HUD releases notice implementing capital improvements financing tool for senior living owners with Section 202 PRAC properties

The fiscal year 2018 omnibus spending bill expanded the U.S. Department of Housing and Urban Development (HUD) Rental Assistance Demonstration Program (RAD) to include Section 202 Supportive Housing for the Elderly properties with Project Rental Assistance Contracts (PRAC). The program expansion opened the door for current owners of Section 202 projects to address significant capital repairs and maintenance and long-awaited implementation guidance is now here (RAD Notice 2019-09).  The program is referred to as RAD for PRAC. 

Section 202 funds are structured as a government grant, so until now, owners of Section 202 PRAC properties were not permitted to take on private debt or secondary financing, hindering their ability to address all of their capital needs. Now, Section 202 PRAC properties are able to leverage new financing and access private capital by converting existing short-term PRACs to long-term subsidies under the RAD program, such as project-based vouchers (PBV) or project-based rental assistance (PBRA).

The implementation guidance includes two particularly noteworthy benefits:

• If needed, properties may have their PRAC rents adjusted up from $15 to $27 per unit per month to provide effective supportive services for the elderly. This adjustment would become effective immediately prior to the conversion and rescinded if the conversion does not occur. It is subject to availability of funds in the Section 202/Housing for the Elderly account controlled by HUD and subject to HUD approval.
• For converting properties that did not have a comprehensive needs assessment available at the time of the most recent PRAC renewal, rent adjustments to update reserve for replacement deposits may be requested in the middle of the contract year, ahead of conversion.

How it works

The RAD program was initially enacted to preserve and improve public housing buildings by converting a property’s HUD funding to either Section 8 PBV or Section 8 PBRA. The long-term nature of Section 8 contracts allows for more funding flexibility, including the use of other funding sources like bank financing and tax credits in addition to public funds.

The conversion process for Section 202 owners is similar to public housing, which is:

1. Feasibility analysis
2. Submission of application package to HUD
3. Submission of financing plan to HUD
4. Execution of RAD conversion commitment
5. Final HUD review and closing

Based on our experience with the high demand at the start of the RAD program, we encourage owners to examine their Section 202 projects now. Owners should determine their current and future capital needs and understand their existing resources. This information will guide the transaction financing plan and structure features of the conversion as you work through the RAD process.

For more information on this topic, or to learn how Baker Tilly senior living specialists can help, contact our team.