ability to establish Operating & Replacement Reserves through Mixed-Finance—compromised by ACC-related transition reserves? • Tilt large Mixed Finance transactions to multi-phase 9% LIHTCs with small, QAP-by-QAP allocations? • Seek new PH-only capital sources to work down the back log, stem the loss of 10,000-15,000 hard units/year?

36. Where Do PHAs Go from Here? Or, advance themselves as community-based affordable housing providers...cont’d • Tapping unused PA Volume Cap & low FHA rates by making 4% LIHTCs more viable using higher RAD rents, short bond structures? • Accessing CDBG, HOME funds more readily, including disaster-related CDBG boosts or special allocations? • Accessing the full value of their assets, operating cash flows? • Joining a stronger constituency to • Continue to reasonably grow Section 8 & needed annual OCAF & budget-based adjustments as needed? • Seek new PH-MF housing capital funding sources with a broad constituency?

37. Implications for the Rest of Us

38. Implications for Future Processes & Products What really need... • Simplified means to help small-medium size, low resource-capacity PHAs access debt/equity resources mostly available to larger, higher resource-capacity PHAs • Established—or new—intermediary/advisor to offer inventory assessments, deal packaging & potential predevelopment-construction-bridge financing accommodating permanent debt take-out, including FHA products • One-stop “black box” deal packages combining predevelopment, acquisition, construction, bridge, permanent debt & LIHTC equity financing • Move to standardized financing documents, processes • MassDocs—all soft lenders use unified application & documents • Enterprise Community Investment ask force

39. Implications for Future Processes & Products What really need...cont’d • Reduce transactional complexities of 4% LIHTC/TE bond deals—many now making bond-burning transitions to FHA (223(f), 221(d)(4), other facilities—to perform like 9% LIHTC transactions • Develop simplified financing product with fewer moving parts & complexities [bonds, tranches, etc] assumed in upper tier structure • Maximize elasticity/efficiencies of 4% LIHTC/TE bonds with needed gap financing as alternative multi-phase stack-up of 9% LIHTC deals • MD-CDA MHRP-provided gap financing of up to $500k/project—~30 new 4%/ TE deals • Facilitate more short bond structures • De-coupling TE bonds from 4% LIHTCs a la FY13 budget proposals

40. ...including HUD

41. What RAD Can Do Now

42. What RAD May Do Soon Changes to Notice in the Works… • Remove per PHA & Mixed Finance caps • New accommodations for fast-moving, multi-phase projects • For multiple project submissions, re-combine per property Capital & Operating fund allocations across “bundle” of projects as warranted • Acceptance of CNI Implementation Grant application as RAD application • More….

43. What RAD is Shaping at HUD Rethinking the PIH and MF Housing Program-Intake Chutes • Upstream “desk review” of PHA objectives relative to initial contact —Section 18 dispositions/RAD conversions, Mixed-Finance, CFFP, EPC, Mod Rehab, McKinney SROs, FHA insurance • Priority processing of time-limited &/or complex recapitalization transactions—CNI Implementation grantees, LIHTC Pilot, RAD-FHA Mortgagees • Organization of a “recap office” integrating PIH & MF Housing processes & teams • Review, restructuring of MF Housing & PIH asset management processes

44. Sample RAD Deals Deal prototypes: • Conversion/No Rehab (includes conversion-only HUD mixed-finance transactions) • FHA/No LIHTC; Basic Rehab/Conversion • 4% LIHTC/Bond/FHA; Substantial Rehab/Conversion • 4% LIHTC/Bond/Private Financing; Substantial Rehab/Conversion • 9% LIHTC/FHA or Private; Substantial Rehab/Conversion

45. Parties • Developer – PHA or private developer • Lender(s) • LIHTC Investor (if applicable) • State Housing Finance Agency • Development team (e.g. general contractor, architect, attorneys, accountants, management agent, etc.)

46. Developer Responsibilities:Create and Implement the Development Vision • Develop overall program (design, unit mix, income mix) • Assemble/Manage Development Team • Architects/Engineers • General Contractor • Attorneys • Accountants • Manage Closeout, Cost Certification

47. Developer Responsibilities Structure the Financing • Proforma/Underwrite Project • Acquire Allocation of Tax Credits • Select/Negotiate Tax Credit Investor • Arrange First Mortgage • Identify/Negotiate Gap Financing

48. Development Models PRIVATE DEVELOPER FEE-BASED DEVELOPER PHA AS DEVELOPER A B C Development: PHA Related Entity Ownership: PHA Related Entity Property Management: PHA Related Entity (or Agent) Development: Developer Ownership: Developer’s Related Entity, Partnership Property Management: Developer’s Agent Development: Developer Ownership: PHA Related Entity Property Management: PHA or private Management Agent Maximum PHA Involvement Minimum PHA Involvement Developer responsible for all developmentservices including design, construction,and construction/permanent financing PHA negotiates scope of responsibility with private developer (e.g. developer fee, guarantees, role in owner entity, etc.) PHA is responsible for everything

49. RAD/LIHTC Development Structure Diagram Housing Corporation General Partner for-profit corporation (may be PHA related entity) Investor Entity .01% owner and General Partner 99.99% owner Limited Partner Limited Partnership Owner Entity Limited Partnership

50. Public Housing Sources • Traditional Public Housing Sources for PHA Development: • Capital Funds • Replacement Housing Factor (RHF) Funds • Central Office Cost Center (COCC) Funds • Operating Reserves • PHA Program Income • Cash Flow to support permanent debt service