Holly Knight
202-699-1998
holly@thebennettgrp.net
Justin Brooks
336- 473-2515
justin@edgewatertexas.com
Hilton Head, SC
August 26. 2014
Operating Subsidy Funding
OFND Annual Amount
$6,000,000,000
$5,031,106,183
$4,594,294,060 $4,611,918,201
$4,149,983,999
$4,900,000,000 $4,921,341,060
$5,000,000,000
$4,000,000,000
$3,000,000,000
$2,000,000,000
$1,000,000,000
89.20%
$-
2014
82%
94.968%
2013
100%
2012
OFND Annual Amount (U.S.)
2011
Proration
103%
2010
88.42%
2009
Capital Fund Capital Funding Trends
2.5E+09
$2,341,258,000$2,365,835,000
$1,910,035,000
$1,800,000,000
$1,790,000,000
$1,696,372,000
2E+09
1.5E+09
1E+09
500000000
2009
2010
2011
2012
2013
2014
0
1
2
3
4
5
6
Typical Expense Trends
Total Maintenance
$900,000
$800,000
$700,000
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$0
Total Maintenance
FYE 2009
$594,383
FYE 2010
$692,426
FYE 2011
$711,099
FYE 2012
$803,869
Backlog of Capital Needs
 Capital repair needs of $23,365 per unit
 Needs at your PHA
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Roof - $8,000
3 Bedroom 504 Compliance $25-35,000
ADA Site compliance $10-15,000
HVAC replacement -$4,000
Water Heater - $350
Site Soil Erosion- $20,000
Appliances –Range $450 / Fridge $550
Challenge and tools
CHALLENGE:
• The Public Housing program has remained underfunded for more than 30 years,
leading to ~$26 billion capital backlog
• The nation’s Public Housing stock is struggling, and has significant capital repair
needs
NEW TOOL:
• Conversion to the project-based Section 8 programs provides an opportunity to
invest billions into the public housing stock
• The Rental Assistance Demonstration (RAD) allows PHAs to undertake this
conversion for some units
• HUD has achieved its goal of standing up this new tool, attracting many PHAs to
participate
• Only 60,000 units are currently able to convert; lifting cap will make the RAD tool
available to all PHAs who want to use it.
Lift the RAD Cap Coalition: website with resources
What is the future?
•
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Losing affordable housing
$26 Billion capital investment need
Unpredictable and insufficient funds
Limited investments in public housing
Aging housing stock: average PH is 43 years old
Marketability and curb appeal
Rules and regulations increasing
Under performing PHAs and consolidation
Funding trends decreasing
HUDs program consolidation goals
PH Options
Goal of RAD
In order to preserve the public housing stock convert
its assistance to the project-based Section 8 platform,
which will:
1. Stabilize funding
2. Create access to private capital
3. Streamline HUD programs
4. Enhance housing options for residents
In order to convert the entire public housing stock,
HUD continues to ask Congress for authority and for
funds.
PERCENTAGE OF CURRENT PH UNITS BY HUD REGION THAT HAVE
APPLIED FOR RAD
7%
15%
3%
6%
7%
18%
16%
21%
22%
21%
Note: This data reflects the percentage of PH units in each HUD region that have applied for RAD; note that units are considered public housing until
the RAD closing is complete.
10
Whole Portfolio Conversions
•
76% of the PHAs with CHAP awards have
proposed to convert their entire stock,
including
• 52 small PHA (<250 units)
• 29 medium PHA (250-1,250 units)
• 26 large PHAs (>1,250 units)
RAD Cap Waitlist
•
Secretary Donovan letter 2/20 confirms HUD will review the ~ 685
applications above the 60,000 unit cap
•
Instruction from Secretary:
• Review applications and prepare conditional approvals.
•
Next two weeks conditional CHAPs to be issued
•
When cap is lifted, HUD will issue CHAPs to all approved
applications and process in order of the waiting list.
•
HUD will use the RAD Notice for these projects but will use FY14
funding levels to calculate the rents.
​ Lift the RAD Cap Coalition
A group of public housing authorities, developers, lenders,
businesses and other stakeholders across the country that have an
interest in preserving affordable housing.
V I S I T T H E C OA L I T I O N W E B S I T E AT :
H T T P : / / W W W. B E N N E T T G R O U P C O N S U LT I N G . C O M / L I F T T H E - R A D - C A P - C OA L I T I O N
S I G N U P T O J O I N T H E C OA L I T I O N A N D A C C E S S
TA L K I N G P O I N T S , FA Q S ,
A SAMPLE LETTER TO CONGRESS,
O P - E D A N D L E T T E R T O T H E E D I T O R T E M P L AT E S ,
T H E L I S T O F C O N G R E S S I O N A L TA R G E T S
AND MORE.
