The Capital Concerns of 202 PRAC Program
In the mid-nineties to mid-2000s, the affordable housing industry saw an explosion in the number of properties approved and built under the Section 202 PRAC program. This program was restricted to non-profit sponsors providing housing for the elderly, and the operating subsidy was guaranteed for forty years – securing housing for the elderly for many years. However, the problem with a 40-year compliance period is that periodically the property requires revitalization, and the only way that 202 PRAC properties can afford to pay for major repairs is through the reserve for replacement (R4R) account – and budget-based rent increases.
Over the last few years, we have seen more and more 202 PRACs enter into their 20th year or beyond, and many of the major and minor components are aging and starting to fail – and unfortunately – what is being deposited into their reserves has not been updated to reflect the new realities. Coupling this with very few or infrequent rent increases and restrictions prevent owners from funding revitalization with additional debt. This has forced properties to pick and choose what systems to replace or upgrade, deferring maintenance and putting the initial investment at risk.
Budget-Based Funding for HUD 202 PRACs
Due to this concern, HUD has now taken a keener interest in these properties and working with the owners to fund needed capital projects by increasing their annual replacement reserve deposit. From our work with owners and managers of 202 PRACs, we have seen the benefits which can come from a capital needs assessment that reevaluates the property’s short and long-term costs.
But unlike for-profit properties, all of the funding of long-term needs has to be done from within the program. Suppose a property owner of a 202 PRAC is not diligent in keeping pace with the replacement needs. In that case, eventually, the reserve account will be so far behind that it is difficult to restore it to proper funding levels.
Properly Funded Replacement Reserve Accounts
For owners and agents of 202 PRACs, it is vital that they make sure that the replacement reserves are properly funded, as it remains the only way to keep a property in good repair well into the future. The benefit of a budget-based rent program is that as the property’s needs increase, the rent can compensate for the needs – but these changes must be incremental to be realistic. We at US Housing Consultants are seeing more and more owners conduct a new Capital Needs Assessment every five years to keep up with the ever-changing needs of a property.
We are at the forefront of this ever-increasing issue. We have a very successful record of quickly producing CNAs which explains why changes to the reserve accounts are vital to continuing their mission of providing decent, safe, and sanitary housing and, most of all, independent living for our ever-aging population. If you would like to find out if your replacement reserves and rents are properly structured, call our dedicated staff, and they will help you navigate the process. Please contact us at any time by calling (603) 223-0003 or visiting our website at www.us-hc.com.