Preservation Algebra

By
8 min read

Working with PHAs on RAD deals  

“I really like RAD projects,” declares Holly Bray, senior director of originations for Love Funding in Washington, DC. “You’re in the weeds, helping housing authorities take their housing stocks and making them great. There are a lot of things to figure out and a lot of coordination. But the end result is truly rewarding.”

Her experience has shown her, however, that they are not an undertaking for the unwary or anyone uneducated in the complexities of the Rental Assistance Demonstration program process and procedures. “In school, I thought geometry was boring,” she recalls. “It was obvious how many sides and angles an object had. But I loved algebra – having to figure out all the unknowns. That’s what we’re doing here.”

Love Funding is a leading HUD lender, with more than 30 years of national experience in market-rate and affordable multifamily housing, healthcare, hospitals and senior housing facilities. Bray is also a National Housing & Rehabilitation Association board member and chair of the Arlington County, VA, Housing Commission.

All of the RAD projects she works on are with small to medium-size public housing authorities (PHAs) and involve HUD-FHA 223(f) insured multifamily loans, meaning the renovation costs can go up to $40,000 per residential unit. Bray says the first task is educating her clients on, “’How do you get these deals done?’” None of her current deals are using Low Income Housing Tax Credits and all involve properties built during the 1960s and ‘70s, with significant deferred maintenance issues. “A lot of these properties haven’t ever seen any real rehab dollars since they were built,” she says. “The new dollars going into these transactions will cover things, like windows, kitchens, bathrooms, HVAC systems and all the structural stuff.

“They are owned outright by the local housing authorities.

The only debt we will put on are renovation and transaction costs.” Love will issue a 35-year, self-amortizing loan. The debt is protected by a dedicated Section 8 20-year contract.

Most observers agree that without the RAD program, which is revenue-neutral from HUD’s perspective, many residential buildings would ultimately fall out of the affordable housing sphere.

“The housing authorities I’ve worked with are really excited,” Bray states. “Most of these PHAs have never had to do this. They’ve never thought about all these things because they’ve never before had the money to do it. They are very complicated and very hands-on deals. You’re dealing with two separate silos inside HUD: the production side and the RAD side, so you have to check for the different requirements. For example, the RAD side requires Davis-Bacon [prevailing] wage rates; FHA 223(f) does not. And the executive director of the housing authority may need to go to the board for approval to write checks for big ticket items, such as third-party reports, the HUD application fee and the good faith deposit for rate lock. Some boards meet only once a month, so coordination is needed to make sure no time is lost. Under the RAD refinance program, all renovation has to be completed within 12 months, so as soon as the loan closes, the clock is ticking.”

The Right Team
Bray’s strategy: “Communicate, communicate, communicate! And that means assembling a strong team for each project.” For her, this includes a lender, a strong consultant and the borrower’s and lender’s legal counsel. “You need someone who’s familiar with the city regulations and the local housing authority, but also someone versed in the FHA world and familiar with this kind of deal, titles, surveys, Section 8 contracts and everything that goes along.” Reno & Cavanaugh, a law firm specializing in real estate with offices in Washington, DC, Columbia, MD, and Nashville, TN, has served as borrower’s counsel on many RAD projects. Bray has worked closely with Stephen Holmquist in the Washington office and Gwendolyn Allen in the Columbia office.

An experienced consultant is equally important. “The consultant helps get you through the various boards, as well as educating the PHA staff, whose executive directors don’t always know the details of these kinds of projects,” Bray continues. She relies on The Beatty Group, headquartered in Duluth, GA, a firm that provides assistance to the public housing industry and government, private sector and nonprofit organizations. Its core services include strategic planning and development, board and staff training, and operational and organizational consulting. They are equipped to handle every phase of the conversion cycle, from project planning to property management. Willie J. Beatty, Sr. is CEO, and Willie J. Beatty, Jr. and Stephen Beatty are general partners.

And there is a great deal of necessary communication with the residents and specific regulations on when they need to be notified. This is especially important when a RAD conversion requires tenant displacement.

“Another lesson learned,” says Bray, “is to get out in front of the housing authority early in the process. Start promptly on the scope of work and educate the housing authority on how that scope of work directly impacts the initial deposit to replacement reserves and then the annual replacement reserves deposit. Make sure you discuss in detail the future of all the units at the property, both on-line units and off-line units.

“We then hire an independent engineer. When we get the engineer’s report, we can marry that with what the PHA wants to do with the property.” She notes that while the PHA may focus on cosmetic, energy or facilities enhancements, engineers may also find structural or systems issues that must be addressed. These can either alter the scope of work, or may, in some instances, cause a reevaluation of the entire project. And she recommends quickly obtaining the ALTA [American Land Title Association] surveys.

“HUD is saying, ‘We’re going to cherry pick housing authority portfolios and dedicate our funding to a sustainable model,’” Bray notes. “By the time I get to the CHAP [Section 8 Commitment to Enter Housing Assistance Payments Contract] approval process, I want to know the project is viable.

“You also want to get out front of any environmental issues, like flood zones, asbestos, lead paint and cell towers.”

Location is another issue when projects that fall under the same RAD deal are not right next to each other. “HUD always had angst about scattered sites, but the department’s production side has been great about that.”

The Holy Grail
Another beneficiary of the RAD program is Mod Rehab (Moderate Rehabilitation) and Mod Rehab SRO (McKinney-Vento Moderate Rehabilitation Single Room Occupancy) properties, which Bray calls, “the Holy Grail of this business.” There are 31,500 units under year-to-year, restricted rent level Mod Rehab and SRO contracts, which are administered by PHAs. SROs are specifically targeted to single, homeless individuals, while Mod Rehab properties are available to a broader range of low-income residents.

Through RAD, owners can replace the current Mod Rehab Housing Assistance Payments (HAP) contract with a new long-term Section 8 contract with a term up to 20 years, and is renewable, allowing the owner to make long-term plans, ensures the housing remains affordable, provides funding levels based on standard Section 8 rent setting procedures and making it possible for the owner to leverage financing to support capital repairs or redevelopment, if needed.

More than 2,300 Mod Rehab units have been preserved, rehabbed, and, in some cases redeveloped, through RAD, and HUD’s Office of Multifamily Housing Programs expects the pace of conversions
to increase.

“It’s beautiful when you get these deals done right,” Bray says in summation. “In terms of efficiency, it’s almost always cheaper to renovate than build new, and RAD is keeping housing stock [in the affordable program] and improving it. When you see the stats on how many construction dollars have been put into this program—which is net-neutral—and how much housing stock has been brought up to snuff, it’s pretty mind-blowing!”

Story Contacts:
Gwendolyn Allen
[email protected]

Willie J. Beatty, Sr.
[email protected]

Holly Bray
[email protected]

Stephen Holmquist              
[email protected]

Love Funding’s Current PHA/RAD Projects

  • East Point Housing Authority, East Point, GA – 179 units in two properties within a mile.
  • Housing Authority of the City of Milledgeville, Milledgeville, GA – 149 units in two properties.
  • Sylvester Housing Authority, Sylvester, GA – 260 units in ten properties.
  • Town of Ramapo Housing Authority, Rockland County, NY – 200 units in two properties, five miles apart.
  • Hickory Housing Authority, Hickory, NC – 311 units in four properties within a mile and one property four miles away.
  • The Housing Authority of Kingstree, Kingstree, SC – 140 units in three properties within 1.75 miles.