AZ NAHROJASON ISRAEL & KIMBERLY TAYNTON, Paragon Mortgage CorporationIRMA 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: jisrael@paragon-mortgage.com

KIMBERLY TAYNTON

MAP Underwriter

Paragon Mortgage Corporation

Phone: 602-347-6718

Email: ktaynton@paragon-mortgage.com

IRMA HOLLAMBY, MPA

Administrator

Housing Authority of Maricopa County

8910 North 78th Avenue

Peoria, AZ 85345

Office: 602-744-4541

Email: i.hollamby@maricopahousing.org

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 35-

year mortgage term.• Non-recourse

• Don’t forget! Developer’s Fees are ALLOWED up to 15% of Total Development Costs.

BENEFITS of RADMore $$$$ - 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-RADOTHER 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 / FHAGeneral 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:

Section 221(d)(4) First Mortgage 31%ADOH Housing Trust Funds 2%City of Phoenix CDBG Funds 1%4% Low-Income Housing Tax Credits 36%Historic Tax Credits 12%Seller Carryback Notes 14%FHLB/AHP Funds 3%Total Funding Sources 100%

Funding Sources

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.