Capital Needs Assessments for 202 PRACs Considering RAD Conversion
If you operate a HUD 202 PRAC, you’re now well aware that your property is eligible to convert to a new ownership structure under HUD’s Rental Assistance Demonstration (RAD) program. But how do you know if A RAD conversion is worth the time and effort? Would it be easier to ask HUD to approve a rent increase to cover capital needs in future years? Or would it be worth it to do the conversion or should you remain a 202 PRAC?
These and other RAD for PRAC questions were addressed in a webinar recently with the National Leased Housing Association. NLHA and several of its members explored these questions with a HUD representative working on RAD issues with 202 PRAC operators. This webinar discussed the RAD for PRAC demonstration program and current issues with operating rents at 202 PRAC properties. HUD recently approved the possibility of rent increases for PRAC properties, which had been on hold for quite some time. This call discussed the connection between a property’s current approved rent and participation in RAD for PRAC.
Congress only approves so much money each year for 202/811 PRAC properties. Even though properties may be technically eligible for substantial increases, budget approval includes balancing the needs of the whole PRAC program. A significant increase at one property could mean rejection at another property. Because HUD has to balance the available funding, it is vital to ensure that a property receives the highest possible increase each year. Because if you wait to apply for an increase, the funding may not be available.
How Does a Property Ensure Its Budget Includes All Possible Expenses?
As part of this webinar/call with HUD and NLHA member organizations, there was an in-depth discussion about ensuring that budgets include long-term expense projections. To best capture the long-term needs in the annual budget, a regularly updated Capital Needs Assessment (CNA) can help increase project rents.
Obtaining a CNA is also an essential way to ensure that the property. As properties age, their long-term needs often come into focus and need financial planning. Funding such as residual receipts and replacement reserves can often be depleted quickly in the later years of a property’s life. As a property gets older, its financial needs move from simple replacement such as appliances to substantial investments such as roofing, parking, and HVAC.
HUD suggested that properties that may need a significant rent increase should complete a CNA and submit it for review at least 120 days before your anniversary date.
Using Capital Needs Assessments For Budget Based Rent Increases Before RAD for PRAC Conversion
If you intend to submit an Expression of Interest for the RAD for the 202 PRAC program (see Ref. pg178 2.8.1), it is vital to increase the project’s budget based rent before conversion. Because Congress requires conversions to be budget neutral, the budget based rent adjustment, immediately before the conversion, becomes a particularly important event in the project’s life.
Once it’s in the Section 8 program, the project rents will use OCAF adjustments, not budget based rents. If a project has rents that are underfunded, like many of the 202 PRAC properties, and you fail to increase the project rents before conversion, it could take years for OCAF adjustments to get rents to where they should be.
How Can We Complete a Capital Needs Assessment During COVID-19?
With the need to starting preparing for the future now, it’s essential that properties start creating CNAs, but how can this be done safely during COVID-19? Over the last few months, we have been working on new approaches that will allow for CNA Inspections to involve limited contact inspections.
- Unit Inspections: We can use a combination of Remote Video Inspection (RVI) and documentation review to replace in-person inspection of units. Our CNA analysts can review copies of internal unit inspections, records of replacements of components such as appliances, and remote video inspections to build an accurate picture of the replacement needs in the units.
- Exterior, Common Area, and Building Systems Inspection: Our analyst would still need to complete a thorough inspection of the common area, systems, and exterior/grounds. However, social distancing and PPE can make these properties possible and safe.
We also work with a property to help build an accurate view of the property before any site visit. Analysts will work with the property representative and review documentation regarding replacement expenses. Then the analyst will review the owner’s plans for improvements and any open issues such as failed REAC Inspections or code violations.
Our team of Capital Needs Assessment analysts will work with you towards one common goal, and that is to help and to provide for all of those elderly residents that rely so heavily on low-income assisted housing.
Please contact us today if you would like to discuss a CNA for your PRAC property.