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Soft Funds and Equity Continue to be Crucial for Funding RAD Transactions

Published by Mark O’Meara on Thursday, March 4, 2021

Journal Cover March 2021   Download PDF

The U.S. Department of Housing and Urban Development (HUD) Rental Assistance Demonstration (RAD) program has generated a lot of attention–and results–since it was established in 2012.

So much so that panelists on the Equity for RAD Transactions panel at the Novogradac 2021 RAD Public Housing Virtual Conference in mid-January discussed the different kinds of equity available to RAD conversions.

“Basically, any funds can be used with RAD deals and we love that,” said Eric Novak, president at Praxis Consulting Group, which works with public housing authorities (PHAs) around the country. “We love soft funding for RAD projects.”

Novak said that some of the funds available to RAD conversions include HUD HOME funds, Community Development Block Grants, the Federal Home Loan Bank Affordable Housing Program, National Housing Trust Fund financing, state housing trust fund financing, energy efficiency and solar grants, state preservation grants and more.

Novak said that soft money is critical gap financing for several reasons: PHAs’ resources are limited, RAD rents may not leverage sufficient debt, the 9% low-income housing tax credit (LIHTC) is competitive and capped, 4% LIHTCs are a shallow subsidy (although the 4% floor helps), and straight RAD conversions can be expensive.

Jennifer Erixon, senior vice president of Alliant Capital, a national tax credit syndicator active in all 50 states, said investors like RAD conversions because of all the soft money available.

“It is all the additional subsidy in the deal,” said Erixon. “It’s the fact that all of those soft funds–that are difficult to get–once you stack them into a deal, it’s pretty low-leverage from the foreclosable debt perspective.”

However, using those sources with RAD poses difficulties.

“The more layers of financing, the more complexities, the more lawyers involved,” said Novak. “That’s just the nature of these projects, they will often have five, six, seven different sources of funding.”

Novak mentioned another challenge that PHAs face.

“One of the difficulties is often that housing authorities don’t have those relationships with their entitlement communities or participating judications, so they are having to build those relationships sometimes for the first time in order to access those monies,” said Novak.

Erixon also identified challenges for PHAs doing a RAD conversion.

“Investors want PHAs to have a LIHTC track record and a balance sheet–no less than $1 million in liquid assets. For smaller housing authorities, that can be a challenge,” said Erixon. “Bringing in a partner is a way to address that hurdle and to make sure you get as many looks from investors as possible and get the best possible terms on the equity investment.”

Depending on a PHA’s experience, Erixon said there are a couple partnership options for PHAs doing a RAD conversion.

She said the first option is to partner with a turnkey developer who will get you through financing and completion, share in the guarantee risk and then turn the partnership over, making the PHA the general partner. She said the second option is to have the third-party developer partner stay in partnership as the managing general partner. The developer partner would manage the day-to-day asset while the PHA stays in as the co-general partner. Erixon said this option works well for smaller PHAs.

Despite the challenges, flexibility makes RAD conversions attractive to investors.

“When the RAD program first started, a lot of investors looked at it and said, ‘I don’t know what this is.’ It was a nontraditional structure that they had a difficulty getting their arms around,” said Erixon. “The way this has evolved over the past handful of years, it is something that is much more accepted by the investment community. And even more than accepted, it’s something that investors really like.”

While soft money is essential to RAD conversions, it’s important to bring equity into these investments as well.

“The 4% [LIHTC] floor adds a layer of equity to deals and certainly helps developments pencil out,” said Austin Divino, vice president of R4 Capital, a nationwide syndicator, lender, loan servicer and asset manager.

This means that the effective credit rate can’t fall below 4%. This permanent change applies to buildings placed in service starting in 2021.

R4 Capital has closed 19 RAD conversions, most of which were financed with 9% LIHTCs. “Most [RAD] deals we do are 9%, which allows for steeper set asides,” said Divino. He added that RAD conversions score well on 9% LIHTC qualified allocation plans.

But that’s not the only equity available to RAD conversions.

Divino added that federal and state historic tax credits (HTCs) are valuable resources for PHAs with an aging housing stock.

“Nine percent LIHTCs, 4% LIHTCs with HTCs can be very equity heavy, which is great,” said Divino. “[This means] less credit risk for investors and less hard debt on the project.”


“The main purpose of the RAD program is to be a means for PHAs to incentivize investment in their existing housing stock,” said Divino. “Now is a great opportunity for the program. At this time, when the country has been put through all kinds of stress, the need for affordable housing is as great as it has ever been. RAD is an excellent vehicle for PHAs to deliver on their mission to provide quality affordable housing.”

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