Compliance Challenges in the RAD Portfolio June 22, 2017 Presented by: Carol Howard Vice President & Director of Housing Compliance Boston Capital Corporation Oke Johnson Managing Director, Compliance Services LEDIC Realty Company LLC Compliance Challenges in the RAD Portfolio June 22, 2017 Boston Capital Corporation LEDIC Realty Company LLC One Boston Place 13762 Colorado Blvd #124-175 Boston, MA 02108-4406 Thornton, CO 80602 Research information taken from the following sources: HUD “Rental Assistance Demonstration (RAD) Quick reference Guide to Multifamily Housing Requirements” – October 2015 Crenshaw, Ware & Martin 2014 Legal Seminar –” RAD Conversion & Rehabilitation using LIHTC: Key Considerations for PHAs” HUD “Rental Assistance Demonstration Conversion Guide for Public Housing Agencies” (portal.hud.gov)

Rental Assistance Demonstration (RAD) Program in which properties “convert” their rental assistance to long-term, project based Section 8 contracts “The RAD program was created to provide public housing authorities (PHAs) with new choices for preserving public housing. Its primary feature is the conversion of public housing properties to HUD’s project-based Section 8 assisted housing stage. Section 8 allows for more funding flexibility, including the use of other funding sources like tax credits and public funds to maintain as well as improve existing public housing buildings. Participation in RAD is voluntary for PHAs. Properties that convert are subject to long-term Section 8 rental assistance contracts and use restrictions. RAD contracts also require properties to be owned or controlled by public or nonprofit entities, EXCEPT when low-income housing tax credits are used.” Material taken from “Evaluation of HUD’s Rental Assistance Demonstration (RAD): Interim Report” September 2016

RAD Conversion The intent is to permit PHAs to finance the renovation or revitalization of an existing housing. Adding Low Income Housing Tax Credits (LIHTC) is an important module especially if substantial rehab is required. “Marrying” these two programs (RAD & LIHTC) can sometimes be difficult for those that do not have any experience in either program. Program confusion lays around tenant relocation & unit transfers, timely certifications, tax credit set asides, income & rent limits and student status. Highly recommend communication regarding lease up with management team as soon as the deal is acquired/closes so the in place tenants can be properly tax credit qualified (LIHTC requirement). Material taken from “Evaluation of HUD’s Rental Assistance Demonstration (RAD): Interim Report” September 2016

Add LIHTC to RAD IRS Rules vs HUD Rules The Tax Credit program was created to foster private investment in affordable housing. Unlike RAD which falls under HUD, the LIHTC program is administered by the State Financing Agencies and governed by the IRS. IRS Rules vs HUD Rules

Department of Housing and Urban Renewal Public Housing Authority RAD Players in LIHTC / RAD Transactions Department of Housing and Urban Renewal (HUD) Public Housing Authority (PHA) PHA potential roles: Ownership of the land – Ground lease to LP Can serve as developer Can serve as the onsite management Management

Limited Partnership General Partner Limited Partner PHA Tax Credit Players in LIHTC / RAD Transactions Limited Partnership General Partner 0.01% ownership Limited Partner Tax Credit Investor 99.99% ownership PHA PHAs can be a member of the GP entity and/or can be the management team overseeing operations of the project Management Agent

RAD Conversion – Parties Involved Developer Finance Lender Tax Credit Syndicator/Investor State Allocating Agency In Place Tenants

Syndicator/Investor Concerns Credit Delivery Construction Completion & Lease Up Guarantees Program Conflicts Syndicator/Investor need certainty, early communication to detect concerns and to put an action plan in place!

Management Companies need to know the deal structure to plan accordingly Date of Closing/Acquisition Timing of construction/rehab Projected credit delivery schedule Minimum set aside, unit mix and # of buildings Determine how BIN numbers (Tax Credit) have been established Identify the tenants that are residing in the units at closing/acquisition Know the number of vacant units at acquisition - closing Determine a plan of relocation of tenants Uniform Relocation Act Determine if the tenants will be returning to their original units or not

Program requirement confusion - RAD/LIHTC How does HUD and Tax Credits handle the following? tenant relocation unit transfers timely certifications tax credit set asides income limits rent limits student status

Tenant Relocation Offsite Relocation Onsite Temporary Relocation Rehab on the property may be completed without the tenant leaving their unit. However, there are some situations where the tenants must be relocated. There are a couple of possible scenarios: Offsite Relocation Onsite Temporary Relocation Onsite Permanent Relocation Onsite Temporary Relocation: If a tenant will temporarily move out of their unit to another unit in the same project while their unit is being rehabbed, a new certification is not required for Tax Credit purposes. Interim certifications are not required. Onsite Permanent Relocation: If a tenant permanently relocates to a different unit in the same project a new income certification is not required; however the tenant might sign a new lease or an addendum to the lease reflecting the new unit. Under RAD, new leases for existing tenants must be signed prior to the effective date of the HAP contract.

CERTIFICATION PERIOD – TAX Credits 120 days of the acquisition/closing date The tenant certification is important as we are required to document that the existing tenants were income eligible no earlier than 120 days prior to the date of acquisition/closing using the current income limits or no later than 120 days after the date of acquisition/closing using the current income limits. IRS 120 Day Acquisition Rule: was created to allow developers/owners to income qualify in place tenants with the income limits in place at the time of acquisition. If an in place tenant is not certified within this period, the effective date of certification then becomes the actual date the household is income certified and all documentation is completed. To add to this, you need to determine when credit delivery was projected at underwriting to determine the latest possible period that certifications can occur.

Minimum Set Asides Income & Rent Limits Limits HUD limits Hold Harmless limits MTSP limits (Tax Credits) 40/60 20/50 The requirement for Tax Credits must be met no later than the close of the first year of the credit period and must remain in effect throughout the compliance period. Minimum Set Asides

Student Status Know the difference in the Student Rules: HUD Student Rules LIHTC Full Time Student Rule