By Kevin Laidlaw

The Real Estate Assessment Center (REAC) conducts approximately 20,000 physical inspections of projects owned, insured or subsidized by the Department of Housing and Urban Development each year. The U.S. Department of Agriculture and state housing finance agencies will require similar inspections for USDA and tax credit projects, respectively. By becoming more familiar with the inspection processes, affordable housing providers can significantly raise their inspection scores, maintain future financing mechanisms and identify possible repair items.

Due to overlap of HUD subsidies with other agency financing (e.g., LIHTC projects with Section 8) and the wide reach of HUD financing and subsidies, HUD’s REAC inspections are the most common and formalized type of physical inspection in the affordable housing industry. As HUD has concentrated on developing a standardized and unbiased physical inspection process, other housing finance agencies have begun to mirror the REAC process. Therefore, it benefits all affordable housing property managers to be familiar with the REAC process, even if their project is not currently HUD financed. Remember, the overall objective for all parties involved is to provide affordable, safe, decent and sanitary housing to the residents. A well-maintained property is worth more and usually experiences higher occupancy rates.

Why your Score Matters
An inspection score can impact a property in several ways. First, a poor REAC score that is not corrected can result in a flag in HUD’s Active Partners Performance System (APPS) that tracks board principals’ and management agents’ participation with HUD projects. REAC flags will prohibit additional HUD financing until the issue is resolved. Removing a REAC flag can be a lengthy process that often stalls financings. This is especially important for management agents or principals with multiple properties to consider as a flag at one project can impact an entire portfolio.

Second, poor REAC scores can trigger the direct involvement of HUD and a re-inspection by a HUD official, as projects receiving a REAC score of 60 or below (out of 100) are referred to the Departmental Enforcement Center. Continued scores below 60 could result in drastic action by HUD, such as a declaration of default under the mortgage or termination of the HAP Contract.

Although REAC inspections only identify the functionality of items (ignoring potential obsolescence), a REAC inspection can assist with identifying needed repair items. If a project receives a poor REAC score resulting from the need for capital improvements (new windows, appliances, HVACs, etc.), pursuing a refinance might be considered as part of the reconciliation plan. This could provide the influx of capital needed to fund the repairs to correct the deficiencies for the next REAC inspection.

Providing further motivation to ensure an accurate and passing score, the results of the REAC inspection impact the frequency of subsequent inspections. Projects scoring below 80 will be inspected again within the next year, while projects that score 80-89 can expect another visit from REAC within two years. For projects that score 90 or higher, the anxiety of a REAC inspection can be avoided for three years.

How a REAC Score is Calculated
All projects start with a REAC score of 100, with deductions taken for deficiencies of the site, building exterior, building systems, common areas and units. Health and safety issues are reported by a lowercase “a,” “b” or “c” after the numerical score. “A” deficiencies are considered the least severe and “c” deficiencies require immediate remedy.

The REAC scoring algorithm adjusts to accommodate the numerous configurations and characteristics of the various projects in HUD’s portfolio, accounting for the number of sites, project size, whether elevators are present, etc. It also assigns values for criticality and severity to each potential violation. Criticality deficiencies are assigned a value of 1-5, with 5 the most critical. Severity levels vary from 1-3, with 3 the most severe. These values are then used as multipliers to determine deductions when calculating the REAC score. Therefore, not all deficiencies impact a project’s score the same way.

Generally, the dwelling unit inspection accounts for 35% of the derived REAC score, building systems account for 20%, and site, building exterior, and common area designations each account for 15%.

How to Improve your Score – Before the Inspection
The Preparing for REAC Inspections guidance released by REAC states that the inspection must be scheduled for a “mutually agreeable time/date.” If a project is undergoing rehabilitation, for example, operators have some flexibility to postpone the inspection. This flexibility will be limited, however; REAC determines an “ideal date” of inspection based on past property performance, and the actual inspection date must be within 90 days of that ideal date and in the same calendar year.

A self-inspection can catch most issues prior to the inspector’s arrival, thus avoiding unnecessary deductions. The checklist used by REAC inspectors serves as a valuable resource for this pre-inspection. This document can be accessed by downloading the software at www.hud.gov/offices/reac/products/pass/software.cfm.

First priority in a self-inspection should be to ensure there are no exigent health and safety (EH&S) deficiencies. EH&S deficiencies are items that threaten the life and/or safety of residents. These deficiencies are heavily weighted in REAC’s algorithm (criticality score of 5 and severity score of 3) and result in the most severe point deductions. Examples of common EH&S deficiencies include:

• Poor air quality – propane or natural/methane gas detected
• Electrical hazards
• Emergency fire exits are blocked or unusable (e.g. air conditioners in a room’s only window)
• Missing, damaged, or expired fire extinguishers (tag needs to document inspection by the Fire Department within the past year)

When self-inspecting, be sure to also reference the list of the top maintenance deficiencies released by HUD, which can be found online at http://www.hud.gov/offices/reac/products/pass/top20.pdf.

How to Improve your Score – After the Inspection
After the inspection and receipt of the REAC report, make any required property updates and correct deficiencies. Consider whether the property would benefit from refinancing to improve its physical condition.

Should properties choose to appeal a score, they have two options: a technical review or a database adjustment. A technical review should be pursued if it is suspected that the REAC report includes errors that, if corrected, would result in an improvement in the property’s overall score. REAC considers three types of errors material: the wrong building or a building not owned by the property was inspected, the total number of units considered in the scoring calculation is incorrect, or the inspection cites a deficiency that did not exist at the time of the inspection.

A database adjustment should be pursued if abnormal circumstances led to a deficiency. Examples include a local code that allows or requires exceptions to REAC’s physical condition requirements, the cause of the deficiency is outside the property’s ownership or responsibility, and work in progress or other adverse conditions that existed at the time of the inspection.

Both review processes can be initiated by submitting a written request including verifiable documentation to REAC. After submission of this information, the project should expect a new inspection if REAC agrees with the project’s submitted evaluation.

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