Editor's Note: Michelle Yarbrough Korb is special counsel in the Real Estate Practice Group of Pepper Hamilton LLP, resident in the Pittsburgh office. Her practice focuses in the affordable housing industry with an emphasis on development, including the utilization of low-income housing tax credits, federal programs and programs offered by individual states, as well as the Federal Home Loan Bank's Affordable Housing Program. In this second part of an exclusive two-part Q&A, Korb describes some approaches to affordable housing finance used by public agencies. You can read the first part of the Q&A here.

Q: What are some of the subsidies that Public Housing Agencies provide for affordable housing finance?

A: There are two sources of ongoing subsidy that a PHA may provide, (1) operating subsidy for public housing units and (2) project-based vouchers.

If the affordable housing development includes public housing units, a PHA may provide operating subsidy for those units.  Typically, a PHA wiHUD created a queue of projects above the 60,000 unit cap, in the order in which applications were received, that serves as the RAD waiting list.  The 2015 HUD Appropriations Act increased the conversion limit to 185,000 units.  Note that owners of converted properties are required to renew their HAP contracts and cannot opt out when contracts expire.e required to have a covenant to operate under requirements applicable to public housing for a 10-year period beginning upon the conclusion of the fiscal year for which such amounts were provided (and if Capital Funds were used for the development, there will be a restricted use covenant to operate under the terms and conditions applicable to public housing for a 40-year period that begins on the date on which the project becomes available for occupancy).

Project-based vouchers (PBVs) are assistance attached to specific housing units.  No more than 25 percent of the units in a single building, multiple contiguous buildings, or multiple buildings on contiguous parcels of land may receive PBV assistance, unless an exception applies.

All units must meet HUD housing quality standards, and all rent must be considered reasonable.  The PHA must select PBV proposals by either  (a) a public notice of the PHA request for PBV proposals or (b) selection, without competition, of a proposal for housing assisted under a federal, State, or local government housing assistance, community development, or supportive services program (e.g., 9% LIHTCs) that required competitive selection of proposals, the proposal was selected within 3 years of the PBV proposal selection date, and the earlier competitively selected housing assistance proposal did not involve any consideration that the project would receive PBV assistance.  The PHA may enter into a Housing Assistance Payment (HAP) contract with an owner for an initial term of up to 15 years for each contract unit.  The PHA may select families who are participants in the PHA's tenant-based voucher program and families who have applied for admission to the voucher program.  PBV assisted units must meet housing quality standards (HQS).  Except for certain LIHTC units, the rent to owner must not exceed the lowest of (1) an amount determined by the PHA, not to exceed 110 percent of the applicable fair market rent (FMR) minus any utility allowance, (2) the reasonable rent, or (3) the rent requested by the owner.

Q: How do PHAs work with third party developers on financing?

A: For PHAs that do not have in house experience with constructing new housing stock or revitalizing (rehabilitation or demolition/new construction) existing housing stock, the use of a third party developer is generally the path chosen.  Typically, a PHA will competitively procure a developer and enter into a Master Development Agreement (MDA) that governs the rights and obligations of the parties (including such things as the PHA earning a portion of the developer fee for its services in the endeavor and the PHA's participation, if any, in the owner entity created).  The selected developer usually develops a financing plan for the development or revitalization of the affordable housing.  The development plan will likely include LIHTCs (with guaranties normally being provided by the developer), gap financing and PHA subsidy as discussed above.

PHAs may also pursue a Capital Fund Financing Program (CFFP) financing where a PHA borrows private capital to make improvements and pledges, subject to the availability of appropriations, a portion of its future year annual Capital Funds to make debt service payments for either a bond or conventional bank loan transaction.  HUD does not guarantee or insure these loans or bonds.  HUD approval is required for all Capital Fund financing transactions which pledge, encumber, or otherwise provide a security interest in public housing assets or other property and use Capital Funds for the payment of debt service or other financing costs.  Generally speaking, these financings are limited to no more than 33% of the PHA's current annual Capital Fund grant adjusted for any activity that would reduce Capital Funds appropriated or available to the PHA.  In order to apply, a PHA must submit a CFFP Proposal to HUD.

If the real property for the development is being provided by the PHA and is subject to the Annual Contributions Contract (ACC) with HUD, HUD approval is required for demolition and/or disposition (including leases longer than one year).  This is handled by the Special Applications Center (SAC).  If the PHA is undertaking mixed-finance development, the development or modernization of public housing, where the public housing units are owned in whole or in part by an entity other than a PHA (e.g., an owner entity where LIHTC financing is used), the PHA also needs to submit a mixed-finance proposal (this includes a Mixed-Finance Rental Term Sheet (RTS), a Term Sheet Calculator and additional documents) and receive HUD's approval to (a) proceed with financial closing of the development transaction (following HUD's review of an initial evidentiary submission) and (b) expend HUD public housing funds approved for the project (following HUD's review of a final evidentiary submission).

Q: How does the Choice Neighborhoods program support neighborhood revitalization?

A: Choice Neighborhoods (Choice) has been around since 2010 and is intended to support a locally driven neighborhood revitalization strategy rather than simply a housing strategy.  This approach involves many partners such as local leaders, residents, the PHA, local government, schools, police, business owners, nonprofits, and private developers.  Given the magnitude of this challenge, there are two funding components, (1) planning grants and (2) implementation grants.  Choice Planning Grants support the development of a comprehensive neighborhood revitalization strategy (Transformation Plan) that will guide the revitalization of the public and/or assisted housing units as well as the transformation of the surrounding neighborhood with the goal of positive outcomes for families.  Choice Implementation Grants support those communities that are ready to implement their Transformation Plan.  Notices of Funding Availability (NOFAs) are issued annually and announce the availability of Choice grant funds and provide application instruction.

Q: What is the Rental Assistance Demonstration?

A: The Rental Assistance Demonstration (RAD) was authorized in 2011 and has two components.  The goals of RAD are to test if the conversion of public housing and other HUD-assisted properties to long-term, project-based Section 8 rental assistance (1) helps to preserve and improve the properties by enabling access to private debt and equity for addressing capital needs and (2) provides residents with increased housing choices.  The first component of RAD allows public housing properties to convert to project-based Section 8 programs, either (a) Project-Based Rental Assistance (PBRA), rental assistance administered and provided by HUD to owners according to the terms of a HAP contract for the provision of housing to eligible tenants or (b) PBVs.  No incremental funds were authorized for this component; this is a conversion of assistance.  The competition was limited to 60,000 units, and by December 31, 2013, HUD had received applications for nearly three times as many units as are authorized. HUD created a queue of projects above the 60,000 unit cap, in the order in which applications were received, that serves as the RAD waiting list.  The 2015 HUD Appropriations Act increased the conversion limit to 185,000 units.  Note that owners of converted properties are required to renew their HAP contracts and cannot opt out when contracts expire.

Correction, 3/19/2015: Because regulations had not been amended at the time this article was written, one of the answers incorrectly described the percentage of units that may receive PBV assistance as limited to no more than 25 percent of the units in a building. Subsequent to publication of the article, the federal rules were amended to limit PBV assistance to no more than 25 percent of the units in a "single building, multiple contiguous buildings, or multiple buildings on contiguous parcels of land." That answer above has been changed to reflect the current regulation.

Correction, 1/6/2015: The last paragraph of this article has been revised to reflect that the 60,000 unit cap was increased under the 2015 HUD Appropriations Act. An earlier version of this article, written before the law was passed, did not reflect the actual increase to 185,000 units.