leveraging affordable housing hud financing: rad...
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Leveraging Affordable Housing
HUD Financing: RAD and Other
Mixed-Finance Development Programs Converting and Preserving Public Housing Through Public-Private Partnerships
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THURSDAY, JUNE 4, 2015
Presenting a live 90-minute webinar with interactive Q&A
Delphine G. Carnes, Partner, Crenshaw Ware & Martin, Norfolk, Va.
Antoinette M. Jackson, Partner, Jones Walker, Houston
Julie S. McGovern, Member, Reno & Cavanaugh, Washington, D.C.
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LEVERAGING AFFORDABLE HOUSING HUD FINANCING:
RAD AND OTHER MIXED-FINANCE DEVELOPMENT PROGRAMS
Converting and Preserving Public Housing Through
Public-Private Partnerships
Rental Assistance Demonstration “RAD”
Program
RAD Basics
Conversion Mechanics
RAD In Action
Key RAD Provisions Affecting Residents
Deal Structure Options
Sample Deals
Agenda
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RAD Basics
8
GOAL
Preserve vulnerable federally-assisted projects by converting existing
subsidies to long-term Section 8 to leverage debt/equity
PREMISE
Converting from public housing assistance allows PHAs to finance
properties at higher rents than Mixed Finance
AUTHORITY
FY 2012 HUD Appropriations Act
Notice PIH 2012-32, REV-1 (July 2, 2013)
1ST COMPONENT
Public Housing & Mod Rehab
Unit cap at 1850,000 – all units have been assigned
2ND COMPONENT
Mod Rehab, Rent Supp & RAP; no unit cap
Subject to availability of Tenant Protection Vouchers (TPVs)
RAD Overview
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Conversion Mechanics
10
Overview of Closing Process for RAD Transactions
Initial commitment made via Commitment to enter
into a Housing Assistance Payment (“CHAP”) that
sets out project milestones
PHA submits Financing Plan (or FHA firm
commitment application for projects with FHA
financing)
HUD issues RAD Conversion Commitment
(“RCC”) that outlines closing requirements
Closing occurs
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RAD Milestones Within 30 days - Lender commitment and developer team capacity
Within 60 days
Significant amendment to Annual/Five Year plan
Election to convert to PBV or PBRA
Within 90 days - Submit Physical Condition Assessment (PCA) Within 150 days
All funding applications have been submitted
For FHA-insured deals, this is the Firm Commitment Application
Within 180 days – Submit Financing Plan Within 320 days - Submit firm commitments for all financing
Within 360 days - Financial closing
Within 12-18 months after issuance of HAP - Completion of work.
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Comparison to Other Programs Program FHA Mixed Finance RAD
Initial Application Application for Firm Commitment
Mixed Finance Proposal
RAD Application/CHAP
Presentation of Transaction Details
Submission for Invitation for Firm Commitment
Rental Term Sheet Financing Plan
HUD Preliminary Approval (with Conditions)
Firm Commitment Mixed Finance ACC Amendment
RCC
Closing Requirements Special Conditions in Firm Commitment
Owner’s Consolidated Certifications
HUD Final Approval HUB Closing Approval Letter Issued by HQ
Execution of Use Agreement by HQ
13
CHAP
Effectively the HUD RAD award letter
If selected and awarded a CHAP, PHA must move
quickly to secure lender and investor to satisfy
required milestones
In addition to milestones, CHAP sets forth
information about transaction, including units to be
converted, size, and contract rents
For LIHTC deals, milestones begin at award of
LIHTC funding
14
Financing Plan Key Elements:
Type of conversion (PBV or PBRA)
Physical Condition Assessment
