HUD Posts FAQs about Increased Rent Payments for RAD Projects in Opportunity Zones
Congress created the Rental Assistance Demonstration (RAD) in fiscal year 2012 to test whether public housing agencies (PHAs) could leverage Section 8 rental assistance contracts to raise private debt and equity to make public housing capital improvements and thereby preserve low-income housing. According to updated RAD operation guidance in Notice H-2019-09/PIH-2019-23 issued on September 5, HUD will provide extra rent revenue of up to $100 per unit per month to a public housing project located in an Opportunity Zone that converts to Section 8 project-based rental assistance (PBRA) through RAD, provided the project needs extra revenue to be financially viable. HUD recently posted a set of frequently asked questions (FAQs) that explain the eligibility criteria for receiving the extra rent revenue. The FAQ can be found on HUD’s online RAD Resource Desk at www.radresource.net.
To receive up to an additional $100 per unit per month, subject to the availability of funds, the RAD project must be located in a designated Opportunity Zone and must plan to convert public housing units to PBRA, undertake either new construction or substantial rehabilitation, and demonstrate that the extra revenue is necessary to achieve financial viability. HUD will approve requests on a first-come, first-served basis. According to the FAQ, HUD defines “new construction” or “substantial rehabilitation” as hard construction costs, including general requirements, overhead and profit, and payment and performance bonds, in excess of 60 percent of the Housing Construction Costs as published by HUD for a given market area. According to HUD, funds for this purpose will be allocated on a first-come, first served basis, subject to the availability of funds.
Housing construction costs for a given market area can be found at www.hud.gov/sites/dfiles/PIH/documents/TDC.pdf. HUD has also developed a tool, available on the RAD Resource Desk, that PHAs can use to quickly assess whether their proposed rehab level meets this threshold. For purposes of calculating aggregate construction costs, HUD will consider the combined construction costs of the overall development. The development may include a mixture of new construction and rehabilitation and may include other units besides the converting units, such as through the development of new units.
According to the FAQ, HUD will generally take the following approach to determining whether the rent increase is necessary for the viability of the transaction:
- HUD will consider the total revenue for the property, including any other adjustments to the Commitment to enter into a Housing Assistance Payment (CHAP) rents and other revenue producing units at the site.
- The transaction must utilize “hard,” must-pay financing.
- Using a trending rate of 2 percent for revenue and 3 percent for expenses, the transaction must maintain a debt coverage ratio that is no greater than 1.35 over a 20-year pro forma.
- The transaction can’t include any cash-out financing or net acquisition proceeds to the PHA.
- For transactions with more than 50 units, the transaction must defer or exclude at least 25 percent of the maximum allowable developer fee that would be allowable under the state Qualified Allocation Plan.
As a result of these tests, HUD may deny the rent increase or reduce the amount from what was requested. And HUD reserves the right to consider other unique factors in the analysis of individual transactions.