Talking Heads: Tom Davis, HUD Office of Recapitalization, How to do a RAD deal
By Darryl Hicks
10 min read
Among the many innovative housing programs devised by the Obama Administration was the Rental Assistance Demonstration (RAD), which Congress authorized in 2012 to test a new way of meeting the large and growing capital improvement needs of the nation’s aging public housing stock.
Interest in the program has exceeded RAD’s statutory cap of converting 185,000 housing units, and the wait list grows daily. The person orchestrating this massive effort is Tom Davis, whose 20-plus year career in affordable housing spans many roles, from attorney to nonprofit developer to consultant, for a range of private sector clients.
Because of his deep background revitalizing urban neighborhoods and working with PHAs – not to mention his familiarity with RAD – Davis was the ideal choice to become the next director of the Office of Recapitalization, a position he has held since June 2015.
Tax Credit Advisor sat down with Davis to talk about what RAD has achieved, what developers looking for new opportunities need to know about the program, and where it’s headed.
Tax Credit Advisor: What advice would you give to affordable housing developers who have experience using Low Income Housing Tax Credits, New Markets Tax Credits, or HUD programs, like HOME, but have never done a RAD deal?
Davis: There is extensive guidance in the RAD Notice and the Fair Housing, Civil Rights and Relocation Notice, which can be downloaded from the RAD web page at HUD.gov. Also on the RAD page, you can find training webinars and resource materials that newcomers and experienced users of RAD find informative. As a developer, it’s important to understand the public housing authority’s objectives. These are partnerships. Be clear with each other about what you’re trying to get out of the partnership and what each party in the relationship is bringing and offering. It’s also useful for the PHA’s team to have a long-term vision, not just for the transaction at hand, but for the housing authority’s portfolio as a whole. Pairing properties as part of an integrated plan can sometimes make a recapitalization work, while stand alone, one or both of them, might be unfeasible. A RAD transaction may also be the moment to launch a new strategic vision for resident engagement or for administrative staffing. It’s about making your work more impactful for the people you are trying to serve. The most interesting and most exciting RAD transactions are the ones where people have stepped back and said, ‘how can we use RAD as a tool for our ten- and 20-year vision for these properties and not just as a tool to fix the roof.’
TCA: What areas of the country do you see the highest concentrations of RAD activity? What percentage of the deals are rehabilitations versus new construction? How long do these projects generally take once construction starts?
Davis: The Southeast region of the U.S., which includes Texas, east to the Carolinas, and as far north as Maryland, was an early adopter of the RAD program, both in terms of applications received and number of units under construction. About 31 percent of the public housing stock is in this region and about 24 percent of our RAD conversions. Activity has been slowest in the Northeast, but it has picked up recently. New construction and significant rehab ($25,000 per unit or more) have accounted for 46 percent of all closed transactions – almost half the portfolio. New construction accounts for 12 percent of our transactions and significant rehab accounts for 34 percent, with the remaining 53 percent of transactions doing more modest rehab. And getting to your question about how long these projects take, that can vary depending on the scale of the project, but the bigger projects are comparable to typical LIHTC or recapitalization projects that take anywhere from 12 to 18 months.
TCA: What funding sources are typically used in RAD deals?
Davis: It’s all of the things that LIHTC and affordable housing developers are familiar with. We see tax credit equity, both LIHTC and Historic Rehabilitation Tax Credits, local and state funding sources, which may include federal dollars that are administered locally, like CDBG, or state funds that support RAD transactions. We see first mortgage debt, some of it FHA-insured and some of it standard commercial debt. Housing authorities will sometimes contribute capital funds or operating reserves and they can do seller financing if they are selling the property to a tax credit ownership entity. One of the exciting things about RAD is that it is a budget neutral program. By shifting from the public housing regulatory platform to the Sec. 8 regulatory platform, which is more flexible, housing authorities and developers have tapped into a lot of opportunities without any new funding from the federal government. They have been able to put together transactions that have resulted in over $3.9 billion in construction work at these RAD properties – estimated to be 73,000 jobs. This budget-neutral effort generates an incredible amount of economic stimulus and improvement in the quality of housing offered at these sites.
TCA: If you could change one thing about the RAD program to make it function more efficiently, what would that be? What program enhancements are you working on?
