HUD Offers One-Time “Good-Cause” OCAF Exception for RAD Owners

Two weeks before the federal government closed down, HUD delivered some welcome news to a group of owners getting hammered by inflation. Titled “Relief for RAD Projects Facing Extraordinary Costs,” the email announced that HUD would grant owners of Rental Assistance Demonstration (RAD) projects the chance to apply for a one-time adjustment to the operating cost adjustment factor (OCAF) used to calculate their HAP rents. Here’s a look at the new good-cause exception and the process RAD project owners must follow to apply for it. 

The OCAF & Its Impact on Rents

HUD relies on the OCAF to determine the amount of the subsidy it will provide during the year—and upon renewal of the HAP contract—for properties with project-based Section 8 housing. OCAFs are especially important for public housing authorities (PHAs) that convert units under the RAD program. That’s because after the property converts, it receives a fixed RAD rent that gets adjusted for inflation each year on the contract anniversary date, in accordance with the applicable OCAF, subject to a Maximum Rent cap. The OCAFs, which HUD publishes at the state, territory, and national level each year, are calculated as the sum of weighted component cost changes for nine kinds of expenses: 

• Electricity;
• Employee benefits;
• Employee wages; 
• Equipment;
• Fuel oil;
• Insurance;
• Natural gas;
• Property taxes; and
• Water/sewer/trash. 

The New OCAF Adjustment Rules

Annual OCAF rent adjustments are supposed to enable owners to keep up with rising operating costs. The problem is that weighted cost averages in a particular market don’t reflect the actual operating expenses that many owners incur in the real world. Accordingly, HUD has made a number of tweaks to the calculation formula in recent years, such as by switching to use of insurance industry data from the Bureau of Labor Statistics, Producer Price Index to determine the OCAF property insurance cost component. 

While welcoming these improvements, industry advocates like the National Association of Housing and Redevelopment Officials (NAHRO) have also called on HUD to establish a process allowing individual owners who can document their abnormally high component costs to apply for an OCAF recalculation. 

And that’s exactly what HUD has done. “In recent years, rising operating costs have meant that the standard OCAF has been insufficient for some RAD projects experiencing extraordinary circumstances,” according to HUD’s Sept. 15 email. As a result, RAD project owners are getting the opportunity to seek a one-time “good-cause exception” to use of the standard OCAF by demonstrating “that cost increases are beyond their control and are causing severe financial strain.”

How to Apply for the OCAF Exception

Starting Sept. 30, owners can submit requests for a good-cause exception via the RAD Resource Desk under the specific RAD project’s Post-Closing page, which is located in the Transaction Pages drop-down. Instructions:

• Go to the RAD Property page;
• Navigate to the Transaction Pages drop-down menu; 
• Click on Post-Closing Processing (HUD);
• Select start a “New Request”; 
• Name the request, “[Project Name] OCAF 2025”; and
• Select the “Exception of the OCAF as the Operating Cost Factor” checkbox, and no other checkbox, from the Post Closing Activity checkbox list.

The site will ask owners to respond to a series of questions and submit “concise supporting documentation” enabling HUD “to quickly determine” if the project faces the extraordinary circumstances required to qualify for a good-cause alternative OCF (“Alternative OCF”) to be applied to the current RAD rents. If the request relates to RAD Project Based Vouchers (PBV), owners must submit a certification acknowledging that the Contract Administrator is aware that the owner is requesting to use an Alternative OCF from the PHA serving as the PBV Contract Administrator (see the Model Certification below). 

How HUD Will Review OCF Exception Requests

The HUD Office of Recapitalization will review project-level OCF exception requests “within reasonable time frames.” If it determines that a property is facing extraordinary circumstances justifying an exception, HUD will issue an approval letter and offer an Alternative OCF based on available administrative data for operating cost increases in the project’s market. 

If the Alternative OCF Is Accepted

If the owner accepts the Alternative OCF, the adjustment will take effect on the next contract anniversary date, subject to availability of funding. Increases for RAD PBV contracts must be funded by the existing budget authority of the PHA serving as the Contract Administrator. In addition, the Office of Public & Indian Housing must confirm that the Contract Administrator has ample budget and is not in shortfall. Increases for RAD Project-Based Rental Assistance (PBRA) contracts will be funded from HUD’s PBRA appropriation and may be limited or delayed based on the availability of funding.

If the Alternative OCF Is Declined 

An owner can decline the Alternative OCF if it believes it to be inadequate to resolve its cost issues and instead seek a higher Alternative OCF by submitting detailed cost information enabling the Office of Recapitalization to conduct an in-depth project-specific underwriting analysis. Owners need to consider the potential costs and risks of such appeals: 

• The Office of Recapitalization underwriting review will take at least six months to complete;
• The underwriting review may result in an Alternative OCF that’s lower than the one initially proposed based on the administrative cost data; and
• The owner will no longer be able to opt for the originally proposed Alternative OCF.

Effect of the OCF Adjustment 

Although it’s a one-time adjustment, the Alternative OCF will establish a new baseline to be adjusted annually through the remaining term of the current HAP contract in accordance with standard RAD rent adjustment procedures. HUD also notes that in accepting the Alternative OCF, the owner waives the right to claim any missed or under-calculated prior-year OCAF adjustments to the RAD rents.

The Shutdown Factor

The fly in the ointment, of course, is that applications for good cause OCF exceptions began on Sept. 30, the day before the federal government shut down. In its Contingency Plan, HUD says that applications for RAD can be submitted through RADApplications@hud.gov during the shutdown. However, it also says that there won’t be staff available to review applications until appropriations are restored. Result: Owners of RAD projects can still apply for OCAF exceptions, but they won’t get any answers or actual adjustments from HUD until the shutdown ends.