RAD, or the Rental Assistance Demonstration program administered by the U.S. Department of Housing and Urban Development (HUD), may not be as radical in its approach to preserving low-income housing as its acronym suggests, but an interim evaluation of the pilot program indicates it shows promise. The HUD report, released in September of 2016, describes the program’s purpose as follows:
RAD enables Public Housing Authorities to convert public housing properties to project-based Section 8 contracts and, in so doing, permit an infusion of private capital to address the project’s repair and rehabilitation needs and to put the property on a path of financial stability over the long term.
The RAD program, and its potential impact, is explained in more detail on the CED blog in this post.
The interim report highlights the preliminary findings of a larger study which aims to demonstrate whether conversion to project-based Section 8, compared to other financing alternatives, can address the capital needs of the existing housing stock while remaining affordable and having a minimal impact on tenants. With only two years under its belt, however, it is too soon to evaluate the RAD program by all of these measures. Instead, the interim report gives us a glimpse of RAD’s potential, focusing on rates of participation by Public Housing Authorities (PHAs), the program’s success in converting projects, and the amount and sources of financing. HUD contracted Econometrica and its subcontractors, the Urban Institute and EMG Corporation, to conduct an evaluation of RAD over an initial 20-month period. The study surveyed and compared 24 participating projects and 48 non-participating PHAs. The following are some key findings.
RAD Participation and Motivation
Applications to RAD quickly exceeded the 185,000-unit cap set by Congress. In its first two years, RAD received over 1,200 project applications from public housing entities around the country that, combined, sought to convert nearly 189,000 units to Section 8 Housing Assistance Program (HAP) contracts. By October 2015, RAD had closed on 185 projects, and PHAs had converted 19,255 public housing units. An additional 110,000 units of housing with $8 billion in funding commitments had received approvals for RAD with a Commitment to Enter into a Housing Assistance Payment Contract (CHAP). The report estimates that projects in the program take an average of 16 months to close, although the stated goal is 12 months.
The PHAs surveyed were primarily motivated to participate in RAD in order to move projects into the Section 8 program. Section 8 HAP contracts are perceived by participants as more stable, in contrast to the fluctuating capital and operating funds for public housing. 18.4 percent of projects in RAD were converted without any capital needs, and indicated the conversion was “for the sake of better long-run management.” RAD also offered an opportunity to improve administrative efficiency by merging all housing assets under a single publically-subsidized program.
Projects owned by medium and large PHAs have higher participation in RAD, particularly those that serve larger families with lower median household incomes. The projects tend to be located in overcrowded urban areas where rents are highest relative to incomes. At the same time, projects with greater financial feasibility are more likely to be in the program, as indicated by the lower per-unit expenses and higher per-unit operating subsidies of participating projects. The analysis links low participation by projects in high-poverty neighborhoods to perceived financial infeasibility.
Capital Accessed after RAD Conversion
PHAs in RAD raised $2.5 billion in funding, of which $250 million came from public housing sources, for an adjusted leverage ratio of 8.91:1, that is, for every $1 of public housing funds, PHAs secured $8.91 from external sources of financing. This ratio fluctuated significantly between new construction and rehabilitation projects. The following are the common sources of capital secured by PHAs in RAD, listed in order of share:
- Private investors in Low-Income Housing Tax Credit (LIHTC) equity (39.4 percent)
- Soft-money, i.e. seller or take-back financing (27.6 percent)
- Lenders for first mortgage financing and other third-party debt (22.7 percent)
- PHA’s own resources (10.1 percent)
Financial analysts modeled alternative scenarios for four RAD projects and found that in those cases RAD offered better financing options and/or financial stability through a more stable long-run positive cash flow.
RAD vs. Alternative Financing Options
Since HUD offers various options to finance the public housing improvements, the interim report compiled the following list of five factors that influenced PHAs in their decision to choose RAD over alternative financing options:
- Relative ease of use: Although the RAD program infrastructure includes a range of training products that participating projects found useful, as a HUD “start-up” it is still clarifying its guidelines and hence creating some confusion for PHAs.
- Technical capacity: RAD requires adequate technical capacity to, among other requirements, find financing sources, negotiate complicated finance requirements, hire developers and provide for long-term management. Many PHAs hired outside consultants to manage the process.
- Perception of Section 8: Overall, Section 8 is seen as a better program for the long-term management of low-income housing units. PHAs in higher rent areas mentioned that the Section 8 rents were lower than expected.
- Access to capital: Most participants met their expectations for accessing external financing, and found that the funding received under RAD “exceeded their expectations.” Most, however, also think that RAD provides the same amount of funding that they could access elsewhere, if not less.
- Large-scale conversions: Some PHAs surveyed stressed that the program gave them the ability to make large-scale conversions through multiphase or portfolio projects.
PHAs that steered away from RAD cited factors such as a lack of capacity, no capital needs and the perception that RAD would not benefit their housing stock.
A final report is expected to expand on the factors that distinguish RAD and will assess the financial, physical and administrative efficacy of the program. It will also evaluate RAD’s impact on tenants. It is slated for release by December 2018.
Sarah Odio is a Master’s candidate specializing in Economic Development in the UNC-Chapel Hill Department of City and Regional Planning. She is currently a Community Revitalization Fellow with the Development Finance Initiative.