National Church Residences has closed on the nation’s first RAD for PRAC conversion, a move that enables the nonprofit to rehabilitate and preserve an Ohio senior housing community for the long term.
Located in Chillicothe, Hopeton Terrace was built in 1994 with a Department of Housing and Urban Development Section 202 capital advance and provided rental assistance under the Section 202 Project Rental Assistance Contracts (PRAC) program and has since been providing 45 affordable one-bedroom apartments for seniors 62 and older.
Despite the importance of PRAC providing senor housing, the program limited the ability of National Church Residences and other owners to recapitalize and preserve their aging communities. While owners of other properties can often finance large-scale improvements and rehabilitation by taking out a loan or refinancing an existing mortgage, operators of PRAC-subsidized homes have been constrained because their developments are dependent on annual funding from Congress.
That changed when the 2018 omnibus spending bill expanded the Rental Assistance Demonstration (RAD) program to include Section 202 properties with PRAC. National Church Residences and other housing organization advocated for the change.
RAD allows properties to convert their Section 202 PRAC contracts to project-based rental assistance (PBRA), a more steady source of financing that opens up the possibility of securing additional financing through low-income housing tax credits (LIHTCs) and other sources.
The nonprofit’s Hopeton Terrace became the first to apply and receive approval for the RAD conversion from the Department of Housing and Urban Development (HUD). The developer then closed on the financing with several partners.
“Hopeton Terrace will be the first of many RAD for PRAC conversions as part of a long-term national strategy to preserve affordable housing for older adults, which is in critically short supply,” says Michelle Norris, executive vice president of external affairs and growth strategies at National Church Residences.
The firm, one of the nation’s largest owners of PRAC-subsidized homes with about 100 properties, is working on several more conversions in Florida, Ohio, and Texas. Many other developers are also pursuing their own RAD for PRAC deals.
At the end of October, there were seven transaction with 356 units in active underwriting and nearly 8,000 additional units in the pipeline at HUD.
For National Church Residences, Hopeton Terrace was a good first project to pilot a RAD conversion. The organization is deeply embedded in Chillicothe with several signature properties, including affordable housing, assisted living, and skilled nursing facilities in the area.
Not only is the development located in the organization’s home state, the property allowed National Church Residences to work with several longtime partners, including the Ohio Housing Finance Agency (OHFA) and the Ohio Capital Corporation for Housing (OCCH). That history would be important because they would be working together on a complicated deal that had not been done before.
Norris emphasizes the importance of the PRAC properties in serving low-income seniors. Hopeton Terrace is home to seniors who earn between 30% and 50% of the area median income.
At National Church Residences, about 80% of the residents in its Section 202 PRAC communities are women, and 50% are older than 75. In any given building, about 30% of the residents are diabetic and about 70% have hypertension.
In addition, one out of three are dual eligible, meaning they carry a Medicaid and a Medicare card, which is important as states look for new ways to deliver health care.
The Complexities of the Deal
The attorneys at the Klein Hornig law firm helped the developers work through the deal’s many challenges.
“There were a number of documents that had not yet been drafted or had not gone through the entire review and approval process by HUD,” says Daniel Ehrenberg, a partner at the firm. “We worked with HUD to finalize those documents for this transaction. Some of those took a little time. HUD was extremely cooperative and very good to work with on this first RAD for PRAC transaction.”
Owners thinking about utilizing the program need to be aware that the initial contract rents for RAD for PRAC to PRBRA conversions will be the lower of the current PRAC rents or 120% of the applicable fair market rent. In most cases, this means that the contract rents after the RAD conversion will be the same as the contract rents prior to the RAD conversion.
“Therefore, our first suggestion to current Section 202 PRAC owners is to review your current PRAC contract rent levels,” says Jessica Cassella, an associate at Klein Hornig. “Because PRAC contract rents are established based on an annual budget-based rent adjustment process, it’s important to evaluate whether the current PRAC rents adequately capture the needs of the project, especially the replacement reserve and supportive services levels. If not, owners should request increases in these levels, as supported by sufficient documentation, in their next annual PRAC budget-based rent request.”
At the time of the RAD conversion, there are some ways to slightly increase the contract rents (i.e., increasing the supportive services levels from $15/unit/month to $27/unit/month), but usually the contract rents before the conversion will largely be the same as the rents after the conversion, according to Cassella.
“Because of this, we expect that many of the early RAD for PRAC conversions will be for projects that have limited rehab needs or are able to access sufficient third-party financing,” she says. “But this should not discourage owners from considering a RAD for PRAC conversion. One of the reasons a conversion is so valuable is that it changes the type of rental subsidy from an annual PRAC to a 20-year HAP [Housing Assistance Payment] contract. This change alone makes the rental assistance more stable and allows owners to leverage public and private debt and equity.”
The properties also have a capital advance use agreement, deed of trust, and regulatory agreement. The capital advance for Section 202 projects is the money, the capital, that HUD advanced to the project to allow it to be built. Those agreements go away once you convert under RAD for PRAC, adds Ehrenberg.
In its place is a new elderly housing use agreement that is recorded against the property prior to any other recorded documents. This elderly housing use agreement will have a term of 20 years plus the balance of the term remaining on the Section 202 capital advance use agreement.
“You are still maintaining a senior housing project, but an owner won’t have the constraints of having, for the most part, the Section 202 documents, including the capital advance mortgage, deed of trust, regulatory agreement, and use agreement, as well as other conditions that may preclude other types of financing coming into a project,” Ehrenberg says.
Owners should read up on the RAD for PRAC program.
Also, after a submission of interest is filed with HUD, the owner will be assigned a transaction manager. It’s important to work with the transaction manager, Ehrenberg says.
Most of the early RAD for PRAC conversions will likely rely upon LIHTCs as a key source of financing. “We expect that 9% LIHTCs will be necessary to enable the conversion of projects with significant levels of rehab,” adds Cassella. “In addition, 4% LIHTCs may also enable the conversion of a project with more moderate levels of repairs.”
Hopeton Terrace is using 4% LIHTCs and tax-exempt bonds. OCCH is investing $2.3 million through the housing tax credit program administered by OHFA.
National Church Residences is committing $1 million of its own funds into the property as well as $260,000 in Capital Magnet Funds. The Community Development Financial Institutions (CDFI) Fund provides Capital Magnet Fund grants to CDFIs and qualified nonprofit housing organizations. National Church Residences received one of the largest Capital Magnet Fund awards in 2018, $7.5 million, and is committed to deploying it into projects over the next three years.
In addition, the renovation will include funding from the Huntington Bank Digital Inclusion Fund, a partnership with Ohio Capital Impact Corp., to cover the hardware and installation costs necessary to provide high-speed wireless internet to all residents at no additional cost to them.
“I look at RAD for PRAC as an opportunity to rejuvenate the physical building and to look at it as a way to potentially bring new services into the building at the same time,” Norris says. “One of our goals as much as possible is to bring digital inclusion to the building.”
