The RAD Learning Curve: Understanding Interaction of Compliance Rules for Different Subsidy Programs Is Critical

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Many owners and managers of existing multifamily housing properties converting under the federal Rental Assistance Demonstration (RAD) program will need to become familiar with the compliance requirements for the federal low-income housing tax credit (LIHTC) program and often also those of other subsidy programs. Many RAD transactions will utilize the housing tax credit equity to raise equity to renovate and recapitalize these properties.

Administered by the U.S. Department of Housing and Urban Development (HUD), the RAD program is designed to test new methods of placing public housing projects and certain assisted multifamily rental properties on a solid economic footing, as well as make it easier to attract private debt and equity for renovations.

The program has two components.

Under the first, public housing agencies (PHAs) can apply to HUD to convert the existing subsidies for public housing properties (operating subsidies, capital funds) to either project-based Section 8 rental assistance or project-based vouchers under new contracts of up to 20 years. The same conversion choice is available to owners of Section 8 Moderate Rehabilitation (Mod Rehab) projects.

Under the second component, owners of multifamily properties assisted under three HUD “orphan” rental subsidy programs (Mod Rehab, Rent Supplement, Section 236 Rental Assistance Program) can apply to HUD to convert tenant protection vouchers to project-based vouchers under new contracts of up to 15 or 20 years.

In public housing, the best candidates for conversion under RAD are properties needing $30,000 to $40,000 per unit in rehabilitation. In many cases, LIHTC equity will be required to make the deals feasible, using either 9% or 4% credits.

In many converted public housing properties, 100% of the converted units will be LIHTC units but a large portion will be reserved for income-eligible public housing residents and some units may even be market rate.

 

Combining Programs

Since the RAD program relies on combining multiple federal housing subsidy programs for success, developers, owners, and managers of RAD projects must understand the compliance requirements of all the subsidy programs used in a transaction, such as LIHTC, project-based Section 8 (either through HUD or the PHA), public housing, and the HOME program. None of these programs supersede one or more of the others in terms of program regulations. Therefore the rules of each program must be mastered to ensure successful long-term operation of a RAD property. Different program requirements relative to maximum tenant income, rents, resident eligibility, and service components all have to be fully understood.

 

Tenant Eligibility

Each subsidy program has different tenant eligibility requirements. In many cases, projects will have units that are required to qualify under one program but those standards may not satisfy the requirements of another subsidy program.

For example, a project could have all units with project-based Section 8, some of which must meet the PHA’s public housing rules, while other units are LIHTC only. Tenant household income limits may well differ for each of the programs, with caps at up to 80% of the area median income (AMI) for Section 8 and 60% or less of AMI for LIHTC. Similarly, PHAs may limit occupancy for public housing to households as low as 30% or less of AMI.

In the same vein, immigration status is not an issue under the LIHTC program but it is for Section 8; individuals without verified legal status in the U.S. are ineligible for rental assistance.

Some existing residents in projects converted under the RAD program are likely to be above the LIHTC income limit. This can create issues. Since these projects have not received tax credit allocations in the past, current “over-income” residents are not grandfathered in for LIHTC purposes. However, under the Section 8 and public housing rules, involuntary displacement of such residents is not permitted. Therefore, either the units occupied by over-income households will not be LIHTC eligible or else substantial expenditures will have to be incurred to relocate over-income tenants willing to move. Careful planning is required here.

 

Available Unit Rule

The LIHTC program also has the Available Unit Rule, which the Section 8 and public housing programs do not. Accordingly, for RAD projects utilizing housing tax credits that have some market-rate units, a full understanding of the Available Unit Rule is critical to prevent the suspension or the loss of tax credits. Tax credit developers partnering with local PHAs lacking LIHTC experience need to provide necessary management oversight in this area.

 

Maximum Rents

Section 8 tenant-paid rents are based on the income of the household; public housing rents may be based on household income or a “flat” rent. HOME rents are dictated by the agency that provides the HOME funds. And LIHTC rents are based on an “imputed” income limit (the size of household assumed to occupy a unit of that particular size in terms of number of bedrooms).

Accordingly, owners and managers of “combo” properties must understand how the rent level is determined for each program and make sure to set the rent at the lowest among all the applicable programs.

 

Income and Student Verification Requirements

While most affordable housing programs have similar requirements regarding verification of income for tenant eligibility purposes, there are some differences.

For example, Section 8 properties use the Enterprise Income Verification (EIV) system as a primary method of income verification. Under the LIHTC program, though, there is no access to EIV data. Therefore, management companies that primarily oversee LIHTC properties must become qualified to use the EIV system if the development will have project-based Section 8.

Another tricky area is student eligibility requirements, which differ among the Section 8, public housing, and LIHTC programs. Therefore, in properties utilizing two or more of these programs, managers must figure out how to comply simultaneously with all of the applicable student rules.

 

Housing Credit Requirements

For many PHAs in particular, many terms and requirements areas unique to the LIHTC program will be unfamiliar at first but must be understood in order to utilize housing tax credits in RAD transactions. Examples are the determination of qualified basis, allowable uses of common areas, and requirements regarding the marketing of vacant units. Strong involvement and oversight in these areas by a tax credit partner is a necessity.

RAD represents the future of the nation’s public housing stock – a transition to private equity and debt. In order to succeed, developers, PHAs, owners, and property managers must become familiar with the rules for all of the subsidy programs that they use for RAD transactions, in order to structure viable deals that will also comply successfully over the long term.

A. J. Johnson is president of A. J. Johnson Consulting Services, Inc., a Williamsburg, Va.-based full service real estate consulting firm specializing in due diligence and asset management issues, with an emphasis on low-income housing tax credit properties. He may be reached at 757-259-9920, [email protected]@cox.net.