Scope of Work (for rehab or new construction)
Completed Environmental Review
Relocation Plan
Development Budget
Development Team (including 2530 clearance of PBRA
conversion)
Proposed Financing
Operating Pro Forma
HUD’s Approval of Financial Plan: Triggers closing
process
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Follows approval of Financing Plan
Triggers invitation to submit documents and assignment
of field counsel
Sets forth legal requirements related to conversion/rehab,
including:
Effective Date of HAP (executed by HUD, but held in
escrow)
Scope of Work
Timeline for Work
Key terms of financing, replacement reserve funding, and
other special conditions
RCC
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Closing
Closing checklists available on HUD website
www.radresource.net/closing.cfm
Documents submitted to HUD
HQ closing manager reviews documents for
consistency with RCC
Field counsel reviews title/survey, opinions and
new owner’s organizational documents
No approval letter; execution of Use Agreement is
HUD’s final step
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RAD Form Documents Financing Plan
Conversion Commitment
Use Agreement and Lender Rider
PBV HAP+ RAD, Lender & Investor Riders
No AHAP in 1st Component
HAP Executed Before Construction
PBRA HAP – Lender &Investor Riders
RAD Checklists – periodically updated
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RAD Issues
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Portfolio Awards PHA may reserve RAD conversion authority for a set of
projects and lock in the current year’s contract rent
Requires:
A list of all projects proposed for a Portfolio Award, including units
to be converted, total estimated capital needs, and the major
anticipated financing sources, where applicable, for each project; and
RAD Applications for at least 50% of the projects identified in the
portfolio (PHA has 1 year to submit application for other projects)
Upon Approval - HUD issues a Portfolio Award Letter covering the
remaining projects within the proposed portfolio
HUD may revoke RAD conversion authority for all projects
that have not yet received CHAPs if HUD determines the
PHA is not making sufficient progress.
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Rent Bundling Under RAD
PHAs may “bundle” or adjust current allocations of
Capital and Operating funds in setting initial contract
rents across multiple projects
Must submit applications for at least 2 projects
No limit on number of projects PHA may bundle
The combined subsidy for “bundled” projects may not
exceed the aggregate funding for all of the projects the
PHA is proposing to bundle
21
Long-Term Affordability
Initial Contract Terms: 20 (PBRA) and 15 (PBV) years Contract Renewal: Secretary must offer, and PHA must
accept
Use Agreement: Long-term use agreement extended
with each contract renewal
22
PHA Requirements I
Significant Amendment to PHA Plan Must be done within 60 days after the CHAP is issued.
Requires 45-day notice, broad public outreach, and tenant
consultation
Use of Public Housing Funds
PHA may use current public housing funds, including
reserves, for predevelopment costs and construction.
Future Public Housing Funding
RAD units not eligible for Asset Repositioning Fee (ARF) or
Replacement Housing Factor (RHF) funds.
Public Housing Cap
A PHA’s “Faircloth cap” reduced by number of RAD units.
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Other Requirements II
Davis-Bacon
Applies to all initial repairs identified in Financing Plan even if
Davis Bacon would not otherwise apply.
Demo/Dispo - Section 18
Not apply unless number of assisted units would be reduced
by more than a de minimis amount.
