RAD Inventory Assessment Tool for PHAs INSTRUCTIONS Overview The RAD Inventory Assessment Tool is designed to help public housing agencies (PHAs) make a firstlevel assessment of properties in their inventory for potential conversion of assistance from public housing to long-term Section 8 contracts under the Rental Assistance Demonstration (RAD). A helpful initial step in such analysis is to estimate how much permanent mortgage debt could be supported by “current funding” under the public housing program when converted to Section 8 assistance to help meet identified capital needs. With this estimate, a PHA can begin to structure a more thorough Income and Expense statement (or Operating Budget) as well as Sources and Uses of funds (Development Budget). In some cases, the maximum supportable first-mortgage debt may offer a sufficient amount of financing to meet the capital needs of a project. In other cases, it will be necessary for the PHA to obtain other sources of subordinate debt, equity and/or grant financing to make the project feasible. There is no requirement under RAD to assume any level of debt if a conversion is feasible without debt. Additionally, it may be prudent to reduce the amount of supportable debt by coupling it with subordinate financing or capital grants to improve a project's cash flow. A PHA might consider applying its own public housing Operating or Capital Funds (permitted under RAD as a statutory waiver) as an additional source of capital. Other public and private sources, such as state and local CDGB and HOME funds or social investment funds, can be structured as subordinate financing. For projects with higher capital needs, PHAs are encouraged to consider accessing private equity investments utilizing either 4% or 9% Low Income Housing Tax Credits (LIHTCs). In all cases involving multiple sources of financing, particularly LIHTCs, PHAs are strongly encouraged to enlist advisors, development team members and/or partners in needed financing for a potential conversion of assistance under RAD. The Tool is preloaded with information from HUD systems on each Asset Management Project (project) in a PHA’s portfolio, including the number and bedroom size of units and current public housing funding. The Tool also addresses various underwriting assumptions related to generating a preliminary Operating and Development budgets. The user only needs to enter a minimal amount of data in order to generate initial results for each project. The user can then modify any of the information supplied, or any of the assumptions or formulas, to perform more detailed ‘what-if’ analyses. For more information on RAD, please see PIH Notice 2012-32 or visit the RAD website at www.hud.gov/rad. Additional information on preparing a RAD application is provided in the RAD Conversion Guide, which can also be accessed from the RAD website. How the Tool Works There are two types of cells: ► Green cells with bold borders are user inputs. The user can modify the data in these cells to help refine the analysis ► Black cells are formulas that are locked. Additionally, throughout the tool are blue question boxes. By holding the cursor over these cells, the user can see additional information or suggestions specific to that area of the worksheet. Step 1: Enter Global Inputs Navigate to the Global Inputs Tab (which appears on the bottom of this Excel window). On this tab, the user must: 1) Enter the five digit PHA code, e.g., MI011 (Monroe, MI Housing Commission). If you are unsure of the PHA code, you can look up the PHA in the PHA Code Tab. 2) Click on the “Populate Data for All Properties for this PHA” button. Once clicked, the tool will populate data for all properties for this PHA on the Inventory Overview Tab. (You will see the tool go through the population routine and then return to the Global Inputs Tab.). Note: While intended primarily for PHA use, the Tool contains only publicly available/non-confidential. The prepopulation routine works only once. If you are using this tool for multiple PHAs, you will need to open a new version of the tool where the radio button has not been engaged. You can then save a file for each PHA. 3) Enter the First Mortgage Financing Terms (rate, amortization, term, etc.). These terms will then apply to all projects in your inventory. (On the next tab, you will be able to modify these terms for any individual project.) 4) Select the type of conversion: PBRA or PBV from the drop-down box. (For the purposes of this tool, this choice affects the different rent caps under RAD for PBRA and PBV conversions.) 5) Enter whether you would like the tool to auto-populate an initial operating expenses estimate for each project with one of the options in the drop-down box or begin each project blank. You’re now finished with the Global Inputs Tab. Step 2: Build an Initial Income and Expenses Budget Click on Inventory Overview Tab. The Tool will now display a first-level, simplified Income and Expense Budget for each project in the PHA’s inventory, including the estimated first mortgage debt that each project can support based on the global financing terms that the user entered, operating expenses (if the user selected an estimate), and the Tool’s pre-loaded underwriting assumptions. In addition to modifying the data or assumptions in this section (Section 1), the user can click on the buttons to reveal Sections 2 and 3, where the user can make additional property-specific adjustments to fine-tune the pro-forma and first mortgage estimates. Some of the key underwriting assumptions that the Tool begins with, and that can be modified by the user, include: Vacancy loss of 5%; Bad debt loss of 2%; Other Income of $120 per unit per annum; and Replacement reserves of $500 per unit per annum. Step 3: Build an Initial Sources & Uses Budget Now the user can build out a more detailed development budget, by using the Tool's Sources and Uses template. For building out Sources, the user can begin with the estimated first mortgage debt provided in Step 2. If additional funding is likely to be needed to address a given level of capital rehabilitation or construction, the user should consider the availability of soft second mortgages or subordinated debt from a variety of potential sources. Some of these are controlled by the PHA and some are available to affordable housing projects generally through state, local and private sources. For filling in Uses, the user should begin with the estimated rehab/construction costs for the project and then estimate additional project costs including professional fees, loan fees and costs, reserves and developer fees. If Sources and Uses do not balance, a user can