We recently hosted a followup “Ask the Experts” call with Greg Klaas from Signet Partners in Denver to discuss the RAD final notice. As September 28 (the date when HUD will begin accepting applications) draws near, Greg and I have a few closing thoughts we'd like to share with you.
Identifying RAD projects: Don't lose sight of the following!
- RAD is a demonstration program. It may not be a good solution for properties that are suffering from obsolescence or that have unusual, one-of-a-kind, or unique issues.
- RAD is an acknowledgement that Capital Fund program allocations are insufficient to address capital replacement needs at most public housing properties.
- RAD allows a public housing property to acquire debt financing to address its unmet capital replacement needs.
- The debt financing obtained must be sufficient to address both the property's immediate and future capital replacement needs.
- The amount of rehab that can be performed is constrained by the size of the loan for which the property can qualify.
- Most public housing properties may not be able to qualify for large loans.
- RAD is likely to be a good fit for properties with very large capital replacement needs, but only if those properties have sophisticated development teams and access to additional funds such as tax credits.
Key considerations and drivers:
- Consider converting to a PBRA contract. The RAD program encourages conversion, and program rules provide more flexibility to projects that convert to PBRA.
- Hire a qualified GPCA contractor. RAD requires a specific and unique type of PCA. There are a limited number of contractors qualified to do this work, and they'll book up fast. Your PCA will be submitted to/reviewed by PIH. Submitting a GPCA which fails to meet the required Scope of Work may result in removal from the RAD program.
- The scope of the rehab is determined by the PCA!
- The new 1st mortgage loan must be big enough to address 100% of the property's immediate rehab needs, plus any initial deposit to the reserve account necessary to address future capital replacement needs. If you can't obtain a loan big enough to cover those two items, then you have a problem. You'll have to seek additional funding sources.
- The size of the new loan that you can obtain is constrained by the amount of cash flow available to service this debt. Cash flow is a function of income, less expenses and any required deposits to reserve. Income is primarily a function of rents, which are more or less a given. Thus, the only way to increase cash flow is to reduce/minimize expenses.
- If you'll be seeking an FHA-insured loan, the size of the loan you can obtain is also constrained by the loan program that you're required to select. Less rehab can often mean the ability to utilize a loan program that's simpler and less expensive. More rehab may require a loan type that's more complex, with more fees, more third-party reports, and more required escrows.
- The cost of the rehab is determined by the contractor bids that you obtain. However, these bids must be David Bacon and Section 3 compliant, which increases costs and reduces the amount of rehab that can be performed using loan proceeds.
- What source of funds will you use to pay general contractor fees, developer fees, relocation costs, etc.? Paying for them out of new loan proceeds reduces the amount available to perform rehab. Careful management of these fees is crucial to avoiding running short of sources.
- It may be necessary to obtain additional funding sources, such as tax credits, to cover costs that can't be paid for out of new loan proceeds and allow for the completion of additional upfront rehab. However, this adds more complexity to the project. Lenders may be wary of borrowers without previous experience or involvement in these types of developments.
With over 30 years of experience in the affordable housing industry, VP of Professional Services Carrol Vaughan ensures that NMA continues to help PHAs better serve their communities.
To learn more about how we can assist your agency with RAD applications, visit our website.