Previously demolished units eligible for RAD if still receiving
subsidy
Allows transfer of subsidy for off-site replacement
Existing Debt – CFFP and EPC
Address reduced loan coverage with current lender
Can prepay in whole or in part with RAD proceeds
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Operating Proforma
Must project for term of initial PBV or PBRA contract
Rents must be set in accordance with RAD rules (incorporate
OCAF into projections)
Vacancy and bad debt set at not less than greater of: (i) average of
past three years; or (ii) 3% for vacancy and 2% for bad debt (or
stricter lender requirements)
Real Estate taxes set at most recent actual tax bill amount
Note: Continuation of PILOT requires legal opinion
Other operating expenses set at no less than 85% of most recent
three year average (unless HUD waives based on reasonable justification)
25
Developer and Other Fees For non-LIHTC, developer fee up to 10% of development
budget (less dev fee, reserves, and related party acq. costs)
Payout limits: 33% at closing, 33% at 50% rehab completion; and
remainder at 100% rehab completion (and certification of HUD’s
inspector)
For LIHTC deals, developer fee lesser of: i) 15%; or ii) state
LIHTC agency limits
Other potential PHA fees:
Ground lease payments
Seller financing (i.e. acquisition note)
Financing fees
Cash flow
RAD fees earned by PHAs are unrestricted, non-federal
funds
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Permanent Debt Terms
HUD requirements:
Fixed interest rate
Fixed term
Fully amortizing over no more than 40 years
Maturity date or balloon no earlier than 18 years
(except loans in PBV deals may be coterminous
with PBV HAP)
DSC cannot be less than 1.11 or lender
requirements
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RAD In Practice I RAD requirements can conflict with LIHTC program
requirements in regards to resident income
Demolition/Disposition 1:1 replacement requirements Asking HUD for flexibility to allow diminimis reductions
Lender issues with Use Agreement and HAP Contracts Foreclosure
Investor issues with HAP Contracts Transfer of LP interest
Replacement of general partner
PCA (Physical Condition Assessment) for rehabs
Replacement Reserve - set based on capital needs
(minimum balance of 5% of total aggregate capital
needs)
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RAD In Practice II Resident Relocation Follow Uniform Relocation Act AND
Provide right to return (more later)
No relocation until Use Agreement is recorded at closing
Notice H 2014-09 and Notice PIH 2014-17
Eligibility for URA relocation assistance is generally effective
on the date of initiation of negotiations (ION)
RAD ION date is issuance of the RAD Conversion
Commitment (RCC).
No demolition or land transfer until closing
Site and Neighborhood standards review by HUD
FHEO for any transfer of assistance to a new site
Coordinating different departments of HUD with
varying approaches and requirements Public housing, Office of Recapitalization, and (if applicable) FHA
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Key RAD Provisions Affecting Residents
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Enhanced Tenant Protections for Pre-Conversion Residents
Right to Return Tenants may waive
Households that do not want to transition to new program
can be offered transfer to other public housing as available
Review Relocation Notice for procedures
No rescreening Even for income eligibility of new financing
I.e, residents with income between 60% and 80% of AMI
must be offered a unit in a project refinanced with tax
credit
Phased Rent Increases Three to five year phase in of any rent increases of more
than 10% or $25.00
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Tenant Protections Prior to Termination
Notice Of Termination
Owner must provide a notice of termination “Reasonable period of time” up to 30 days if: (i) the health or safety of
other tenants, management, PHA employees, or persons residing in
the immediate vicinity of the premises is threatened; or (b) in the event
of any drug-related or violent criminal activity or any felony
conviction.
At least 14 days for non-payment of rent
At least 30 days notice is required for any other case, except that any
shorter notice period established by a State or local law applies.
Informal Hearing Owner must provide access to an informal hearing that is similar to
the public housing grievance process under 24 C.F.R 966
Include in PBV Tenant Lease or PBRA House
Rules
32
CHOICE MOBILITY Defined Option to obtain a HCV from a PHA after a defined period of residency
PBV – RAD adheres to current program rules Minimum residency: 1 year
Waitlist priority if tenant-based assistance is not immediately available
RAD PBRA – RAD adds requirements not in PBRA Minimum residency: 2 years
Limits
PHA may limit Choice-Mobility vouchers to 1/3 of turnover vouchers, or
moves to 15% of the project’s assisted units
Owner must keep a list of requests in order submitted
Exemptions HUD may exempt up to 10% of converted units if no vouchers available
33
B Y D E L P H I N E G . C A R N E S
C R E N S H A W , W A R E & M A R T I N , P . L . C .
