RAD Case Study: New Jersey Development Team Learns Early Lessons

Published by Mark O’Meara on Tuesday, January 8, 2019
Journal cover thumb January 2019

The Housing Authority of the City of Passaic, N.J., was among the first housing authorities to use the U.S. Department of Housing and Urban Development’s (HUD’s) Rental Assistance Demonstration (RAD) program to revitalize three of its former public housing developments. 

“This was everyone’s first RAD deal,” said Vincent Wynter, director of finance at the Housing Authority of the City of Passaic. “We were the guinea pigs.” 

The Murphy Hecht Ascension Apartments is a scattered-site development consisting of three former public housing properties: the Hecht Apartments (50 units) and Murphy Apartments (50 units) were built in 1965 while the Miller Apartments (30 units) was built in 1978. 

“Scattered-site developments are not unusual for RAD conversions,” said Terry Wellman, senior vice president, Federal Housing Administration (FHA) chief underwriter at PNC, the FHA lender and 4 percent low-income housing tax credit (LIHTC) equity investor for the Murphy Hecht Ascension Apartments. “[Combining multiple public housing developments under one RAD conversion] is a great way to save on fees, reports and other costs.” 

Converting the three properties from public housing to Section 8 housing began in December 2012 when the Murphy Hecht Ascension Apartments was among the first round of RAD recipients. The development received its certificate of occupancy in July 2017.
 
With years of deferred maintenance, the RAD program provided the best option to bring these three developments up-to-date. “With RAD, developers are able to finance 100 percent of the building’s capital needs,” said Rich Larsen, partner in the Toms River, N.J., office of Novogradac & Company LLP, which provides independent audit services to the Passaic Housing Authority as well as audit and tax services to Murphy Hecht Ascension Apartments. “Capital funding for public housing is like putting a Band-Aid on a broken arm. Public housing developments are not getting enough capital to repair these buildings. It’s patch work.” 

“You’d be hard-pressed to find a housing authority property that is not a good fit for RAD,” said Dan Mariniello, principal of NW Financial, which was the financial consultant to the housing authority. “This is the perfect project for the RAD program. There was no other way the housing authority would have gotten enough money through public housing to rehabilitate the development.” 

Journal January 2019 RAD photo

Image: Courtesy of Housing Authority of the City of Passaic
The Murphy Hecht Ascension Apartments is a scattered-site development in Passaic, N.J., consisting of three former public housing properties: the Hecht Apartments (50 units) and Murphy Apartments (50 units) were built in 1965 while the Miller Apartments (30 units) was built in 1978.

Need for RAD Program

“HUD can’t meet the capital needs in public housing,” said Larsen. “RAD lets government agencies partner with the private sector to fund capital needs.” 

With the Murphy Hecht Ascension Apartments out of public housing, Larsen said that the development receives increased RAD rents and Section 8 vouchers. 

Larsen said the challenge with operating public housing is that an owner never really knows how much money they will get from the federal government. Larsen said a public housing development may be eligible for X dollars per unit for capital needs, but HUD may give the owner only 85 percent of that amount. “It is very difficult to operate public housing as a result,” said Larsen. 

Larsen said the Murphy Hecht Ascension Apartments needed quite a bit of improvement, which was impossible without 4 percent LIHTCs and the RAD conversion. 

“The best part about the RAD program is that now you can collateralize rents and go out and borrow money to do capital improvements,” said Mariniello. 

Lessons Learned 

Because the development team was new to RAD, many lessons were learned working on the Murphy Hecht Ascension Apartments redevelopment. 

“Many times we proceeded in one direction then had to backtrack,” said Wynter, who said this happened while filling out the various documents. Wynter said another major lesson he learned was that soft costs associated with finalizing the closing were expensive. 

Joann Arroyo, senior site manager at the Housing Authority of the City of Passaic, said the RAD conversion created many logistical challenges as well. 

“Murphy Hecht Ascension Apartments has 130 families, but these are seniors. They have special needs,” said Arroyo. “They struggle with daily life. How do we get them through construction?” Because the buildings were redeveloped with residents living on-site, Arroyo said it was particularly challenging when it was time to work on the elevators. Arroyo said the housing authority had staff on-site to help the residents get in and out of the buildings. 

“We tried to think of every detail,” said Arroyo. “Doing that for 130 people was difficult.” 

While challenging, Larsen said the in-place rehabilitation was cost effective. 

With buildings from the 1960s and 1970s, Wynter said that having each building meet 21st century standards was a challenge. From meeting the new fire and safety codes to bringing the old elevators up to code, a lot of upgrades needed to be made to the development. Wynter added that rezoning the development was a challenge as it had to meet certain new density requirements. 

Furthermore, Wynter said that by managing the property, the Housing Authority of the City of Passaic receives a management fee from HUD. He said that money can then be used to operate the property. Larsen added that by converting to project-based vouchers, the housing authority also gets an administration fee. “These other income streams are important to an owner,” said Larsen. 

Wellman said many early RAD conversions used FHA loans (like the Murphy Hecht Ascension Apartments). “In 2013, conventional lenders weren’t comfortable with the RAD use agreement,” said Wellman. Wellman said that because FHA loans are another HUD program, these loans work well with RAD. 

Mariniello said it is important to assemble the proper team to work on a RAD development. Mariniello said to get an engineer who understands the nuances of the RAD program. “If they don’t, it may delay the project because of the learning curve of the program,” said Mariniello. Mariniello gave kudos to the Housing Authority of the City of Passaic for assembling such a strong team, from the accountants to the investor to the engineer and consultants. “That was a very good learning experience and a very successful project,” said Mariniello. 

Mariniello said the engineer is important as he/she must balance the upfront needs of the building with the capital improvements that will need to be made over the next 20 years. “It’s required through the RAD program to have enough money for the immediate needs of a building and to have enough capital reserves going forward to cover the need for unit repairs for the next 20 years,” said Mariniello. 

Conclusion

The RAD program provides an opportunity to rehabilitate public housing while maintaining it as affordable housing. “The government invented the RAD program to keep the public housing stock up to date,” said Wynter. “These units are in need of modernization and upgrades.”

“By taking part in the RAD program, the housing authority was able to provide up to $42,000 per unit in upgrades,” said Wellman.

Development partners for the Murphy Hecht Ascension Apartments agreed that a strong development team is needed to navigate through the various RAD requirements. “Putting together the best possible team is the No. 1 component to your success,” said Wellman.