Five No-Cost Ways PHAs Can Prepare to Be Competitive in the Next RAD Round

Published by Rich Larsen, CPA on Monday, June 5, 2017

In recent months, public housing authority (PHA) executives have attended 2017 regional and state housing conferences. At these events, discussions focused on the high level of uncertainty regarding PHAs’ futures. Years of stable funding projected through the U.S. Department of Housing and Urban Development’s (HUD’s) Rental Assistance Demonstration (RAD) program seemed to be the consensus solution as the most promising opportunity. In fact, there is more interest in the RAD program now than with any other HUD program in recent history. 

The program, enacted in 2012, is still being adopted by PHAs. Fortunately for PHAs that have not yet converted to RAD, there is still time to participate. While it’s not possible to predict the future with certainty, it’s likely that if the RAD cap of 185,000 units is lifted, the program will receive new applications for a couple of hundred thousand PHA units immediately. 

In the meantime, if PHAs are serious about converting to RAD, they should get their finances in order. Because PHAs will be competing against other PHAs for investor dollars, tax credits and financing, presenting a financially sound picture will assist PHAs in getting the best deal possible. 

What PHAs Can Do Now

In these tough financial times it’s not that easy to present a sound financial picture. However, here are five things PHAs can do to strengthen their year-end financial picture without costing anything.

  1. Drawdown on reimbursement grants before year-end. Many PHA grants are used for reimbursements of salaries, benefits and other soft costs. Drawing down on these grants at year-end can increases your PHAs liquidity and profitability.
  2. Clear prior year audit findings. Nothing scares a tax credit investor or a lender more than compliance audit findings within the Public Housing or Section 8 Program. If a PHA had audit findings in its most recent annual audit, it is important that the PHA demonstrate that the findings are cleared. An internal review should be done by the PHA (or its independent auditor) and a report generated that demonstrates that the PHA is now in compliance.
  3. Avoid prior period adjustments (PPAs). While it may seem like just a journal entry to “fix” a PHA’s books, a tax credit syndicator or lender may look at a PPA quite differently. That’s because when a PHA records a PPA to its financial statements, by definition, it is saying to the reader that the PHA’s previously issued audited financial statements were materially misstated and a correction needs to be recorded. Recording a PPA may reflect poorly on an organization insofar as it raises questions about the competence of its finance professionals. PPAs also reflect poorly on an organization’s internal control. PHAs should consult with an independent auditor regarding what constitutes a PPA according to generally accepted accounting principles (GAAP). In many instances, GAAP will require that the transaction be recorded in the current year, thus avoiding the PPA. 
  4. Bifurcate the Central Office Cost Center (COCC) between federal and non-federal reserves. In response to an Office of Inspector General (OIG) audit report, HUD is considering changes to eligible uses of COCC funds. PHA clients that use asset management should perform an analysis of their COCC reserves to determine the amount of reserves generated from outside the Section 8 and Section 9 programs. COCC reserves generated outside HUD’s Section 8 and Section 9 programs can be used for RAD.  
  5. Include the cost of premiums for project guarantees in the RFP for equity investors. Inherent to most RAD deals is a “PHA guarantee.” That is, most syndicators want the PHA to guarantee certain performance from construction through post-stabilization of the project. PHAs that are more experienced in mixed finance development and/or are financially strong get better deals from equity investors than the inexperienced and weaker PHAs. An effective way to improve a deal is to have a third party leverage the PHA guarantee. The premium cost for the guarantee is then built into the development budget, so there is no out-of-pocket cost to the PHA. When putting together an RFP for an equity investor, PHAs should include the premium for leveraging the PHA guarantee as part of the deal. 

Conclusion 

The steps described here are just a few ways that PHAs can begin to position themselves for the next opportunity under the RAD program. Beyond these initial steps, PHAs are strongly encouraged to consult with legal and tax advisors to chart the best course forward for converting to RAD.