RAD Green Incentive
By Ravi Malhotra
2 min read
We all know the PHA program faces approximately $27 billion shortfall for capital improvements. HUD’s Rental Assistance Demonstration (RAD) program was designed in large part to finance these capital improvements. While it is common knowledge that RAD can provide financing for capital improvements, few are aware that RAD also provides an opportunity, through green improvements, to reduce operating costs and increase NOI. And the good news – HUD pays for these green improvements!
When designing RAD, the Office of Recapitalization included a ‘green incentive’ to overcome the traditional pitfalls of the split-incentive i.e. why would an owner spend money to reduce utility costs for tenants? As PHAs rehabilitate their properties through RAD, any green improvements they make that results in utility costs savings, even for tenants, can be captured by the PHA. RAD allows 75 percent of the value of the savings in tenant-paid utilities, achieved as a result of green upgrades, to be subtracted from the utility allowance and transferred to the PHA as a rent increase! For example, if green improvements will lower a tenant’s utility bill by $40, HUD allows an increase of $30 to the Contract Rent.
The RAD ‘green incentive’ provides a mechanism for PHAs to make their properties more efficient and capture the ensuing cost savings, which in turn increases the NOI and creates an opportunity to access additional financing. Despite these benefits, the ‘green incentive’ has been severely underutilized in most RAD conversions. And the irony – ALL rehabs under RAD, whether designed to be Green or not, will likely result in utility cost savings that could be captured as a rent increase or simply as increased NOI. This is because the old, inefficient systems have to be replaced with what is currently available, i.e. newer, more efficient systems.
PHAs should have a green consultant on their RAD team to assess the value of their green incentives. In an era of budget cuts, no PHA should miss out on opportunities to garner additional resources.
