Future Prospects for Public Housing in the United States: Lessons From the Rental Assistance Demonstration Program

Abstract

This article provides an overview of the Rental Assistance Demonstration (RAD) program in the United States and examines its early implementation from its start in 2013 through April 6, 2016. RAD was devised to address the physical deterioration of public housing and secure a more stable funding stream. It requires public housing authorities to shift properties out of the public housing program into a different subsidy program (project-based Section 8) which enables them to obtain mortgages on more favorable terms and to secure tax-credit investment. The program is currently limited to 185,000 housing units. As of April 6th, the program was fully subscribed, and had generated more than $2 billion in new investment. Extrapolating from the early results, RAD has the potential to yield more than $15 billion for fund the redevelopment and renovation of public housing.

Keywords:

• United States
• public housing
• housing policy

Acknowledgments

Special thanks to Gregory Byrne, Will Lavy, and Robert Robinson at HUD’s Office of Recapitalization for providing me with the RAD data and for patiently answering my many questions about the data and about the RAD program itself. Thanks too to Deborah VanAmerongen for tutoring me on the RAD program.

Notes

1. In addition to public housing, the RAD program also applies to the Section 8 Moderate Rehab program, the Rent Supplement program, and the Rental Assistance Program. These latter legacy programs were established in the 1960s and early 1970s. They account for less than 40,000 units, but are otherwise “ineligible to renew their contracts on terms that favor modernization and long-term preservation” (HUD, 2014, p. C-2).

2. Some, but not all, of the data used for this article are available on RAD’s website: http://www.radresource.net/firstcomponent.cfm

3. Previously, PHAs were prohibited from borrowing against individual public housing developments. They could borrow against a portion of their future Capital Fund payments, but such borrowing was subject to more stringent terms than what is possible under RAD. For example, the maximum debt service coverage (DSC) ratio for a Capital Fund loan is about 3.0, whereas DSC ratios for mortgages issued under the RAD program are generally around 1.2 or lower (Mathematica, 2016, p. xxi).

4. In addition to debt and tax credits, the RAD program allows PHAs to use a wide array of other sources to pay for rehabilition and redevelopment. The most important of these sources are discussed below.

5. The RAD program is roughly analogous to the Stock Transfer initiative in the United Kingdom during the 1980s and 1990s. Under stock transfer, ownership and management of several hundred thousand units of council housing (analogous to public housing in the United States) were transferred to nonprofit housing associations. The housing and residents remained the same, but the ownership of the housing changed, as did some of the subsidy mechanisms (Pawson & Fancie, 2003). As with the RAD program, a chief motivation of stock transfer was to access private financing (i.e., bonds, bank loans) for the rehabilitation of the housing stock. More recently, several jurisdictions in Australia have also transferred public housing to nonprofit organizations (see Pawson et al., 2013).

6. A maximum of 30% of a project’s Capital Fund allocation can be used for debt service, and the maximum mortgage term is 20 years. This estimate also assumes a debt coverage ratio of 1.2 and an interest rate of 6%.

7. The program’s regulations specify that “conversions may not result in a reduction of the number of assisted units, except by a de minimus amount, defined as no more than the greater of five percent of the number of project or portfolio units under Annual Contribution Contract (ACC) immediately prior to conversion or five units” (HUD 2015a, p. 25). The de minimus amount, however, may be increased in two circumstances: (a) if units have been vacant for more than 24 months at the time of RAD application; (b) if reducing the number of units in the property will enable the PHA to “more effectively or efficiently serve assisted households through (a) reconfiguring apartments (e.g., converting efficiency units to one-bedroom units) or (b) facilitating social service delivery (e.g., converting a basement unit into a community space” (HUD 2015a, p. 25).

8. As of April 2016, 68 PHAs planned to convert their entire public housing portfolios to Section 8 through the RAD program and 42 had multiphase plans. See Note 12 for details.

9. Other priority categories include projects that HUD deems to be in imminent danger of losing financing if they are not awarded a CHAP; other applications using tax credits; applications that are part of a portfolio or multiphase award in which 50% of properties fall under any of the above categories; and all other applications, portfolio awards, and multiphase awards (HUD, 2015a, p. 87).

10. It is important to note that this analysis is based on projects that have received CHAPs or that have already converted to Section 8 under RAD; it does not cover projects that are pending (reserved) for PHAs that have been approved for portfolio conversions or multiphase developments. PHAs slated for portfolio conversions and/or multiphase developments had yet to receive CHAPs for projects with about 50,000 units as of April 2016. When HUD awards CHAPs to these remaining properties, the number and percentage of PHAs that have converted all of their public housing to RAD will increase further. The 68 PHAs approved for portfolio conversions account for 19% of all PHAs in the RAD program, and 54% of all units. Ultimately, HUD estimates that about 58% of participating PHAs will convert all of their public housing to Section 8 through the RAD program (HUD, 2016a). Put differently, 75% of all properties in RAD involve PHAs that are converting their entire portfolios (Will Lavy, Senior Advisor, U.S. Department of Housing and Urban Development, Office of Recapitalization, interview, November 19, 2015).

11. In June 2016 the New York City Housing Authority added 21 projects with 5,000 units to the RAD wait list. In January 2017, HUD issued CHAPs for 17 of these projects, involving 1,700 units.

12. My analysis of project costs and funding differs from Mathematica, Inc.’s recent interim evaluation of RAD (Mathematica, Inc. 2016). Whereas I focus exclusively on projects that only include converted public housing units, Mathematica also included projects that contain additional units, whether subsidized by the LIHTC and other sources, or market-rate. As a result, Mathematica’s estimates of total and average project costs are higher. For example, Mathematica finds that the 185 projects that had closed by mid-October 2015 received an average of $129,000 in funding for construction, rehabilitation, and related costs. My analysis, covering 206 RAD-only projects that had closed by April 6, 2016, indicates that they received an average of $106,000 per unit.

13. Deferred development fees are often applied in underwriting affordable housing; rather than receive the fee at the time of the closing or at the completion of the project, the fee is paid over time from rental revenue.

14. The projects to close before the start of 2015 were also more likely to involve just one or two funding sources compared with projects that converted afterward, and tended to cost less per unit, and contain fewer units.

15. According to an administrator of the RAD program, some PHAs opt to address “the minimum need now,” financing this work with replacement reserves, and apply for tax credits in six or seven years when the property is in better shape and has a more stable funding stream” (Will Lavy, Senior Advisor, U.S. Department of Housing and Urban Development, Office of Recapitalization, interview, November 19, 2015). He also noted that it is not realistic to expect larger PHAs to obtain 9% tax credits for multiple RAD projects at the same time. Instead, they will apply for some projects now, and hold off on the others. These latter projects will receive less investment, and less in any debt financing, until the PHA obtains 9% tax credits for them (Will Lavy, Senior Advisor, U.S. Department of Housing and Urban Development, Office of Recapitalization, interview, November 19, 2015)

16. As noted earlier, HUD revised RAD selection criteria in 2015 to favor properties that are “physically or financially obsolete” or that are part of comprehensive neighborhood revitalization plans (HUD, 2015a). These new criteria will apply to properties currently on the RAD wait list or to new applications if Congress expands or lifts the cap on the number of RAD conversions.

17. This estimate was derived by multiplying the mean cost per unit for the properties that have closed by the total number of units in properties that have yet to complete the conversion process.

18. Some of the larger PHAs that have not participated in RAD include Boston, Massachusetts; Miami, Florida; San Antonio, Texas; and Detroit, Michigan