PHAs Prepare for a (Possibly) Transformational Year: Five Actions to Consider

Published by Michael Novogradac on Monday, January 3, 2022
Journal Cover Thumb January 2022

This could be a transformational year for public housing authorities (PHAs).

The coalescence of a once-in-a-generation investment by the federal government, the opportunity to apply lessons learned during the COVID-19 pandemic and a looming cap for the Rental Assistance Demonstration (RAD) program have PHA leaders (and developers who work with them) facing big decisions in 2022. This issue of the Novogradac Journal of Tax Credits focuses on PHA-related topics, but the overriding question may be what should PHAs be doing now to be ready for potential opportunities, as well as challenges.

From preparing for a possible influx of significant additional federal dollars to considering what practices from the pandemic to continue, here’s a nonexhaustive list of five actions PHAs should consider as we begin a unique year for PHAs:

1. Prepare for a Much-Needed Infusion of Capital

The Build Back Better Act (BBBA)–which passed the House of Representatives before stalling in the Senate at the time of the writing of this column–would have included a once-in-a-generation infusion of capital from the federal government for public housing. All 50 Democratic senators are needed to vote for the bill in order for it to pass, but Sen. Joe Manchin, D-West Virginia, announced Dec. 19 that he would not vote for the BBBA. At the time of this writing, although the BBBA was seen as unlikely to pass unchanged, there remained hope for housing provisions to be included in revised legislation that could be considered in early 2022.

For background, here’s what the Build Back Better Act included in its $156 billion proposal for housing and community development spending.

Most significant to PHAs was $65 billion in capital funding to preserve public housing, but the House-passed version of the legislation also included $24 billion for Housing Choice Vouchers (tenant-based rental assistance), $15 billion for the national Housing Trust Fund, $10 billion for the HOME Investment Partnership Program, $3 billion for community development block grants and $750 million ($7.5 billion when leveraged 10-1 with other resources) for the Housing Investment Fund (structured like the Capital Magnet Fund). That’s not all the spending, either. The Senate draft legislation released by the Banking Committee also includes the $156 billion in housing spending, and the Finance Committee includes low-income housing tax credit (LIHTC) and neighborhood homes tax credit proposals with some slight changes.

The House-passed bill also included $5 billion for lead hazard remediation and healthy housing funding, $3 billion for a new, HUD-administered Community Restoration and Revitalization Fund, $2.1 billion for U.S. Department of Agricultural rural housing programs, $2 billion for loans and grants to finance green preservation of HUD multifamily housing, $1.75 billion for a zoning and land use reform program to promote affordable housing and coordination with transportation investments, and more. For homeownership, there was a $10 billion first-generation down payment assistance and housing counseling program and $5 billion to subsidize 20-year mortgages for first-generation homebuyers.

The $65 billion to address the backlog of capital improvements needed in public housing would be a huge change from what PHAs traditionally see (for instance, $2.77 billion was allocated to the PHA capital fund in calendar year 2021, which is in line with recent historical funding). That amount–which would be distributed based on need as determined by the HUD secretary–would unlikely completely fund needed capital upgrades for most PHAs, but it would be an unprecedented expenditure.

Much of that would go to the New York City Housing Authority, the nation’s largest PHA. However, PHAs across the nation would receive significant funding under BBBA proposals. Once funds are allocated, the clock would start ticking–with PHAs required to obligate at least 90% of each capital fund grant within 24 months, then to spend it no later than within 48 months.

The BBBA also included $11.72 billion in provisions concerning the LIHTC, which can be used by PHAs in certain transactions, such as in the RAD program. That boost, as approved by the House, included a temporary 10% increase in the annual allocation of 9% credits, a temporary reduction in the 50% financed-by test to 25% for housing financed by private activity bonds and a permanent maximum 50% basis boost for units serving extremely low income tenants. Each of those provisions would make LIHTCs more useful and accessible in funding affordable rental housing–a particularly huge benefit to PHAs that use RAD.

