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PHA Repositioning Options for RAD

Published by Nick DeCicco and Rich Larsen on Thursday, May 4, 2023

Journal Cover May 2023   Download PDF

After several years of relative stability in terms of financing, those working at public housing authorities (PHAs) may see a divided Congress and become curious what that means for future funding from the U.S. Department of Housing and Urban Development (HUD).

A decline in funding wouldn’t be unusual. Many PHAs are concerned that public housing operating subsidy funding levels could decline to 80% or 85%, which has happened in the past.

The uncertainty has some PHAs considering their options for asset repositioning, which is finding alternative funding sources to pay for both operations and redevelopment of existing housing.

Rehabilitating properties that have been poorly and inconsistently funded and moving to a Section 8 platform, which provides greater stability, allows PHAs to modernize their housing stock and reposition them for greater success in the market.

PHAs often follow one of five paths when deciding if and how to reposition their assets.

Rental Assistance Demonstration

The Rental Assistance Demonstration (RAD) program, introduced in 2012, connects PHAs looking to preserve their housing stock with more stable Section 8 funding. The property can receive an infusion of capital through tax credit equity from private investors or conventional debt from lenders, who draw underwriting confidence in the property due to the stability of the Section 8 program.

This access to private capital is a barrier placed on public housing buildings relieved through the RAD transition, creating a new funding mechanism that allows PHAs to borrow against, transfer and receive tax credit equity for a property. The capital improvements are beneficial to PHAs as well as residents, improving their homes as well as their quality of life.

In a straight RAD conversion, a PHA takes its annual operating expense subsidy and capital subsidy and converts it to a Section 8 rent subsidy. This also correlates to an automatic operating cost-adjustment factor increase to rents on an annual basis.

One complication of straight RAD transactions is making the math pencil for rent income.

RAD and Section 18 Blend

A combination of RAD and Section 18, which requires substantial rehabilitation of public housing, can also bring project-based voucher rents. These rents are often higher than those from a straight RAD conversion, can which be the difference for a PHA in making a RAD conversion economically feasible.

Public and Indian Housing Notice 2018-04 expanded the possibilities for PHAs to blend RAD conversions with Section 18. This allows PHAs to blend up to 60% of their apartments; previously, that ceiling was set at 25%.

One of the largest hurdles to the feasibility of RAD and Section 18 blends is a property that demands substantial rehabilitation. Such an endeavor cannot apply for 9% low-income housing tax credits, further complicating the capital stack for rehabilitation or new construction.

Section 22

Section 22 allows PHAs to do a streamlined voluntary conversion of their properties provided their portfolio includes 250 or fewer public housing units. This allows PHAs to leave the public housing program and their annual contribution contract behind, which allows them to get Section 8 fair-market rents. In this scenario, current tenants are giving tenant-based vouchers.

PHAs should be aware that any remaining public housing funds subsequent to a Section 22 conversion must be put back into the property or they are returned to HUD.

Section 32 Homeownership

The Section 32 option allows a PHA to sell sites. This option is sometimes invoked by PHAs with sites that are scattered across a geographic area.

Status Quo

One final option for some PHAs may be to stay put for now. This can be the preferred option when previous possibilities have been explored and discarded, i.e., rents are insufficient in a straight RAD conversion and a site does not meet the construction crosscut criteria for a Section 18 blend.

This position often comes with continuing to explore other options, including alternative financing sources such as Community Development Block Grant funds.

For More Information

For PHAs considering repositioning their assets, contact Novogradac partner Rich Larsen for auditing, consulting and other financial services. 

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