6 min read

Preservation support for low-income senior housing

The Project Rental Assistance Contract, known as PRAC, was instituted in 1990 into HUD’s Section 202 Supportive Housing for the Elderly program to subsidize one of the most needy and vulnerable cohorts of the population: low-income seniors. Since then, more than 125,000 PRAC-subsidized apartment units have come online. These residents have an average annual income of slightly more than $13,000 and the program was designed to make sure that seniors in this group do not pay more than they can afford for housing. PRAC, with strict guidelines, requirements and formulas for computing proper costs and rents, provides an operating subsidy for three-year terms, based on 75 percent of operating cost standards, assuming a 25 percent contribution from residents. Until recently, however, there was virtually no effective means for owners to pay for capital improvements to their properties, which meant this sector of the senior affordable housing stock was falling into increasing disrepair and challenging maintenance issues.

That changed dramatically last year with the passage of the omnibus spending bill in March 2018, allowing PRAC properties into HUD’s Rental Assistance Demonstration (RAD) program, after years of advocacy from owner-managers and nonprofit housing organizations.

What the Change Means
What this means is that PRAC operators can now shift their properties into Project-Based Rental Assistance (PBRA) and Project-Based Voucher (PBV) programs within RAD and secure renovation and rehabilitation financing through Low Income Housing Tax Credits, mortgage debt and other soft funding. For the first time, private capital can be leveraged to fund preservation costs.

“Two things are really exciting about this,” says Matthew D. “Matt” Rule, an attorney who is senior vice president of property development for National Church Residences (NCR), the nonprofit based in Columbus, OH, dedicated to providing high-quality care, services and housing to seniors. “Before, if you had a capital repair that needed to be done, you had to go directly to HUD. Owners were really disadvantaged in being able to recapitalize their businesses. There was not a funding stream to do that. Going into RAD allows PRAC owners to place debt on their projects, which allows us to make much-needed renovations, and to pursue tax credit financing.” He goes on to explain, “For PRACs, HUD gives you a short-term operating subsidy, but there is no mechanism to take on debt. What this allows us to do is transform this subsidy of two or three years into a long-term contract.”

Rule, formerly a transactional attorney at Squires Sanders, LLP, has extensive experience combining tax credit equity with FHA loans and other HUD operational subsidies. He mentions LeadingAge, a DC-based trade association for nonprofit providers of aging services, as one of the most important and effective advocates for the change.

National Church Residences owns 73 PRAC properties across the country, one of the largest holdings. As an example of how NCR will utilize the new RAD provision, Rule cites Hopeton Terrace, a 46-unit PRAC senior residence in Chillicothe, OH, that offers home healthcare, nursing and hospice services, handicap accessibility, a resident services coordinator and an emergency call system, as well as normal amenities and facilities for a healthy lifestyle. It was built in 1994 and is now in need of extensive rehabilitation.

“One of the things that is important to us is that it rents for $545 per unit, which is true affordability,” says Rule. “We’ve applied for four percent tax credits, plus soft funding from the state. Once we’ve taken the property through the program, we’ll be able to do about $45,000 per unit of improvements, including roofs, interiors of the apartments, common areas, etc. We currently have a three-year subsidy contract that we’ll convert into a 20-year PBRA contract.”

The PRAC subsidy came with funding for resident service coordinators. “And HUD says it will still allow for that expense.”

Challenges Ahead
Despite the advantages the RAD for PRAC reform offers, Rule warns that there are still challenges to utilizing the program benefits effectively. For one thing, the average project size is relatively small, such as Hopeton Terrace, and the larger the property, the more fixed costs can be spread out.

Another issue, Rule notes, is that, “HUD wants the program to be budget neutral, and rents for PRAC projects are still lower than most LIHTC projects, limiting the amount of resources available.” He says the average monthly rent across NCR holdings is $615. As a result, dealing with debt service coverage ratios—the measurement of the cash flow available to meet current debt obligations that are used to measure qualification for a loan—means, “You can’t leverage a whole lot of debt out of the rents.”

Real estate taxes can be impacted in various ways with PRAC conversion to RAD. The assessed value of a property can go up after a significant renovation. But even more importantly, since PRAC properties are owned by nonprofits and therefore maintain a certain tax status, when private investor money comes into play, such as with tax credits or debt, some states treat that as a move into a for-profit entity in terms of reassessment. Rule mentions Texas and Pennsylvania as two states in which this slippery slope has to be considered.

Everyone in the affordable housing industry is aware of the potential minefield that has to be negotiated when a property or renter class is affected by the sometimes-conflicting regulations of different layers of relevant programs or subsidies. RAD for PRAC is no exception. “As far as the existing capital advance documents, you can be in compliance with all of the regulations operating during the term of the contract. But what happens with new regulations [when you convert]?” He adds, though, that HUD appears to be sensitive in trying to avoid new restrictions.

Finally, there is the challenge of disbursed ownership and locations. NCR’s 73 PRAC properties are spread out over 19 states, which makes management a difficult enterprise for owners, especially when the individual projects are small, and economies of scale aren’t feasible.

Making the Program Win-Win-Win
On the other hand, RAD is still undergoing refinements to make it as useful and flexible as possible for PRAC operators. Eric Walker, NCR’s director of affordable housing development, says, “HUD is very receptive to comments. It wants to do whatever makes the most sense and take into account the input from people with actual experience.”

And though those individuals covered by the PRAC program are a small number, relatively speaking, Rule says that with last year’s changes, “This is a perfect example of a public-private partnership that is a win-win-win for the residents, the owners and the investment community, that will allow more capital to flow into these much-needed projects.”

Story Contacts:
Matthew Rule

Eric Walker