HUD issues updated rent increase guidance for PRAC owners

Regulation | March 18, 2020 | by Juliana Bilowich

As of March 18, HUD has restarted routine processing and approval of Section 202 PRAC rent adjustments to increase Reserve for Replacement deposits using updated procedures.

As of March 18, HUD has restarted routine processing and approval of Section 202 PRAC rent adjustments to increase Reserve for Replacement deposits. Budget-Based Rent Increase (BBRI) requests were temporarily suspended by HUD’s Office of Multifamily Housing in July of 2019 following escalating subsidy requirements that strained the program’s annual budget. Since last summer, HUD continued to approve PRAC rent increase requests for core operating cost needs until resources for the full fiscal year were made available by Congress.

Since the temporary suspension, HUD has made several updates to field office procedures for reviewing Capital Needs Assessments (CNAs) and determining how capital needs should be reflected in annual PRAC project operating rents. In a March 18th memo to stakeholders, the Office of Multifamily Housing outlines their updated procedures and thanks owners for their patience and continued commitment to affordable housing. 

HUD’s updated processing and approval of budget-based rent adjustments: 

  • Prioritizes core operating costs for all renewing PRAC contracts while recognizing the repair costs of aging PRACs - Previously, HUD reported receiving increase requests for amounts that were anticipated and therefore adequately reflected in the HUD Section 202 budget. Under the previous scenario, HUD had little need to put in place a prioritization process beyond confirming the 20-year Capital Needs Assessments and a closer analysis of requests over 5%. 

  • Reflects new authority for 202 PRACs to convert under the RAD program - As owners rightfully positioned their rents for conversion under the newly authorized Rental Assistance Demonstration (RAD) for 202 PRACs, the increase requests far exceeded HUD’s Section 202 account allotment for both Reserve for Replacement deposits and standard renewals. 

According to HUD, the new process will help secure the financial viability of the broader 202 PRAC portfolio, whether converting to RAD or not. While HUD has worked with Congress to replenish their Section 202 account to meet the needs of the portfolio (both RAD-converting and not), the Office of Multifamily Housing expects that many PRAC owners will be able to leverage financing to address capital repairs without large, short-term increases to PRAC replacement reserves.

  • Promotes consistency across the portfolio through standards and trainings - In order to improve consistency, HUD has adopted clearer standards for field staff to use when determining whether a Capital Needs Assessment (CNA) is needed to justify an increase in replacement reserve deposit levels. HUD has also developed a training plan to prepare staff for CNA reviews.

  • Establishes protocols for RAD coordination - HUD has established protocols for Asset Management staff to coordinate with the Office of Recapitalization when an owner is planning to convert under RAD for 202 PRAC. According to HUD’s memo, coordination will allow for key information sharing and streamlined processing. To initiate this protocol, owners should inform HUD of their intention to apply for RAD conversion within the coming year in the cover letter for their Budget-Based Rent Increase requests.

For owners with PRAC anniversary dates in the fall or winter of 2019-2020 who were not able to access rent increases to support large reserve for replacement deposits, HUD: 

  • Encourages owners to request a reconsideration by HUD - Owners should consult with their assigned Account Executive to develop a plan for HUD reconsideration of denied or foregone requests. In these cases, Asset Management will also require submission of a recent CNA to justify significant increases in monthly reserve deposits. A CNA will not be required where monthly deposits remain at or below $250 a unit OR the requested percentage increase to the deposit falls below the Operating Cost Adjustment Factor in the state where the property is located. 

  • Emphasizes the timing of owner requests - Large rent increases may require additional internal budget processing prior to approval, making it particularly important that owner requests are submitted in a timely way (120 days prior to the annual contract renewal or amendment effective date).

Owners are urged to contact their Account Executive with any questions about the process for adjusting rents or reserve for replacement deposits. To view the MFH memo, please click here

LeadingAge is working with HUD and Congress to ensure, just as it did for the current fiscal year funding, that PRAC funds are sufficient to cover all renewals in FY21.