It’s Very Clear, This RAD is Here to Stay
By Kaitlyn Snyder
9 min read
Successful program continues to refine and expand
The newly expanded Rental Assistance Demonstration (RAD) Component 1 cap and the new RAD for PRAC conversion option under RAD Component 2 makes it a great time for developers who have previously not considered RAD deals to now do so. This evolving demonstration seems as if it is here to stay and serves as one of the best tools we have to preserve the taxpayer’s investment in the much needed, publicly funded affordable housing stock, the issue front and center in all of our very crowded minds.
RAD was authorized by Congress in 2011 and the first conversion was completed in September 2013. RAD Component 1 was created to address the backlog of public housing capital needs by allowing public housing authorities (PHAs) to leverage outside capital and convert from public housing units funded through Section 9 to either Project Based Vouchers (PBV) or Project Based Rental Assistance (PBRA) funded through Section 8.
According to a 2010 HUD study, the public housing capital backlog reached $26 billion that year and has grown by approximately $3.4 billion per year.
As we anticipate the arrival of RAD Notice – Revision 4, we thought we would take a look at its progress thus far:
Component 1
RAD Component 1 now allows 455,000 public housing units to convert to PBV or PBRA. So far, over 1,000 RAD Component 1 transactions have closed resulting in 110,825 public housing units converted to Section 8. An additional 11,921 public housing units are in the final stages of the conversion pipeline and about 100,000 units are in the predevelopment process. There are still more units reserved for multi-phase and portfolio conversion efforts and applications continue being processed. A total of $6.78 billion in construction funding (not including acquisition, soft costs, reserves & developer fees) has gone towards converting public housing through the RAD program.
The cap on the number of RAD Component 1 units has grown over time from 60,000 to 185,000 to 225,000 to the current 455,000. This increased unit cap widens the availability of a previously scarce resource; as a result HUD is considering allowing Component 1 applicants to apply for the nine percent Low Income Housing Tax Credit more than once in its forthcoming Revision 4 of the RAD Notice. Currently, RAD Component 1 applicants are barred from applying for the nine percent LIHTCs more than once out of concern that applicants would apply and reapply while sitting on valuable RAD cap that could otherwise go to another PHA.
Section 18 Demo Dispo
Component 1 RAD deals can use Section 18 of the U.S. Housing Act of 1937 to generate Tenant-Protection Vouchers (TPV) for the conversion. Notice PIH 2018-04 allows a PHA to demolish or dispose of its property if it 1) proves unit obsolescence, 2) owns and operates 50 or fewer public housing units, 3) plans to convert at least 75 percent of the public housing units through RAD, 4) demonstrates improved efficiency/effectiveness through on-site development of low-income housing or 5) demonstrates that ongoing operation and maintenance of scattered site public housing units is unsustainable.
Option 3, in particular, is a new path for making RAD deals financially viable. Under Option 3, owners doing a significant amount of rehabilitation can combine RAD and Section 18, putting 75 percent of the units through a RAD conversion and getting TPVs (typically at a higher payment standard) for 25 percent of the units through the Section 18 process, resulting in a stronger property net operating income.
Component 2
Under RAD Component 2, Rent Supplement (Rent Supp), Rental Assistance Payment (RAP), Section 8 Moderate Rehabilitation and Moderate Rehab Single Room Occupancy funded by the McKinney-Vento Homeless Assistance Act (Mod Rehab) can convert to PBV or PBRA without a cap on the number of conversions. The FY 2018 omnibus spending bill expanded RAD Component 2 to also include Section 202 Housing for the Elderly communities with Project Rental Assistance Contracts (RAD for PRAC). When you think of RAD Component 2, think of everything in the RAD universe that is not public housing.
RAD for PRAC
RAD for PRAC is the new kid on the block getting all of the attention right now. (See RAD for PRAC, p. 18) HUD is drafting a new section in the RAD Notice, Revision 4, that will implement the new RAD for PRAC conversion options for Section 202 PRAC properties. From 1990 to 2012,
Congress funded the creation of approximately 2,800 properties with over 120,000 units through Section 202 Supportive Housing for the Elderly. Section 202 funded the construction of the properties while the PRAC funded the difference between what the residents could afford to pay in rent and the building operation and maintenance costs. While some PRAC properties are starting to face a backlog of repairs, many others are anticipating significant capital needs. RAD for PRACs helps avoid the capital backlog problem we currently see in public housing.