review the Tax Credit Estimator in the Tool below the Sources and Uses template. Before using the Estimator, be sure to make adjustments to Acquisition Cost, Operating Reserves and Developer Fee, which are substantively different in transactions involving tax credits and/or impact the equity that could be raised. Additionally, the acquisition cost of the units is typically lent to the project as Seller Take-Back Financing, which should appear then as a Source. Guidance for those changes is provided in the blue box adjacent to the specific line item. Once you have made these changes, the amount shown in the Tax Credit Estimator already deducts certain LIHTCrelated transaction costs, including additional legal fees and bond issuance costs (if applicable), and so represents a net equity figure. This is simply an estimate and users who anticipate using LIHTC should contact an experienced advisor early in the process. Finally, based on the 1) first mortgage debt proceeds indicated in the Sources and Uses, 2) inflation factors for rents, expenses, and replacement reserves, and 3) the number of years a user would like to project out, the Tool estimates the amount of the debt service and the debt coverage ratio in a future year. The trending of operating Income and Expenses to reflect inflation will be an important underwriting criterion for some affordable housing lenders, and especially to LIHTC investors Additional Notes on Use Saving: IMPORTANT NOTE - The workbook's Excel file format (.xlsm) must be retained. Do not change the file type or all macros/radio buttons may be deactivated. Printing: The Inventory Tab is preset to print only Section 1 (Operating Pro Forma and Section 4 (Sources & Uses). A user may change the print area in the Page Setup ribbon. Multiple PHAs: If you are using this tool for multiple PHAs, be sure to start with the original version of the tool for each PHA; the pre-population routine will only work if the tool is in its original state (i.e. PHA Code = "Blank") and the “Populate Data For All Properties for this PHA” button has not been engaged. Changing HUD’s Assumptions: The tool begins with initial underwriting assumptions, which are applied to all projects (e.g. vacancy rate of 5%). The user can customize these by project or can modify the global assumptions. To the right of the last project column on the Inventory Overview tab, you will find a number of these standard economic assumptions in blue bold font that the PHA can modify. Further Customization: HUD has also designed this workbook so that it can be customized by users. The password is "RAD2." Before customizing the workbook, be sure you have completed the prepopulation routine in the Global Inputs Tab and saved a copy of the resulting pre-populated workbook. Technical Notes Disclaimer: HUD does not warranty any of the formulas, data, or assumptions included in this tool. This tool is for planning purposes only. To create this tool, HUD made a number of assumptions, all of which a user may modify: 1. Project and Unit information come from a PIC extract from 6/8/12. 2. Contract Rents are calculated based on Attachment 1C of PIH Notice 2012-32 using the 2012 Appropriation. a. The Operating Subsidy was derived from Form-52723, taking the following steps: Step 1: Combine 1) PEL [Section 3 Part A, Line 03 (PUM inflated PEL)] + 2) UEL [Section 3 Part A, Line 05 (PUM inflated UEL)] + 3) Add-ons [Section 3 Part A, Line 07-15] (excluding Asset Repositioning Fee [Line14] and Resident Partipation Funding [Line 11], divided by Total Unit Months + 4) Resident Participation Funding [$25, divided by 12]. The result is a PUM amount. Step 2: Subtract Adjusted Formula Income [Section 3 Part B, Line 03 (PUM adjusted Formula Income)] Step 3: Mutliply the result by the current year's pro-ration The Result is the derived PUM Operating Subsidy under RAD. (For MTW agencies, HUD used the average per unit operating subsidy and the reported tenant rents from the 50058). b. For the Capital subsidy, HUD used the per unit subsidy amount calculated for the Capital Fund formula for 2012 grants based on units counts as of 9/30/2011. Actual amounts may differ if the unit counts of the proposed converting project differ from the standing unit count as of 9/30/2011. c. Tenant Rents are based on Adjusted Formula Income [Section 3 Part B, Line 03 (PUM adjusted Formula Income)] from the Form-52723 d. A project with a null value for Operating Subsidy, Capital Subsidy, or Tenant rents, indicates that the project does not receive one or more of these revenue streams in 2012. If the project is eligible for subsidy, or would be after rehabilitation under RAD, you can modify this information in Rows 71-73 of the Inventory Overview tab. e. The calculation of contract rents for MTW agencies with an alternative subsidy calculation under the public housing program differs from the approach illustrated above because their Operating subsidy is not currently allocated at a project level. For these agencies, HUD has calculated a perunit Operating subsidy based on each agency’s Operating Subsidy grant. For tenant rents, this tool uses data provided in the 50058. 3. Operating Expenses – The option to auto-populate operating expenses with 95% of Formula Expenses calculates the operating expenses for each project with 95% of the sum of Project Expense Levels (PELs), Utility Expense Levels (UELs), and Add-ons (excluding Asset Repositioning Fee). (For alternative-subsidy MTWs, HUD used the average PEL, UEL, and Addon for the metro area in which the agency is located.) The option to auto-populate operating expenses with Mark-to-Market Comparables utilizes a limited sample size of 1,500 properties and 121,000 units and are representative only of the M2M portfolio. Actual results may for any given property due to a number of project and market factors. 4. Fair Market Rents were pulled from HUD’s Final FY 12 FMRs. For some projects, where HUD was unable to map the project to the FMR database, HUD used the state-wide FMR. The tool uses FMR data to calculate the applicable rent caps. 5. Utility Allowance data is extracted from PIC. Where such data is not available, HUD used the national average of $38 PUPM. The tool uses Utility Allowance data only for the purposes of determining the applicable rent caps (for example, for PBV conversions, contract rents cannot be greater than 110% of the FMR adjusted for Utility Allowances). 6. Market Rents are estimated at 93% of Fair Market Rents. This estimate is based on a national comparison of rents found in the Housing Choice Voucher program compared to FMRs. The tool uses the estimate of market rent to calculate the applicable rent caps.