LEVERAGING AFFORDABLE HOUSING HUD FINANCING: RAD AND OTHER MIXED-FINANCE
DEVELOPMENT PROGRAMS
Converting and Preserving Public Housing Through Public-Private Partnerships
Using Low Income Housing Tax Credits (LIHTC) with RAD
Strafford Publications, Inc. June 4, 2015
ADDING LIHTC TO THE RAD PROCESS
LIHTC is a key component if substantial rehabilitation is needed
The property may not qualify for a large enough loan/may not be able to generate enough cash flow for debt service
If the existing units have low contract rents/high expenses and need substantial rehab, 9% LIHTC may be the only way to finance the renovation
Opportunity to earn a developer fee
35
LIHTC PROGRAM OVERVIEW
Established by the Tax Reform Act of 1986 to encourage private investment in affordable housing
Program administered by state housing finance agencies
States receive tax credits based on population, therefore the amount of available 9% credits is limited. Selection priorities and procedures vary in each state and are outlined in a Qualified Allocation Plan (“QAP”)
Dollar for dollar reduction of federal tax liability for the owner of the qualified project
Credits claimed over a 10 year period
Restrictions in place for 15 years
Many states extend the restrictions for a longer period
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TYPES OF LIHTC
9% LIHTC are the best you can get
More equity – 70% present value
But much more competitive because limited amount in each State
4% LIHTC with Tax-Exempt Bonds
Less equity – 30% present value
Easier to obtain (bonds are competitive but 4% credits are automatic and not subject to the per capita limit)
More complex financing structure
Higher closing costs
Rates change monthly as published by the IRS
37
LIHTC PROGRAM REQUIREMENTS
Occupancy/Income Requirements
Either 20% of units occupied by households with incomes at or below 50% of AMI, adjusted for family size (“20/50”)
Or 40% of units occupied by households with incomes at or below 60% of AMI, adjusted for family size (“40/60”)
The set-aside election is made on IRS Form 8609
The requirements of the minimum set-aside must be met no later than the close of the first year of the credit period and must continue throughout the compliance period
Tenant income must be reviewed and documented at least annually throughout the compliance period
Rent Requirements
The gross rent for a LIHTC unit may not exceed 30% of the imputed income limit applicable to such unit size
Maintain habitability standards
Operate under the occupancy/income and rent restrictions for at least 15 years (30 or more years in many States pursuant to Extended Use Agreements)
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CREDIT CALCULATION
Credits based on Eligible Basis, not total development costs. The determination of a building’s Eligible basis is the starting point for the computation of the credit
Most costs, minus non-depreciable items (Eligible basis includes rehabilitation costs, reasonable developer fee)
Examples of non-eligible costs: land, syndication costs, financing costs, legal fees related to the acquisition of land, costs of surveys, federal grants
Qualified basis The qualified basis of a building is that portion of the building’s eligible basis that is attributable to low-income tenants
The credit is calculated to provide a yield over a 10 year period equal to 70 percent or 30 percent, as applicable, of the building’s qualified basis
39
CREDIT CALCULATION
Eligible basis x percent qualified units x applicable percentage x 10 years = total tax credits
Total tax credits x price per credit = investor total equity
Note that most of the investor’s equity will not be contributed to the owner entity until the project is completed
40
RECAPTURE
10 year credit period / 15 year compliance period means the credits are “accelerated”, i.e. claimed faster than they are earned
Recapture percentage depends on year in which recapture event occurs. Only the accelerated portion of the credit is recaptured.