2. Consider the RAD Program

Congress approved RAD in 2012 to convert public housing and legacy rental assistance program funding to Section 8 funding for properties with private ownership. RAD leverages public and private debt and equity to rehabilitate the housing stock and address billions of dollars in a backlog of capital needs.

The program has been transformative for many PHAs. As of mid-December 2021, 154,999 units had been closed through RAD, 55,810 were active and 129,057 had reserved a spot. Since the cap for RAD conversions is 455,000 units, there’s still room–115,134 units as of mid-December 2021–but it’s not unlimited.

Now is the time to consider or reconsider RAD. While PHAs have long needed to examine the viability of RAD as a means to raise funds for capital improvements for their rental units, the expected infusion of funding through the BBBA will make it more desirable and feasible for many housing authorities to use RAD.

The RAD process starts with the PHA doing a capital needs assessment, wherein it assesses the needs over the next 20 years–clarifying how much financing is needed to complete the transformation. Even PHAs that elect to not go through a RAD conversion find the capital needs assessment worthwhile because it provides a longer-term look at repairs than the annual HUD Real Estate Assessment Center reports.

PHAs should also consider RAD because the potential windfall of funding in 2022 will cap a several-year run where public housing funding was stable or increasing. It’s largely expected that that trend will stop. The possibility that Republicans will take back the House of Representatives in the 2022 midterm elections should remind PHAs that public housing funding is an annual appropriation, subject to political winds. Unless Democrats retain both houses of Congress–which most observers consider unlikely–public housing funding may drop in 2023 and 2024.

Consider working with an expert to evaluate entity structuring and financing possibilities through RAD. The expected arrival of the extra HUD funding will make some transactions work in a way that wasn’t previously available.

3. Evaluate Faircloth-to-RAD Possibilities

Last April, HUD released guidance to PHAs and their partners concerning a new Faircloth-to-RAD process and how to make submissions to HUD.

The Faircloth Amendment was a provision of the Quality Housing and Work Responsibility Act of 1998. Named after Sen. Lauch Faircloth, R-North Carolina, the provision set a ceiling on the number of public housing units owned, assisted or operated by a PHA at the figure in effect Oct. 1, 1999. Due to financial restraints, many PHAs operate under that limit and RAD is one tool for PHAs to approach their limit.

HUD reports that the nation is nearly 220,000 units under the Faircloth limit. PHAs should determine how many units they have available under the Faircloth limit, then examine the feasibility of financing more Section 8 units under their Faircloth limit through RAD.

4. Prepare for the end of 15-Year LIHTC Compliance Periods

Beginning in the 1990s, PHAs started using a mix of public, private and nonprofit funding to develop and operate housing developments, which included LIHTCs. Because of that, many PHAs operate properties that were financed by LIHTC equity–and many are nearing the end of their 15-year compliance period.

During the 15-year compliance period, PHAs generally have limited options regarding such issues as property operations, refinancing and disposition, because tax credit investor partners place numerous operating conditions on LIHTC properties and restrictions on rights of managing partners, as well as hold expansive approval rights. When the compliance period ends, a PHA generally has more latitude regarding future property operations and ownership structure. For example, a PHA may have a fair-market-value purchase option, a below-market right of first refusal, and/or the right to refinance the property. A PHA nearing the end of the compliance period for a LIHTC property should also assess the potential to resyndicate the property through a RAD conversion.

Even if the end of the LIHTC period doesn’t come in 2022 or 2023, it’s worth the time for a PHA to assess and prepare early for those possibilities and eventualities.

5. Learn from the Pandemic

The COVID-19 pandemic accelerated many trends, including the use of technology for PHA systems. In 2021, we saw the implementation of kiosks to handle payments and documentation and the expanded use of online services. Such changes were widespread–and even required–during the height of the pandemic and PHAs should consider whether those options should be implemented permanently.

Conclusion

PHA leaders will have many decisions to make in 2022 that will set the trajectory for the coming years. Whether it’s using RAD to transform the properties or continuing the transition to digital technology to adjusting budget expectations, it’s wise to be prepared for what’s coming.

PHAs should make sure they consider their options. Consulting with experts is a smart way to be ready for what awaits in 2022.