RAD Update
 HUD has asked for RAD cap to be lifted in 2015 budget
RAD Application by
RAD Application update
Application Overall Sources of Funding
RAD Application tax credits
Sample Public Housing Conversion
Per Unit Monthly (PUM) – Same funding
$900
$800
$700
$600
Operating Fund
$200
2013 Funding
$164
Operating Fund
$330
Payment
$474
$500
$409
$100
Tenant Payment
$150
Tenant Payment
Total
Tenant Payment
$318
$259
$200
$792
$450
OP
$300
Capital
Fund
Capital Fund
$144
$100
Tenant Payment
$150
2013 Cap and
2013 Funding
$95
$400
Housing Assistance
Payment
Housing
$300
Assistance
$318
$-
Pre-Conversion
Post-Conversion
Why RAD
 Builds on a more stable funding platform
 Lock in funding

Better than Capital Fund Finance, Leveraged Op Sub,
or EPC
 Leverage private capital to address physical
needs and preserve your units
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Leverage 4% LIHTC get 30% project equity
Leverage 9% LIHTC get 60+% project equity
Leverage developer fees, seller take back finance,
ground lease
 Apply for grants HOME, Federal Home Loan Bank
 Provides a great deal of regulatory and reporting
relief

Saves in reporting to HUD, policies, and oversight
more with board and PHA
Why RAD
 Procurement with developer partner is simplified
 Expenses
 Gives real estate opportunities
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Can move HAP contract as needed
Can move out of flood zones/hazard zones/undesirable
areas
Can use non federal funds to purchase properties or land
Benefits of partnering for expiring LIHTC, Home projects,
HUD Multifamily developments
Best and highest use of assets
 Feasibility, Marketability, and Sustainability
RAD flexibility
 Transfer assistance from unworkable units prior to
conversion
 Market accommodations in meeting 1-for-1 preservation
(e.g., convert efficiencies to 1 bdrms; long-term vacant units)
 Combine RAD & agency PBVs or SAC TPVs>PBVs
 Flexibility to reduce densities, replace housing off-site,
produce mixed income communities
 Allows PHA to undertake renovations immediately or after
conversion, as warranted
 Demolition/New Construction allowed
 Ability to “bundle” project applications for flexibility with initial
contract rents
Show the PHA the Money
• The RAD options:
• Modest rehab with no debt
• Modest rehab with debt only
• Moderate rehab with debt and 4% LIHTCs
• Major rehab or replacement with debt and 9% LIHTCs
• These are funding sources that are not conveniently
available to small PHAs
• A conversion of all LIPH units eliminates the HUD
requirements for:
• Procurement
• Annual and Five‐ Year Plans
• PHAS
• REAC (if…PBV)
• You Get to Keep the Money – no offsets, developer fees, seller take back financing,
cash flow options
PH Development Resources
Note: Not listed PHA PBV at FMR, PHA Cost Center Funds, Admin Fees
What can RAD do now?
 15-20 year, renewable contracts with use agreement
 Predictable initial contract rent setting; annual operating cost
adjustments for inflation (OCAF)
 Established replacement and operating reserves; standard
industry underwriting requirements
 RAD HAP funding begins at construction closing
 No limitations on use of project cash flow
 PHA ownership/control similar to LIHTC practices
 Long-term affordability ensured
RAD Similar and Different to mixed
finance
• Similarities:
Real Estate Transaction same
Rent/Income
Reporting to 3rd parties
Physical needs assessment is a driver
• Differences:
PHAs want to self manage
RAD PCNA tool
Complicated HUD regulations
Lower Income to project
Expenses higher may need to be adjusted
Type of 3rd party reporting HUD versus Investor
• Benefits of PHA Partner
Invested in community
Familiar with social services
Knows the community partners
Has managed PH inventory on shoestring budget
Familiar with compliance
RAD Transaction Concerns
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Timing
Tax credit compliance versus HUD compliance
Rent calculation and income qualification
Boards and their role changes
Limited knowledge of mixed finance
Management
Ownership changes impact pilot and taxes
Investors and HFA unfamiliar with PHAs
RAD rents are low
HUD conversion requirements
• PBV/PBRA
• PHA Plan
• Site and neighborhood
• Elderly designation
• Environmental
• Relocation (URA)
• Affirmatively Furthering Fair Housing
Mixed Finance/Loans and tax credits
 Traditional Public Housing follows complicated mixed
finance rules
 ACC formula for Capital Fund is based on current building
type and DOFA
 Can not move your ACC like a HAP
 Must go through demo/dispo application with SAC to
change ownership
• Can use FHA and traditional public housing but difficult
• Can leverage 4% and 9% tax credits
• Can leverage debt but ACC amendment may not agree with
lender requirements
RAD financing
 Availability of FHA 223(f) & 221(d)(3) insurance, with priority
processing
 Access to FHA LIHTC Pilot processing
 Ability to tap 9% & 4% LIHTCs, including “short bond”
structures
 Ability to support transaction with public housing reserves
and capital funds, including Replacement Housing Factor
funds
 Access to HOME and CDBG for development budgets
 Available sales proceeds can support other affordable
housing purposes
Overview
 Private Finance Paradigm: The Affordable
Housing Development as a Stand-alone
Small Business
 Calculating Debt: Rental Income, Net
Operating Income, and an Estimate of Debt
 LIHTC Program
 Calculating Equity
 Organizational Structure: Roles and
Responsibilities
 Risk and Reward
Private Finance Paradigm
Affordable Housing Financed Like a Small Business
 A stand-alone entity owns and operates a development
 Estimates of income based on market potential of the
product (quality, location, and appeal), use restrictions,
and/or long-term subsidies
 Operating expenses based on contemporary professional
property management standards without below-market
participation from affiliated interests
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Staffing budgets
Back-office expenses covered by management fee
 Ongoing replacement reserves deposits based on
underwriting standards & project’s particular needs
Private Finance Paradigm
Where does the money come from?