Section IV of the draft of the forthcoming RAD Notice Revision 4 contains recommendations on including services and design considerations for an aging population. HUD will allow up to $27 per unit per month from rents to pay for supportive services for the elderly by waiving previous requirements that limit the amount to $15 per unit per month. HUD “strongly encourages Project Owners to incorporate design standards that address fall prevention, visitability, universal design and electronic communication mechanisms.” While the services may pay for themselves through the increased rent allowance, there is a looming question of how the design upgrades will be paid for.
According to Rob Hazelton, president and CEO of Dominion Due Diligence Group, the average cost of upgrading is about $15,000 per unit.
Rents
Arguably the most important parts of the RAD for PRAC notice are the initial contract rent setting provisions. For PBRA conversions, rents will be set at the lower of a) approved PRAC rents or b) 120 percent of the applicable fair market rent, less any utility allowances. Owners can also request to use small area fair market rents. For PBV conversions, rents will be set at the lower of a) approved PRAC rents, b) the reasonable rents (as defined under 24 CFR § 983.303, c) any amount determined by the PHA, not to exceed 110 percent of the applicable fair market rent (or applicable exception payment standard, or rent cap approved in an MTW Plan), minus any utility allowances or d) the rent requested by the project owner.
Hazelton says that, “Though not directly stated in the notice, owners and operators who intend to take advantage of the rental contract conversion process should consider an operating budget rental increase now.” Conducting a HUD Asset Management-compliant PRAC Capital Needs Assessment will likely demonstrate the need for increased rents to cover short- and long-term capital needs through a replacement reserve account. Owners will need to go through the same process at the time of the RAD conversion, but going through the process prior to conversion will allow owners to increase their approved PRAC rents.
MAP Guide Changes
The 2016 Multifamily Accelerated Processing (MAP) Guide prohibits the use of an FHA mortgage on bundled, scattered-site properties that are 15 or 20 miles away from each other. Most 202 properties are small, about 41 units, making them difficult to convert through RAD on their own. By bundling properties, developers can achieve economies of scale. We recommend that HUD should consider modifications to its MAP Guide that would allow FHA mortgages on RAD conversions with properties farther than 20 miles from each other.
Rent Supp
In February of 2018, HUD announced that it successfully converted the last 249 properties with contracts under the Rent Supp program and preserved 13,670 affordable homes. “This is the first legacy HUD-assisted housing program we have fully wound down through RAD, converting a decades old program to the modern and cost-efficient Section 8 platform while still preserving assistance for low-income families. It’s a true win-win for residents and for the American taxpayer,” says Tom Davis, director of the Office of Recapitalization in the Office of Multifamily Housing Programs.
RAP
HUD will likely also celebrate the wind-down of RAP in the coming months: just nine properties remain in the portfolio, seven of which have contracts that expire in 2019. HUD allows for retroactive conversion of RAP properties with expired contracts. In Revision 4 of the RAD Notice, HUD is considering setting a cutoff date for notifying the department about retroactively converting RAP properties. “If you have a retroactive conversion that you are thinking of doing,” suggests Tom Davis, “you should accelerate that thinking.”
Mod Rehab
HUD funded the development of Section 8 Moderate Rehabilitation properties, including McKinney Vento Moderate Rehabilitation Single Room Occupancy (SRO) properties through PHAs. Because PHAs funded the individual projects, HUD does not have a complete list of all Mod Rehab owners and properties. HUD does, however, have a list of all PHAs that received funds for Mod Rehab Projects and the number of units assisted. HUD estimates that there are 240 properties with 11,389 units of SRO Mod Rehab and 300 properties with 13,369 units of standard Mod Rehab. There are currently 24 active transactions in the RAD Conversion pipeline and HUD is actively working to add more.
Developers interested in working on Mod Rehab RAD Conversions should contact their local PHA and ask for a list of Mod Rehab properties and owners. Many Mod Rehab owners are relatively small and may not be familiar with RAD. Through their local networks, developers can help to identify Mod Rehab properties and work with them throughout the RAD conversion process.
Post-Closing Changes Coming
Several post-closing changes will also be coming as HUD rolls out a 2.0 version of the owner’s completion certification, according to Tom Davis. Owners will need to certify that residents who were temporarily relocated as a result of acquisition, demolition or rehabilitation were able to return to the newly RAD-converted property. In addition, HUD’s Office of Public and Indian Housing is beginning to think more about how it conducts asset management of its PBV properties. According to Davis, the PBV program has grown from 70,000 units in 2012 to 210,000 in 2019. While 60,000 to 70,000 of those additional units can be attributed to RAD, the rest are a result of programmatic growth at the local level. This substantial growth in the program will pose new asset management challenges and HUD is grappling with these questions.
Conclusion
RAD has been tested and refined over the eight years of its existence and will continue to evolve. Stakeholders have been welcomed into the process and their direct experience continues to influence the program’s improvements.
