A Variety of Options: Local Authorities Enjoy Flexibilities as They Revitalize Public Housing Under RAD Program

6 min read

In Cuyahoga County, Ohio, Seattle, Wash., and many other communities across the nation, more and more local housing authorities are deciding that the best way to revitalize their aging, obsolete public housing properties is to transform them through the new federal Rental Assistance Demonstration (RAD) program, which also provides opportunities for private developers.

Under one component of the program, public housing authorities can apply to the U.S. Department of Housing and Urban Development to “convert” public housing units to a different form of affordable rental housing. To do so, they elect to forgo the future receipt of public housing and operating subsidies for a certain number of public housing units, and instead receive HUD commitments for long-term Section 8 contracts, providing long-term project-based vouchers or rental assistance for the same number of units.

RAD enables PHAs to raise private and public capital to help finance the new developments, such as equity generated by 9% or 4% federal low-income housing tax credits, new mortgage debt, and gap funds.

In the next few months, the Cuyahoga Metropolitan Housing Authority (CMHA) expects to close RAD transactions to convert and renovate or replace several public housing properties.

At Bohn Tower, in downtown Cleveland, the authority will act as the lead developer to convert and renovate the 264-unit public housing property, a 22-story high-rise for seniors completed in 1972, fixing up the exterior and upgrading the apartments and the lobby.

Meanwhile, CMHA is partnering with two private developers, Pittsburgh, Pa.-based Ralph A. Falbo, Inc. and Philadelphia, Pa.-based Pennrose Properties, to develop Heritage View Homes IV, a 60-unit apartment community that will be the latest phase in the replacement of the former 668-unit Garden Valley Estates, a public housing community for families. Part of the funding mix is equity generated by federal housing tax credits.

As of May 31, CMHA had received HUD awards for 1,317 RAD units on which the rents are to be subsidized by project-based rental assistance.

Flexible Role for PHAs

RAD projects can take many forms. “You can do a RAD transaction that is just a rehab, or tear down and rebuild, or move residents and subsidy from one building to another,” says Tom Davis, Senior Vice President at Recap Real Estate Advisors, a Boston-based real estate services firm.

Indeed, public housing properties can be renovated or replaced with new construction located on the same site or at one or more different sites, and RAD units can be part of a larger affordable or mixed-income development, perhaps even including market-rate apartments.

The program gives PHAs the flexibility to act at their own developer or to partner with private developers.

“We can decide how involved we want to be [in RAD],” states CEO Jeffery Patterson of CMHA, a large housing authority with substantial development experience, including using housing credits.

Some PHAs, such as the Seattle Housing Authority, have decided to develop RAD projects without private partners because they possess in-house staff capacity and have prior development experience.

In addition, some authorities may not use a private partner because the property only needs minor repairs or renovations, or the transformation at the property is largely financial.

Many housing authorities, though, seek to partner with a private developer on RAD transactions. For developers eager to partner with a PHA on a RAD deal, the first and most important step is to understand the housing authority’s long-term goals and how a partnership might help it achieve those goals.

There are various reasons why a housing authority may want a developer partner.

A PHA might lack development experience or capacity, simply wish to outsource the tasks of applying for tax credits and managing construction, or have only one or two properties it wishes to convert under RAD.

“They may not want to invest that effort for a discrete number of projects,” says Recap’s Davis.

Some PHAs may partner with private developers because of a massive number of planned RAD transactions. The San Francisco Housing Authority, for instance, has chosen a dozen development partners to help it put 29 public housing properties through RAD transactions.

“The housing authority doesn’t have the bandwidth or the experience to redevelop 3,500 housing units,” says Olson Lee, Director of the Mayor’s Office of Housing.

Strong development partners can help San Francisco’s RAD transactions access capital as the housing authority recovers from its designation by HUD as a troubled housing agency.

Strong private partners can benefit PHAs in RAD deals with their financial strength, to help satisfy the requirements of tax credit syndicators and investors and lenders regarding construction guarantees and net worth and liquidity. According to Davis, housing authorities can’t use public housing resources to back up guarantees.

Choosing a Partner

Most housing authorities use a formal process to choose a developer partner, issuing a request for proposals with detailed information on the property’s needs and the subsidy available. PHAs choose development partners based largely on such factors as the developer’s experience, track record, and financial capacity.

Private developers aren’t shy about contacting housing authorities.

“Our developer community is aware of the RAD applicants in the queue and are reaching out to them,” says Donna Duarte, Director of Program Compliance at the Tennessee Housing Development Agency, which allocates housing tax credits.

Development partners should be nimble enough to navigate the intricacies of the RAD program and satisfy all of the requirements of HUD, capital providers, and subsidy programs.

Relationship with Residents

Housing authorities must also earn the trust of public housing residents throughout the revitalization process.

“RAD includes a lot more protections for residents than HOPE VI,” Davis explains. “It’s designed so that the residents are not adversely impacted – that’s a core principal.”

If the housing authority plans to outsource property management of the RAD development after it is completed, the management company must establish trust with residents and learn the rules governing its relationship with public housing tenants.

Changing Role of Housing Authorities

In addition to changing the nature of public housing, RAD is transforming the role – and revenue sources – of PHAs.

A RAD transaction ends a PHA’s stream of public housing subsidies for a property, but enables the new development to rely on a more reliable subsidy in the form of project-based vouchers or rental assistance. The housing authority earns fees from administration of the RAD project-based vouchers that it provides. It also collects a fee for managing the property if it does so, and a development fee (or a share of one) if it acts as the developer or co-developer.

Many small and mid-sized housing authorities are putting their entire public housing portfolios through the RAD program, preparing for a new role in the affordable housing field: They are taking a more entrepreneurial bent, being less of a landlord in many cases, and carving out new revenue streams to fund their future operations.

“RAD has a huge financial impact on housing authorities,” says Washington, D.C. attorney Sharon Wilson Géno, a partner at Ballard Spahr LLP. “They have to make sure they have sufficient revenue to keep the boat afloat.”