 Equity
 Must-pay debt (predominantly private
sources)
 Soft debt (public and private sources)
Equity expects a risk premium compared to debt
Private Finance Paradigm
 Equity provider is in risky position, thus requiring
some control over operating decisions
 No lien
 Paid only from net cash flow after payment of all
other obligations
 Theoretically unlimited return
 Debt provider is in a less risky position, thus lower
return compared to equity
 Lien on property
 Loan/Value Ratio
 Lower return compared to equity
Private Finance Paradigm
How is equity different for Affordable Rental
Housing?
 Standard private equity expects:
 Cash flow after payment of all project obligations,
 cash from sales proceeds, and
 perhaps tax benefits
 Tax credit equity provider expects:
 Tax benefits e.g. LIHTC, Historic Tax Credit, and
 “paper losses” e.g. depreciation
 Note that cash flow from operations and sale are
secondary considerations
Private Finance Paradigm
How much debt can my project support?
 Use Estimates of income and expenses to
calculate Net Operating Income (“NOI”)
 Divide NOI by a cushion (Debt Coverage
Ratio)
 Use result to determine loan payment
amount
 Loan payment supports a certain amount of
debt
Calculating Debt
Net Operating Income (NOI) is the engine supporting debt
 NOI = gross income – operating expenses - reserves
 Debt Coverage Ratio (DCR) is a factor intended to provide
cushion in case NOI is lower than expected
 Supportable debt = NOI / DCR
Interventions for affordability impact NOI
 Restrictions have the effect of reducing NOI
 Subsidies often increase NOI compared to a market scenario
Keeping housing affordable often means capping rents,
which lowers NOI and supportable debt
Calculating Debt
 Example:
 50-unit development with rent of $600 per unit
per month
 7% vacancy
 Operating expenses of $4500 per unit per year
 Required replacement reserve deposit of $350
per unit per year
 Assume 1.20 debt coverage ratio
 Assume first mortgage interest rate of 6.0% with
30 year amortization
Calculating Debt
 Gross Income:
 $600 x 50 units x 12 months=$360,000
 Vacancy of 7%=$25,200
 Gross income=$334,800
 Expenses and Replacement Reserves:
 Operating expenses=$4500 x 50 units=$225,000
 Replacement reserve=$17,500
 Net Operating Income
 Gross income – expenses and operating reserves
 NOI=$334,800-$225,000-$17,500=$92,300
Calculating Debt
 Net Operating Income=$92,300
 Assuming 1.20 Debt Coverage Ratio (“DCR”),
allowable debt service shall be $76,917, or
$6,410 per month.
 Assuming a 30-year mortgage with a fixed rate of
6.0%, the project can support a first mortgage of
$1,069,000
 This is equivalent to $21,400 per unit
The Tax Credit Program
 A housing subsidy program for low-income rental
housing
 Created within Section 42 of the Internal Revenue
Code
 A federal income tax credit that is allocated by each
state’s housing finance agency
 Each state receives an amount of credits annually in
tax credits to allocate to projects, $2.15 per capita in
2011
Tax Credit Program
 Rental units with tenants earning no more
than 60% of area median income
 Investors earn dollar-for-dollar credits
against their federal tax liability
 Investors also get tax benefits from losses
 Generally, tax credits are received over the
first 10 years of operation
 Some tax credits are recaptured by the IRS
if the project does not comply for 15 years
Tax Credit Program
 Threshold Elections – Who can live
there?
