Advisories

Introduction to RAD

Last November, Congress enacted changes in law that support the U.S. Dept. of Housing and Urban Development’s long-term effort to move towards more “project-basing” of rental subsidies in both certain privately owned assisted apartment buildings and in public housing developments. (HUD’s 2012 Appropriations Act (PL 112-55)) In particular, a portion of PL 112-55 expanded the Department’s authority to offer project-based Section 8 vouchers (“PBVs”) for so-called “orphan” properties that received Rent Supplement (“Rent Supp”) and Rental Assistance Payments (“RAP”), which are at risk of expiring (or have already expired). HUD’s recently issued Notice PIH 2012-32 (the “Final Notice”) fully implements its new Rental Assistance Demonstration (“RAD”), which offers owners a variety of opportunities in public housing and other HUD-assisted properties to borrow long-term financing through conversions of vouchers to long-term, project-based Section 8 rental assistance.

Under RAD, projects funded under public housing and certain Section 8 Moderate Rehabilitation (“Mod Rehab”) programs may qualify to convert their assistance to long-term, project-based Section 8 rental assistance contracts via a competitive selection and awarding of contracts, limited by PL 112-55 to total funding of up to 60,000 housing units. The details of this competition, including eligibility, financing considerations, options for public housing conversions (to either project-based vouchers or project-based rental assistance), as well as application requirements and award selection criteria are found at pages 14-81 of the Final Notice. While the initial application period opens on September 24, 2012 and closes a month later (and applications submitted during this period will receive priority), funding for applications submitted thereafter will remain available on a competitive first-come, first-serve basis until September 30, 2015.

However, as discussed below, the remainder of this Client Advisory focuses more on those projects in private ownership, as owners will want to focus soon on funding whose availability is only through the coming federal fiscal year and ends as of September 30, 2013.

Rent Supp and RAP Conversions

Background: The projects that benefit from rental assistance known as Rent Supp and RAP are generally older Section 236 and Section 221(d)(3) properties. Typically, RAP and Rent Supp payments from HUD, which benefited tenants whose incomes did not enable them to fully cover rent in properties without Section 8 contracts, covered only 20 percent of units (although in some special circumstances additional units were benefitted). As with more common Section 8 contracts, tenants covered by Rent Supp and RAP pay up to 30 percent of their income toward rent, with the remaining allowable rent paid to the property owner by HUD, although for historic reasons RAP and Rent Supp rent allowances trended lower than Section 8 contracts. While many owners receiving RAP and Rent Supp opted to convert their projects’ eligible rental assistance to project-based Section 8 contracts during the mid-1980s, an estimated 30,000 to 40,000 units nationally continued to receive RAP or Rent Supp payments.

Now that many properties are reaching the end of their original amortization period, or are involved in potential preservation transactions, a new round of these remaining RAP and Rent Supp contracts have recently expired or are about to expire or terminate: RAP and Rent Supp assistance ends immediately upon prepayment or maturity of the property’s underlying mortgage debt.

Opportunities: Given the above background, the first important opportunity for owners provided in the Final Notice is the possible resurrection of assistance that has already ended – specifically, RAD allows conversion of projects to PBVs if the RAP or Rent Supp assistance expired or was terminated on or after October 1, 2006. However, since in most cases these contract events did trigger tenant-based voucher assistance, any retroactive conversion to PBVs is subject to tenant consent procedures. For properties where RAP or Rent Supp will expire in the future, but no later than September 30, 2013, an owner can take advantage of a prospective conversion under a process that is not dependent on tenant consent, although significant tenant input and comment is required.

It is important to note that the new RAD conversion authority and process is provided in addition to the existing general authority of public housing authorities (“PHAs”) to convert up to 20% of their regular vouchers to project-based contracts. Further, the RAD process is also distinct from another program available to PHAs, specifically the Moving to Work authority that enables conversion of so-called Enhanced Vouchers triggered by various preservation events into PBVs. Accordingly, RAD offers an additional tool to owners and parties concerned with preservation for projects that previously were considered “orphaned” because the RAP and Rent Supp could not be renewed or limitations on preservation financing.

Conversion to PBVs under RAD: A project and its owner must each first meet basic eligibility criteria (such as a REAC score) set out at pages 122-127 of the Final Notice. More importantly, certain existing regulations that otherwise limit PHAs and applicable to PBVs generally are lifted or waived by the Final Notice. Foremost is that the 25 percent limit on the number of PBV units in any one project (a rule designed to avoid concentrating lower income residents) is modified and increased up to a 50 percent cap. Further, an owner may project-base 100 percent of a given project’s units provided that at least 50 percent of the units are occupied by the elderly, disabled tenants, or families benefiting from supportive social services, or are within single-family properties, and qualify via applicable program rules for related supportive services exemptions.

Concluding Thoughts

HUD’s Final Notice runs to over 180 pages and contains many detailed provisions too numerous to provide in a short outline. Owners of RAP or Rent Supp (whether previously terminated on or after October 1, 2006 or currently in place, but terminating no later than September 30, 2013) properties may be able to convert to PBVs and unlock substantially more long term financing than previously anticipated. However, as is typical in many HUD-assisted and older projects, specific project documentation or occupancy situations may conflict with accessing PBVs. These transactions call for a high level of cooperation among the PHA, owner, local HUD field office, tenants and their representatives.

The authors, David Abromowitz and Lara Guercio, are members of the Goulston & Storrs Real Estate Group.

For questions regarding the information contained in this advisory, please contact:

David M. Abromowitz
(617) 574-4016
dabromowitz@goulstonstorrs.com

Deborah S. Horwitz
(617) 574-4123
dhorwitz@goulstonstorrs.com

This advisory should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and any specific legal questions you may have.

Pursuant to IRS Circular 230, please be advised that, this communication is not intended to be, was not written to be and cannot be used by any taxpayer for the purpose of (i) avoiding penalties under U.S. federal tax law or (ii) promoting, marketing or recommending to another taxpayer any transaction or matter addressed herein.

© 2012 Goulston & Storrs – A Professional Corporation All Rights Reserved