Davis: We are constantly looking for ideas to make RAD more impactful. A lot of those ideas come from creative housing authorities and development teams floating an idea to us and saying ‘might we be able to do this?’ A lot of the evolution of the program has been in response to ideas that come from folks on the ground who say, ‘if only we could do x,’ and those ideas often show up in subsequent revisions of the RAD Notice. For example, rent bundling was not in the first RAD Notice but it was added to the second Notice and remains in the third Notice where a development team can say, ‘we’ve got one property where the rent level is higher than that property needs, and another property with a rent level that is lower than the property needs, can we – on a budget neutral basis – move rents from one property to the other, so that both deals work?’ A lot of the changes are ideas that respond to problems. We are constantly looking to stretch the impact of RAD and do transactions that are financially on the edge. In the most recent version of the RAD Notice, we expanded how replacement housing factor funds – a particular type of public housing money – can be deployed and used. We are examining ways that housing authorities can more easily provide public housing subsidies in apartment buildings mixed in with non-subsidized units while still meeting all of the requirements of the statute. And we want to make RAD more accessible to small PHAs that don’t have the staff capacity to think about a complex transaction.
TCA: Please comment on some of the barriers that prevent more RAD deals from getting done. Is HUD trying to fix them?
Davis: The biggest barrier is the statutory cap of 185,000 public housing units that can participate in RAD. That number has been reached and we have a wait list exceeding 20,000 units that continues to increase. There has been some interest on Capitol Hill about boosting the cap, but your crystal ball is as good as mine on what actions they might take.
TCA: Describe the types of PHAs that participate in RAD. Is there an ideal property size and staffing level that you like to see before approving a RAD deal? Who generally initiates these projects? The PHA, developer, or both?
Davis: We will work with any public housing authority that expresses an interest in RAD. There is interest across the entire spectrum, small (1-249 units), medium (250-1,249 units) and large (1,250 to 10,000 + units) PHAs. We’ve seen a slightly higher participation rate among medium-sized PHAs: their units account for 28 percent of the public housing inventory across the country, while 35 percent of RAD units are owned by medium-sized PHAs. But we see participation from all three groups. A small PHA that may only have three to five staff will more likely need to bring in expertise in the form of consultants or developer partners if they choose to go in the direction of a tax credit transaction, because it’s possible they’ve never worked with tax credits. If we look at who initiates a RAD deal, we’ve seen deals initiated by both parties, but the PHA is ultimately the one who needs to submit the application.
TCA: What advice would you give to a developer who has never dealt with a PHA?
Davis: Like any business relationship, a developer should be honest and open about its objectives in the partnership. It should also recognize that PHAs, as public entities, may have a different sensibility around how they interact with residents and what their posture is toward outside stakeholders. PHAs may well want to be transparent, and we hope they are transparent, about what they are doing and how they are doing it. A developer may want to be in conversation with the PHA about how to implement a good communication process about the plans as they evolve because PHAs very much want to be in regular communication with residents and stakeholders.
TCA: What have resident experience and satisfaction levels been like? Have there been any challenges relocating residents?
Davis: RAD transactions that have a lot of construction often have some relocation component. Anytime we talk about relocation, it can be intimidating for residents. That’s something that RAD teams need to pay attention to, which is why we have an entire stand-alone notice about fair housing, civil rights and relocation concerns. We’ve heard some great stories from all over the country about residents working well with their housing authorities, including people who were initially skeptical but once they saw the results, they were really pleased. That said, I don’t want to understate that these deals can be disruptive to residents. There are situations where we have had challenges with the housing authorities not understanding their obligations to the residents. When HUD became aware of those situations, we stepped in and guided them in the right direction. Residents, by the way, have the right to come back to the property once construction is completed; not necessarily to the same unit, but definitely to the assisted property. HUD is working on a RAD evaluation, due out in 2018, which will include a focus on resident satisfaction. The contractor working on the evaluations will be studying resident satisfaction in great detail.
TCA: What other noteworthy RAD trends are you seeing right now?
Davis: One of the exciting trends that we are seeing is that more and more PHAs are looking at, playing around with, and using the “transfer of assistance” tool. It’s a mechanism that allows a PHA and development team to move housing units from one site to another, perhaps from an older, distressed property to a new site with access to better schools, shopping and transportation. Sometimes it is used to reduce site density and in other instances to deconcentrate poverty in an area and distribute affordable units across the metropolitan area. Last year, there were twice as many transfers of assistance compared to the previous year. So housing authorities are recognizing that this is a tool that’s helpful to them as they think about how they want to be supporting the low-income households in their communities for the next 20, 40, 50 years.
