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RAD Program Embraced: What Have We Learned?


June 2014

The following was distributed as part of the Affordable Housing News & Views - Spring 2014 newsletter.

In the last months of 2013, applications for the Rental Assistance Demonstration (RAD) program flooded into the U.S. Department of Housing and Urban Development (HUD). “This is an extraordinary response in just over a year of accepting applications,” said HUD Secretary Shaun Donovan in a February 20, 2014 letter to housing authority directors.

Many public housing authorities have embraced the RAD program, which has enough applications to exceed the original cap on the number of housing units the program can transform. However, as with any program, there are learning opportunities to note. The projects in the process of closing their financing and start redevelopment reveal potential pitfalls that housing authorities and other applicants should be careful to avoid.

Housing Authorities Get in Line for RAD

The first component of the RAD program allows public housing and moderate rehabilitation properties to convert their federal rental subsidies into long-term Sec. 8 rental assistance contracts. The program has huge implications for housing authorities, which can transition public housing properties to private ownership and bring in new private investment to preserve the properties as affordable housing.

By the end of 2013, nearly 400 housing authorities had submitted more than 1,000 applications for RAD funding that total 176,000 units of housing. These applications are three times more than the 60,000 unit cap under RAD’s current authority. Applicants should stay tuned as this week, on June 3, the T-HUD Senate Appropriations Committee approved a bill that would increase the cap on the Rental Assistance Demonstration (RAD) program to 185,000 units although the House bill does not include an increase on the cap. Of the applications submitted, 326 applications totaling 55,000 units have won a commitment to enter into a housing assistance payment contract from HUD.

Experts are confident Congress will increase the authority of the RAD program to work with more housing units. “It is clear in my conversations with members directly involved with HUD’s budget that RAD is seen as a highly-promising new resource,” said Donovan.

But it might take a while for the RAD projects approved so far to close the rest of their financing, which typically includes low-income housing tax credits (LIHTCs). The pace of closings is accelerating, but housing advocates say it could be going more quickly. To date, 31 RAD projects totaling 3,000 public housing units had closed their financing. HUD expects to have closed 41 deals by mid-June, totaling 4,500 units of housing.

While HUD noted that developments are closing more quickly as the program gets underway, “It’s not going as quickly as we would like,” says Steve Clark, owner of SE Clark Inc. The process is difficult in part because of the layers of approvals that HUD requires from each application, says Clark. It’s not unusual for a project to have to submit several versions of the same report. HUD is using its multifamily housing office to process applications for the RAD program. That is the same office that works with HUD portfolios of project-based Sec. 8 properties—it has fairly rigid rules and procedures for how it manages its portfolio.

Applications that win approval to go through the RAD process have a limited amount of time to close the rest of their funding and reach their development milestones. Developments that fail get thrown to the end of the line of RAD applications. “If you have to withdraw your application and go to the back of the line, it could be years before you get another chance,” said Clark.

Run the Numbers

To make sure they meet the deadline, housing authorities should work out the details of their development plans before they apply for RAD funding. Many housing authorities rushed to apply to meet the deadline, but without carefully considering how their redevelopment projects would work in practice. That could cause trouble for RAD projects if they are unable to put together the rest of their funding package in time.

For example, many public housing properties charge residents “flat rents” as low as $100 a month. The RAD program turns the public housing rental subsidy provided by HUD into a Sec. 8 contract that the property can use to underwrite a loan to help pay for redevelopment. However, $100 a month only provides minimal cash for debt service.

It is relatively simple for a housing authority to raise its flat rents. The authority’s board of directors simply declares the new rent levels at a public meeting. HUD has already told housing authorities to raise flat rents closer to its fair market rents, and HUD subsidies will pay for much of the increase for residents. But raising flat rents will still have an impact on tenants who earn higher incomes and pay a larger share of their own rent. Housing authorities should give residents time to adjust their finances before implementing the change. “A number of housing authorities are concerned that they may lose these residents,” says Clark.

Change Comes to Housing Authorities

Some housing authorities may also change their intent about participating in RAD once they realize how deeply the program would change them. Housing authorities that put all of their public housing units through the RAD program will no longer be housing authorities in the traditional sense. Their funding will no longer be based on HUD’s assessment of their needs and Congress’ willingness to pay. Instead the housing authorities will become more like asset managers, funding their operations from the fee income of their properties. Some housing authorities may find that they are over staffed. Change will also affect the benefits received by housing authority employees who will no longer qualify as civil servants and would no longer participate in the federal retirement plans.

A wide range of housing authorities have applied to the RAD program. Small housing authorities with less than 250 public housing units make up 40% of the housing authorities that applied. Several of the largest housing authorities in the country also applied, including several that have already renovated thousands of housing units under HUD’s now-finished HOPE VI grant program. The Chicago Housing Authority applied to transform 10,935 public housing units through RAD, making it the largest applicant in the country. Housing authorities in El Paso, Nashville, Birmingham, Baltimore, and San Francisco round out the top six.

RAD Component II

The second component of the RAD program allows privately-owned affordable housing properties that receive HUD rental subsidies to transition to tenant-based vouchers when rental assistance contracts expire for the properties or project-based assistance is terminated by HUD. As of December 2013, the Department approved to 75 projects representing over 8,300 units through the program.

Congress extended RAD’s second Component through the end of 2014 as part of its 2014 Omnibus Appropriations Bill. HUD will soon release guidance on how to submit new conversion requests under the extended authority.

Contact

For more information, please contact Beth Mullen, Partner and Affordable Housing Industry Practice National Director, at 916-930-5750. 

Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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