Case Study

First RAD for PRAC Deal Closes

6 min read

Inside the $7 Million Deal and What HUD Sees in the Pipeline

Hopeton Terrace in Chillicothe, OH, the first senior housing project to benefit from a RAD for PRAC rehab deal, may soon have a lot of company. According to officials at the Department of Housing and Urban Development, HUD has seven more such deals currently being underwritten and has received a total of 180 applications to take part in the new program.

Rental Assistance Demonstration (RAD) for Project Rental Assistance Contracts (PRAC), converts HUD Section 202 housing for the low-income elderly into Section 8 units, allowing for capital to be raised for rehabilitation using the Low Income Housing Tax Credit and other financing sources.

At Hopeton Terrace, this will bring in $7.3 million in total development costs to renovate 46 one-bedroom units for senior residents averaging $13,700 in income. Unit size is about 550 square feet. Construction costs total about $2.5 million.

As with other RAD programs, like the extensive ones that have been done to convert public housing units to Section 8 around the country, none of the current residents will be permanently displaced and affordability of the units is being extended.

Developer National Church Residences of Columbus, OH, plans on spending $54,000 apiece to rehab the units, according to Matt Rule, NCR’s senior vice president for housing development. The capital stack includes $2.3 million in four percent LIHTCs syndicated by Ohio Capital Corp. and sold to a multi-investor fund, a bond from the Ohio Housing Finance Agency to fund construction (Key Bank was the buyer), a soft loan from OHFA, and several contributions from NCR.

The sponsor loan, general partner capital and seller loan, in total about $3 million, were all from National Church Residences, according to Rule. “This was an important renovation for our organization and the seniors who live there, and we loaned the Hopeton community a lot of money in order to fill financing gaps and see it move forward.”

The “extraordinarily low” rents at Hopeton Terrace, $546 a month, meant “there was no room to support any debt” on the project.

Rule says it was “a challenge for sure” to mesh the requirements of both HUD and the state housing agency, but that both had been “really patient” partners on the deal.

Plus, there were other financing sources (see Sources of Funding on p. 26). “There were a lot of funding partners to bring to the table all on the same day,” he notes.

Another Ohio Project
Rule says NCR is interested in doing more of these conversions. “We have several RAD for PRAC deals we are working on,” he says, all tax credit deals. The one farthest along is also in Ohio and is a four percent tax credit deal. NCR hopes to close on this one next spring. Then it has two nine percent LIHTC deals in Florida and one nine percent in Texas in the works for a total of four more that should be closing in the near term.

Construction at Hopeton Terrace was set to start before November 1 and will be a “pretty extensive” rehab for the 26-year-old, two-story building, Rule says.

Renovations are set for the mechanical and HVAC systems, updating the elevators, replacing the roof and the gutters, replacing all windows, milling and resurfacing the parking lot and putting in new flooring in the common areas.

Individual units will see new LED lighting, entry doors, sinks, toilets, cabinets and counter tops as needed, and handicapped units will be gutted and renovated. The building will be hardwired for Wi-Fi as well.

A handful of residents (their average age is 76 with a small number being over 85) will have to move offsite while the work is going on, Rule says. National Church Residences has two other housing projects in Chillicothe so the seniors won’t be moving far.

The seniors “are a really great group to work with,”

he says, and turnover is quite low. “It’s a very tight-knit community,” Rule adds. Discussions with the tenants about the conversion started two years ago.

Rule says the residents will be benefitting from a HUD-funded service coordinator. “Not only are you preserving a building, but the funding for a service coordinator is a really scarce resource,” he points out.

Big Universe for Conversions
How big a universe is the 202 program? According to Tom Davis, director of the Office of Recapitalization at HUD, there are 120,000 units of elderly housing in the Section 202 program in 2,800 properties around the country.

“We are gratified there seems to be a lot of interest,” Davis says, noting that 8,000 units are included in the submissions HUD has received so far.

John Ardovini, HUD branch chief, says of seven active deals (meaning HUD has started underwriting), six of those are tax credit financings. Among the 160 transactions anticipated to submit underwriting materials in the next 12 months, some are contemplating Federal Housing Administration refinancings and some are straight conversions without recapitalization.

Other funding opportunities for RAD for PRAC deals besides tax credits include soft second loans from housing finance agencies, debt from secondary mortgage agencies, like Fannie Mae, Freddie Mac and the FHA, commercial non-FHA debt, Opportunity Zone Tax Credits, New Markets Tax Credits, Community Development Block Grant funds, HUD HOME money and Federal Home Loan Bank Affordable Housing Program awards.

Davis notes that in addition to these sources, “possibly a few” deals might qualify for Historic Tax Credits if the Section 202 development was an adaptive reuse of an older building.

The Hopeton Terrace transaction closed on October 6 with the Boston law firm of Klein, Hornig, a specialist in affordable housing and community development, representing National Church Residences.

The Ohio deal may serve as a template for further projects, according to Will Lavy, director of Program Administration at HUD’s Office of Recapitalization. About 40 to 50 percent of submissions involve LIHTC deals, he says. And at the end of the rehab work, Hopeton Terrace “will be a brand-new property, with a wonderful service package,” he says.

NCR’s Rule concurs. “It’s pretty exciting. We hope to replicate it. The first time, you work the kinks out.”

“For a first transaction, it went really well,” says Ardovini.

Matt Rule, Senior Vice President, Housing Development
National Church Residences, Columbus, OH

Tom Davis, Director, HUD Office of Recapitalization
Washington, DC

John Ardovini, Branch Chief, HUD Office of Recapitalization
Washington, DC

Will Lavy, Director, Program Administration, HUD Office
of Recapitalization, Washington, DC

Mark Fogarty has covered housing and mortgages for more than 30 years. A former editor at National Mortgage News, he has written extensively about tax credits.