Recapture events - Recapture occurs if there is a decrease in qualified basis:
Nonqualified unit: for example, a unit not occupied by a qualified tenant, or a unit for which the owner charges above limit rent
Building disposition through sale or foreclosure unless the building is expected to continue to be operated as a low income building
Unit not suitable for occupancy (casualty loss or dilapidated unit)
41
RECAPTURE, continued
Opportunities to cure issues that could lead to Recapture Compliance issues corrected before year end do not lead to recapture
Units affected by a casualty event can be repaired/placed back in service
Recapture amount calculated based on the decrease in qualified basis / new applicable fraction, plus interest
42
RAD AND LIHTC THE TAX CREDIT “FAST TRACK”
HUD Process created in 2014 for RAD conversions using 9% or 4% LIHTC with conventional/non-FHA financing
Traditional RAD Milestones are consolidated
Financing Plan due 60 days after LIHTC award
Requirements listed at www.radresource.net (see Fast Track Submission Checklist)
Underwriting Documents
Administrative Program Requirements
If you apply but do not receive tax credits, you have 90 days to come up with a feasible alternative financing plan or your CHAP may be revoked
43
OWNERSHIP STRUCTURE IN LIHTC/RAD TRANSACTIONS
Owner of the units is a for-profit entity (limited partnership)
Tax credit investor is the limited partner and typically owns 99.99% of the entity
General Partner typically owns 0.01% and oversees operations
PHA must have some control over the limited partnership
44
Limited Partnership
General Partner
PHA Member
Limited Partner
OWNERSHIP CHART for LIHTC/RAD TRANSACTION
0.01% 99.99%
45
POTENTIAL ROLES FOR THE PHA
PHA can maintain ownership of the land. Ground lease to the limited partnership
Ground Lease Payments
PHA can sell the land to the limited partnership Seller financing
PHA can provide subordinate financing, secured by a lien on the units
Financing fees/debt service
PHA can serve as sole developer, or co-developer Opportunity to earn a developer fee
46
POTENTIAL ROLES FOR THE PHA, continued
PHA will generally be a member (or the sole member) of the general partner entity
Cash flow
PHA can serve as property manager Opportunity to earn a property management fee
Right of first refusal for sale of the property
Fees earned by the PHA are unrestricted funds (NOT program income)
47
PARTIES TO THE TRANSACTION
Developer
Lender
LIHTC investor
State Housing Finance Agency
Residents
Consultant, General Contractor, Architect, Engineer, Surveyor, Title Company, Locality, Attorneys, Accountants
48
INVESTOR CONSIDERATIONS
Price per credit matters, but is not the only concern
Investor familiarity with PHAs
Guaranties (construction completion, operating deficit and recapture)
Investors tend to require a developer with LIHTC experience
Investors/their counsel will review all contracts and loan documents. May require Riders
49
CHOOSING A LENDER
Experience with PHAs
Familiarity with HUD and with RAD. Lack of familiarity with the process may result in delays and increased costs
Underwriting, DSCR requirements and due diligence
Timeline
Costs involved (lender’s legal fees, third party reports such as environmental reviews)
Investor will want to approve the loan structure and loan documents
Note: FHA financing can be used in conjunction with RAD (Section 223(f) for refinancing or acquisition with minor repairs; Section 221(d)(4) for substantial rehab; Section 223(f) LIHTC Pilot Program for rehab up to $40,000 per unit). This presentation does not focus on FHA financing
50
CHOOSING A CONTRACTOR
Price matters but is not the only concern Low bidder may be a company that submits a plethora of
change orders Experience with PHAs
Experience with LIHTC process and ownership structure
Investor will want some input on the contractor selection,
construction contract and insurance coverage
51
RESIDENT RIGHTS
Any displacement of existing residents for more than 1 year requires compliance with the Uniform Relocation Act
Existing residents who are temporarily relocated during construction must have the right to return
Rehab Assistance payments provided by HUD to assist with relocation costs
RAD does not allow screening of existing residents who have a right to return
Investor will review and approve the form of lease
Owner entity must sign Consolidated Owner Certification stating that residents had 30 days advance notice
New leases for existing residents must be signed prior to the effective date of the HAP contract
52
CONCLUSION
RAD can be a good tool, combined with LIHTC, to help finance substantial rehabilitation
Complete re-do or “gut rehab” and new construction will necessitate higher debt
RAD does not always work, even with LIHTC. Run the numbers carefully
Use all funding sources available: Replacement Housing Factor (RHF) Funds, reserves, HOME, CDBG, AHP, grants, senior and subordinated debt . . .
Select your partners carefully
53
Delphine G. Carnes [email protected]
CRENSHAW, WARE & MARTIN, P.L.C. 150 W. Main Street ▪ Suite 1500 ▪ Norfolk, VA 23510
T (757) 623-3000 | F (757) 623-5735
June 4, 2015
www.cwm-law.com
54
Mixed Finance Program and
Converting Mixed Finance to
RAD
LEVERAGING AFFORDABLE HOUSING HUD FINANCING:
RAD AND OTHER MIXED-FINANCE DEVELOPMENT PROGRAMS
Presented for Strafford Publications, Inc.
