Most Section 202 properties receive rent increases based on OCAF or a budget based expense adjustment. As a 202 property’s capital needs grow, the replacement reserve balance may be sufficient to cover critical repairs but not projected needs. An owner must think through the scope of capital improvements as the capital needs inspector develops a capital needs assessment.
The Section 202 RAD for PRAC program may be a solution to financing the long-term projected capital improvements. While the RAD program sounds complicated, here is a simple example to guide an owner through a back-of-the-envelope potential rent increase for a Section 202 property in the RAD for PRAC program.
Under this example, the 202 owner would sign a senior housing use agreement for another 20 years and move from a PRAC to a 20-year HAP contract. Under the HAP contract, the property would receive annual OCAF adjustments to its rental subsidy and the adjusted rents would be $955 per month up from $800 per month. Through the capital improvements including new energy-efficient systems, one can expect that the operating expenses would decrease thereby creating net operating income. Of the NOI, HUD allows 90% to cover debt service for the capital improvements, and any surplus cash flow could be distributed to an owner. Since 202 properties are owned by nonprofits, they may use the cash flow to provide services or other mission-driven activities.
RAD for PRAC Calculation Example: