Tips To Avoid Common RAD Pitfalls
Project-based Section 8 rental assistance can be a powerful leveraging tool for low-income housing. This is the basic idea behind HUD’s Rental Assistance Demonstration (RAD).
RAD is using Section 8 leveraging to great effect and increasing use of project-based Section 8 to spur redevelopment of public housing and other properties across the country. The fiscal year 2018 budget greatly increased the cap on the number of public housing units that can go through RAD, causing many public housing agencies (PHAs), developers and other housing industry players to consider RAD for the first time. The concepts behind RAD are simple, but implementation can get confusing quickly.
These tips can help you avoid unnecessary obstacles and help you maximize your project’s potential.
Tip 1: You don’t know what you don’t know.
Many RAD stakeholders approach the program having familiarity with some HUD programs, but not others. For example, many otherwise HUD-savvy individuals do not necessarily realize that there are multiple Section 8 programs. RAD highlights the two largest: project-based rental assistance (PBRA) and project-based vouchers (PBV). PBRA is administered by HUD’s Office of Housing (Housing) through HUD, state housing finance agencies (HFAs) or performance-based contract administrators (PBCAs). PBVs are administered by HUD’s Office of Public and Indian Housing (PIH) through local PHAs and state HFAs.
While PBRA and PBV are similar, different and distinct rules and regulations apply to each (although some shared regulations apply). Further, both PBRA and PBV have similar, but different, rules and regulations from public housing. Site selection, income certification, project designations, right-sizing, mobility options–these can all vary among PBRA, PBV and public housing. Knowledge of the rules in one program does not necessarily equate to knowledge of the rules in another program or in RAD.
Take rent setting: To the extent of the converted public housing subsidy, RAD caps PBV rents to the lesser of the reasonable rent or 110 percent of the fair market rent (FMR), both as determined by HUD. While equally limited to the available public housing funding being converted, RAD allows PBRA rent limits to be higher, up to 120 percent of FMR, and if current funding is below market, rents can be up to 150 percent of FMR, if supported by a rent comparability study.
These similar differences may explain why many RAD participants get confused at one of the first RAD questions–whether to choose PBV or PBRA contracts. There is no one right answer. The choice depends on the realities for the deciding PHA or property owner. Since PBVs are administered by PHAs, PHAs may have greater familiarity with PBVs and PIH. PHAs may see PBVs as giving them greater control over a RAD project and they may benefit from receiving administrative fees. A PHA with room in their voucher utilization rate may find project-basing vouchers helpful strategically and may be able to navigate the voucher budget processes smoothly. Some projects may find combining RAD PBVs with non-RAD PBVs a helpful tool for boosting net operating income (more below).
PBRAs have a longer history in the conventional lending market and are better known among lenders and other stakeholders. Some properties may find PBRAs more centralized administration attractive. Funding on PBRA contracts has avoided proration in the past, perhaps benefitting from the preponderance of private ownership in the program. In areas with high voucher utilization rates, concerns over short-funding voucher budget authority may steer participants toward PBRA. In addition, participants having better relationships with one or the other program’s administrator may look more favorably on that program over the other.
While HUD’s RAD team strives to make the experience as uniform and user friendly as possible, there are nuances in the implementation. While it is unrealistic to think that every RAD participant will gain a thorough understanding of all nuances before moving forward with a RAD conversion, it is important to be aware that nuances exist to avoid being blindsided and unnecessarily delayed.
Tip 2: Plan for the Future, not the Past
The first step in planning for a RAD application should be strategic thinking and in RAD Component 1, this means thinking about the PHA’s entire portfolio and the future of the PHA. The best RAD plans are part of the larger affordable housing plans of the community and take community needs and assets into account.
PHAs are not necessarily just stuck with the property as it has always existed. RAD has a number of creative tools to help transform a development in whatever way it most needs. A development converting its assistance through RAD (referred to as the “converting project” in RAD guidance) does not need to be the same as the project receiving that RAD assistance (referred to as “covered project” in the RAD guidance). If the rental assistance offered through RAD could better serve the community in another location, RAD permits the transfer of assistance, either to existing housing or to new construction. Nor does the entire amount of assistance from a converting development need to be placed in a single covered project; the assistance can be split among multiple HAP contracts at different locations. Assuming the rights of tenants at the existing location are preserved appropriately, there is even a mechanism for converting assistance at a converting project and holding it in abeyance until construction is complete on a covered project (called “converted awaiting transfer”).
These RAD tools continue to expand. In early July, HUD issued new guidance supplementing the current version of the RAD Implementation Notice (PIH 2012-32, Rev. 3). Among the new tools is an expansion of “rent bundling,” which allows a PHA to change the allocation of subsidy among projects, so long as the total subsidy remains the same. While RAD has always permitted rent bundling among RAD projects, this expansion now allows RAD and non-RAD subsidy (normal project-based HCV budget authority or budget authority gained through TPVs) to be re-allocated, so long as the total subsidy does not increase among the defined portfolio. This is huge.
The biggest problem with RAD is that the rents are so low. This gives PHAs a way to boost RAD rents without having to have two HAP contracts in a building or “bundling” together properties into a single underwriting. When coupled with HUD’s April guidance on Section 18 disposition and TPVs, HUD is giving PHAs a lot more flexibility in how to approach their portfolio.
Tip 3: Don’t Go it Alone
The idea behind RAD is simple, but the implementation can get complicated quickly. Miscommunication and lack of common understanding among the parties around the table adds complexity exponentially. Build a team of trusted advisers to help you navigate the complexities and avoid having to reinvent the wheel.
Since RAD is a tool to bring new financing and new players to these properties, it should not be surprising that many developers, lenders and investors lack a thorough knowledge of PHA rules, timelines, political pressures and logistical realities. Similarly, since PHA is unlocking new development potential in many public housing properties, it is not surprising that many PHAs lack a thorough knowledge of some development processes, financing vehicles and the rationale behind some developer, lender or investor positions.
A RAD developer may not know the process for Section 18 applications or PIC removal. They may not understand the limitations HUD places on public housing funds or realize the logistical challenges of converting households from public housing to Section 8, including the often-surprisingly more-difficult-than-imagined challenge of accurately identifying the current residents of a unit and the always frustrating IT challenges. A PHA may not realize how complex the development process actually is. They may not understand just how hard it is herd all those cats to closing. They are likely unfamiliar with the ramifications of negative capital accounts or need to demonstrate risk mitigation measures to a loan committee. They may not know the LIHTC-boosting features of developer fee or the multi-year backlog of costs the fee supports for the developer.
These different perspectives often come to a head when negotiating the large volume of dense equity and other financing documents that invariably accompany these transactions.
In addition, neither the PHA nor the other stakeholders in a RAD transaction may fully appreciate HUD’s interests in RAD. Within HUD, Housing has the primary responsibility for administering RAD but it is not alone. PIH still holds the authority to release or not release a Declaration of Trust. Many other offices play a role in protecting various other interests, including Fair Housing and Equal Opportunity, which reviews civil rights concerns; Community Planning and Development, which reviews certain relocation and environmental concerns; and the Office of General Counsel, which reviews legal aspects of the program. The reasoning behind some of HUD’s determinations on a particular transaction or program-wide may be clearer with a greater understanding of the competing priorities and concerns inherent in creating a nationwide program.
When the parties around the table are well versed in RAD and the transaction as a whole, with a good understanding of the motivations and limitations of the other parties, transactions reach closing faster, more smoothly and with less potential value left on the table. Engaging with counterparties who share this vision and having the right team of knowledgeable consultants, accountants and attorneys supporting you can keep the focus on getting the deal done right and keep complexity to a minimum. Wasting a little time up front to assure you assemble the right team and establishing open channels of communication can pay huge dividends in the long run.