40/60 election
20/50 election
All tax credit units must be within election parameters
 Rent Restricted – How much can tenants
pay?
Rents and utilities – limited to 30% of
threshold income
Allowable rent based on size of unit
Tax Credit
 “9%” New Construction/ Rehab Credit - the
standard kind of tax credit
 “4%” New Construction/ Rehab Credit - used
when project is financed by tax-exempt bonds
 “4%” Acquisition Credit – may be applied to
building acquisition costs with rehab project under
certain circumstances (Substantial rehab, 10-year
rule)
Tax Credit Equity
Overview:
 Credits generated on the basis of “Hard Costs” (construction,
rehab, building acquisition, and construction-related indirect
costs) attributable to qualified low-income rental use
 Such “Hard Costs” are also known as “Eligible Basis”
 Result is known as the “Qualified Basis”
 Qualified Basis is multiplied by the Tax Credit Percentage
(commonly known as the 9% or 4% rates, but actually
fluctuate)
 Result is annual Tax Credit amount
 Tax Credit amount is generated each year over a 10-Year
Period
TC Equity
Tax Credit Equity = 10 years’ of tax credits multiplied by “Price”
“Price” is determined by informal marketing of an individual project to
investors and syndicators. It is customarily expressed in cents per
dollar of credit generated over the 10-year period.
Tax Credit and Equity Calculation
Eligible Basis
X
Applicable Fraction
X
Basis Boost (if applicable)
=
Qualified Basis
Tax Credit
Annual Tax Credits
X
10 (Years)
=
Total Tax Credits
Total Tax Credits
X
Price (Cents per dollar)
=
Equity
Organizational Structure
Key Characteristics of Organizational Structure:
 Project owned by new, single-purpose, for-profit
entity
 New owner is 0.01% owned by a general partner
(GP), 99.99% owned by an investor limited
partner (LP)
 Sponsor controls or owns GP 0.01% interest, but
controls and operates the entity
 Passive limited partner invests equity
in return for 99.99% ownership
 Tax benefits run 0.01% to GP, 99.99% to LP
Risk and Reward
LP Underwriting Focuses for mitigating risk:
 Experience, track record of development team:



Developer
General contractor
Property manager
 Market analysis – are rents for the proposed product
supportable in the market?
 Loss run analysis: for subsidized projects, examining the
financial results of lost operating subsidy
 Development budget and construction contingency are
sufficient to build the project
 Operating budget and operating reserves support
market-oriented operations
 Guarantees
 Asset Management oversight
Risk and Reward
Benefits from GP’s perspective:
 Developer fee payable from sources and uses
 Possible sales proceeds if purchased from related
party
 Future cash flow
 Ability to purchase property at end of TC compliance
period
 Benefits to PHAs, in particular
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Ability to preserve existing project
Potential to maintain management portfolio and earn
property management fees
Ongoing control of property through GP, with limitations
Risk and Reward
Risk from GP’s perspective:
 LP has ability to remove GP
 Limits on control of property
 Guarantees to financial partners

Construction completion
 Credit adjusters
 Compliance
 Operating deficit
Risk and Reward
GP mitigates risk by:
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Assembling a strong team
Proper setting of rents
Use of project-based operating subsidy
Design, construction, and management quality that
is well-suited for intended population
Solid budgeting
Operating reserves, construction contingency, fixed
price contract and payment and performance bond
from contractor
Support from co-developer
Third party property management or third party
compliance assistance
Risk and Reward
Partnership is Key Factor:
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Long-term relationship
Reasonableness
Shared goals
Trusted advisors
Set realistic goals
How does RAD differ from Public
Housing
Conventional Public Housing Finance:
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Capital and operating fund based on formula
Operating Fund is break-even, at-best
Capital Fund supplements
No NOI
No ability to convert NOI into up-front debt
Developments owned directly by
PHA=syndication not possible
 Even with mixed-finance technique, no ability
of PH units to support debt
How does RAD differ from existing PH?
Rental Assistance Demonstration Financing:
 Takes public housing units out of the operating and
capital funding paradigm
 Converts both layers of subsidy into a single subsidy
 Ownership through single-purpose entities allows for
TC syndication possible
 Positive NOI attainable, thus, project has ability to
support debt
 PHA, as sponsor, can compete for other sources of
funding, such as HOME, FHLB
 PHA has potential to earn developer fees and
property management fees
 PHA can continue to control ownership of project
Change
 Take the first step in faith. You don’t have
to see the whole staircase, just take the
first step.
-Martin Luther King, Jr.