June 4, 2015
Presented by:
Antoinette M. “Toni” Jackson
Jones Walker
1001 Fannin St., Suite 2450
Houston, TX 77002
(713) 437-1888
56
Mixed Finance Public Housing
According to the HUD website, mixed-finance public housing allows HUD to mix
public, private and nonprofit funds to develop and operate housing
developments
57
Mixed financed developments bring additional resources to a transaction which better leverages the HUD funds within the
transaction. Traditional mixed-financed developments have been with Capital
Funds, HOPE VI funds or PHAs including public housing units in LIHTC
developments.
58
• Mixed-finance projects are subject to a Mixed-Finance Amendment to the Annual Contributions Contract (“ACC”).
• The Annual Contributions Contract is a contract between HUD and the PHA obligating HUD to provide capital funds and operating subsidy to the public housing units
59
The Process
Mixed finance submission process to HUD requires various steps of the HUD review:
Rental Term Sheet
Mixed Finance Evidentiary Package
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• Rental Term Sheet
– sets out an overview of the development • number of units, bedroom mix, income mix
• financing of the development
• ownership structure
• describes the guaranty structure
• describes the ownership and control of the reserves and how they are released
• describes the cash flow
• describes the developer fees
• overall timeline through construction
61
• The review of the Rental Term Sheet goes to a HUD committee similar to a bank’s underwriting committee. HUD may come back with questions to clarify information or can direct the PHA to proceed with the evidentiary submission.
62
• Evidentiary Submission
– review of the legal documents for the transaction
– formerly this submission was a comprehensive review of all of the documents related to the transaction including the ownership documents, set of all financing documents, HUD restriction documents and title and survey
63
– HUD has recently abbreviated the number of documents required for the evidentiary submission
– submission is made to HUD headquarters with a local review of title/survey and recording documents
64
Other Sources Used in Mixed Finance
• CDBG-Disaster Recovery Funds
• HOME funds
• Tax Increment Financing
• Tax Exempt Bonds
• Historic Tax Credits
65
Mixed finance developments eligible for RAD conversion
– developments that did not use HOPE VI funds
– developments with HOPE VI that have been in service for greater than 10 years
– developments with HOPE VI that have been in service for less than 10 years and evidence 3 years of financial distress
66
If there are operational shortfalls, the PHA must show HUD its plan to address these issues with its private partners prior to being approved for the RAD conversion
67
A PHA converting a mixed-finance development to RAD cannot benefit from the HAP contract by taking fees off the top
68
In structuring the RAD conversion, the PHA can negotiate a change in the terms of the transaction such as the ground lease payment, cashflow waterfall and developer fee split
69
Legal Documents Eliminated
• the Regulatory and Operating Agreement is eliminated
• the Mixed Finance Proposal and Agreement is eliminated
70
Legal Documents Modified
• the partnership agreement is modified
• the loan documents are modified
• the management documents are modified
• any tax credit or other financing covenants are modified
• any existing guarantees are modified
• the legal opinions are modified
71
Legal Documents Executed
• RAD HAP Contract is executed
• Termination of Mixed-Finance Amendment to Annual Contributions Contract is executed
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Mechanics of the RAD Conversion of a Mixed Finance Development
• The PHA must execute a Termination of Mixed-Finance Amendment to Annual Contributions Contract
• The PHA executes a RAD HAP Contract to evidence the conversion of the public housing units to RAD HAP units
• The Mixed-Finance ACC is replaced by the RAD Restrictive Covenant
73
Conclusion While making a decision to convert
straight public housing to RAD may be an easy decision for some agencies,
PHAs must consider the overall goals of its agency when determining whether to convert a mixed-finance development with public housing units to RAD units
74