The BPC Housing Summit panel regarding HUD’s Rental Assistance Demonstration Program (RAD) was lively to say the least. I was fortunate to be able to discuss with some very esteemed colleagues – Michael Pitchford, Renee Glover, Pat Costigan, Hunter Cushing, Rick Gentry and George Weidenfeller – the benefits of and challenges still facing the RAD program.
Relatively few RAD deals have closed to date (about 5,000 units), so there is not yet extensive data, but so far, it seems RAD works most easily for developments that have relatively high capital and operating subsidies compared to capital needs of the property. By “successful” I generally mean deals where there is not great difficulty leveraging the private funds needed to address all of the outstanding capital needs. We have seen successful RAD deals in all geographic regions of the country, in different sized developments, and in different real estate markets. As many of the RAD transactions are leveraging the Low Income Housing Tax Credit (LIHTC), some of the same indicia of a solid tax credit deal are also the things to look for in a solid RAD transaction – (1) good real estate market fundamentals; (2) sufficient subsidy to pay any debt; (3) not a lot of layers of funding; and (4) a quality project sponsor and property manager. In addition, projects that need debt and very clearly qualify for FHA financing under the section 223(f) or 221(d) (4) programs are also good candidates. That being said, coordinating some of those funding sources that make deals “strong” also presents some of greatest challenges in bringing the projects to close, including the timing of LIHTC allocations, FHA Firm Commitments, RAD RCC Issuance, and locking interest rates.
Challenged RAD deals are those that generally older, sometimes larger in size and have significant capital needs, are in markets where the cost of construction is high and the operating and capital subsidy for the properties is significantly below the fair market rent that would be paid with a traditional Section 8 subsidy. In those cases, the subsidy is not sufficient to leverage the private funds needed to make all of the repairs, so the project sponsor must seek additional funding sources and there are not too many places to go anymore. The more sources, the more challenging it can be to make the deal work.
To its credit, HUD has tried very hard to identify and proactively address challenges in the RAD program. Like any experiment or demonstration program, it is sometimes a bit of a bumpy ride at first. HUD has tried very hard to make the documentation simple and has addressed the concerns of lenders and investors. Although it recently issued a notice regarding the relocation and the right of residents to return, being sure that those statutory requirements are met in every RAD deal will continue to be one aspect of the program that HUD will be working on. Some residents are not yet confident that RAD will ensure that public housing residents can remain in their homes. There is still much work to do in that area. HUD has also worked out some thorny issues with lenders and investors around their rights in the event of default and foreclosure. These steps provide some guidance but still contain some unknown elements. Another challenge is the continued effort to be sure that the FHA programs are sufficiently flexible so that they can be an effective tool for RAD, without creating undue risk to the FHA program. This is a difficult balance.
There are also other more process-related challenges within the Department. RAD was conceived and initially implemented under Secretary Donavan’s leadership. With his departure and those of several other senior level HUD staff who helped develop the program, it will be a challenge for the Department to continue to keep the momentum going. HUD is still testing its new process for processing RAD approvals that include FHA in a predictable and timely way. Again, to its credit, HUD clearly recognizes that in order for the program to succeed, it needs credibility with the private market.
Despite all of the challenges, as our panel discussed, RAD provides a tool, but maybe not the only tool, to protect and preserve the homes of the nearly 3 million people who call public housing home. Unfortunately, the biggest challenge of all – lack of sufficient Congressional appropriations to pay for needed repairs – remains the overarching and biggest challenge to RAD. RAD facilitates the private sector’s ability to be a partner with the government to help fulfill its responsibilities to these families, but it is not a substitute for appropriate funding levels. Given the current budget environment, perhaps the biggest challenge for RAD will be to ensure that the message that the RAD program cannot succeed without sufficient on-going appropriations is not lost.
Sharon Wilson Géno is a partner at Ballard Spahr, LLP.