When he took over as secretary of the Department of Housing and Urban Development (HUD) in 2009, Shaun Donovan was determined to change the policies that had let our public housing stock—and the political will to support it—so badly atrophy. Its neglect was evident even if the need for it was less appreciated. By then a $26 billion backlog of needed capital repairs to the public housing stock had accumulated, effecting the demolition of over 10,000 units a year from the inventory over the previous decade. Yet as stock was lost, hundreds of thousands of the elderly, disabled, and eligible families continued to seek refuge in public housing, and still do today. Most wait on lists for years for apartments to open up, sometimes in long lines when they actually do. More than 270,000 families are on the waiting list of the New York City Housing Authority alone.
Secretary Donovan believed—along with many others before him, including the Millennial Housing Commission—that a different approach to funding public housing was needed. Given structural budget pressures, just beating the same drum in Congress for increases in enterprise-level funding for public housing’s operating and capital needs year after year wasn’t working. Instead, Donovan pushed to get housing authorities on the same playing field as every other form of affordable housing. He wanted them to be able to fully access private capital and other already-available public funding to maintain and improve their properties when needed. Plus, he insisted on offering public housing residents more options beyond public housing tenancy.
By the end of 2011, Donovan’s pushing, with key stakeholders pulling, resulted in Congress approving the Rental Assistance Demonstration, or RAD. Although it does not fully realize what HUD and stakeholders sought, as a start, RAD does afford housing authorities access to additional capital and offers residents expanded housing choices in the bargain that Donovan sought.
Promising Start
Rolled out in an initial notice in March 2012, with additional authority granted by Congress in early 2015, RAD has enabled housing authorities to convert public housing operating and capital funds to long-term Sec. 8 contracts—no additional funds were appropriated—as the means to generate additional financing resources. As some of the demonstration’s initial applications were given final approval and went to closing within a year’s time, RAD has been effectively at work for three years, we can begin to see how RAD is measuring up to its original charge:
· Housing authorities are readily using RAD—and reasonably quickly. The 185,000 units of available authority—available to approximately 15% of the public housing stock—for converting public housing funds to Sec. 8 contracts has been completely allocated, and the queue is building. What’s more, housing authorities have already closed on financing—many with the array of debt and low-income housing tax credits (LIHTCs) typical of other affordable housing projects—for nearly 30,000 units across 273 projects. This is roughly a 16% sample of RAD’s current authority, and these projects closed at a relatively strong pace, considering that other affordable housing projects take more than a few years to get to closing and that any new initiative must align itself to established financing processes and timelines.
· Cost-neutral RAD Sec. 8 contracts are leveraging substantial debt and equity. Already, over $2 billion in new capital has been raised for hard-cost improvements, net of other soft costs. Extrapolated to all 185,000 units of RAD authority, over $12 billion in capital funding for construction could be potentially generated. Even if less than the extrapolated amount, RAD’s ability to generate billions in new capital resources from only currently available subsidies is beginning to make a sizeable dent in public housing’s capital backlog. By this primary yardstick, RAD is evidencing a remarkable proof of concept.
· Nearly all rehabs are energy efficient. Beyond addressing deferred needs, RAD is also affording housing authorities the ability to make energy-saving improvements in both older properties and new construction of replacement housing. Whether undertaken as part of an initial construction project or addressed more gradually through budgeted reserves, state-of-the art energy improvements help agency and resident budgets along with the environment.
· Even no rehab assures better stewardship of public assets. RAD enables housing authorities to be more proactive stewards of their housing assets well into the future. Over one-third of RAD conversions to date have not required immediate financing. Yet long-term, renewable Sec. 8 contracts require—and for the first time provide agencies the resources—to properly maintain and budget for long-term replacement reserves. They can plan when to recapitalize and upgrade their properties when it makes the most sense. Fewer properties will likely suffer from year-to-year neglect owing to limited capital funds, accumulate capital repair backlogs, and ultimately be lost to demolition. While RAD’s limited scope and resources can’t cure all of what ails the aging public housing stock, it seems to be delivering a strong ounce of prevention.
· Residents seem pleased with refurbished and new units. After enduring years of deferred maintenance, deteriorating apartments, forced relocation due to property triaging and demolition, and/or long waits for hoped-for improvement programs that didn’t materialize, residents seem mostly delighted with the first trickle of newly renovated apartments coming on line under RAD. Although anecdotal so far, resident comments in HUD-compiled case study interviews range from some who were naturally nervous about moving to different locations being thrilled with their new units and property amenities, to those marveling at new kitchens and bathrooms, and excited children writing thank you letters to their housing authorities about their new homes.
· And if residents become less pleased, they have more options. If residents in RAD-converted properties prove unsatisfied or simply need to move for any reason—perhaps for a job opportunity or better school choices—they can do so by requesting a Housing Choice Voucher to move elsewhere after one or two years of tenure. While funding was not available to make this so-called “choice-mobility” provision more manageable for administering agencies, it for the first time affords public housing residents a viable affordable housing option beyond the confines of their current public housing.
· RAD makes better use of available resources. Beyond its statutory requirement to rely only on the current levels of public housing operating and capital funds when converting to Sec. 8 contracts, three in 10 RAD conversions are tapping 4% LIHTCs and tax-exempt bond authority that is not fully used each year in nearly every state. An increasing number of 4% LIHTC transactions are in the pipeline. Plus, over 15% of all transactions are using Federal Housing Administration (FHA) insurance to enhance their financing, which prior to RAD, housing authorities used hardly at all. Making better use of public funding already on the table to help preserve much needed housing is of likely interest to policymakers of all stripes.
Lingering Questions
Although RAD is showing considerable evidence about what it can do, there is some continuing confusion about what it actually does and does not require—largely among those not actively implementing RAD or living in housing converted under it.
One thing RAD does not require is “privatizing” public housing. Housing authorities must retain ownership or control over RAD-converted housing in perpetuity—unless there is a foreclosure action. In this unlikely event, ownership must first be offered to another public entity.
Yet in conjunction with a RAD conversion of assistance, many housing authorities do opt to use LIHTCs to generate needed equity capital. When doing so, a limited-liability partnership (LLP) must be formed for a 15-year period to “own” and be responsible for improvements and operations of the property to claim annual tax benefits. This legally necessitates an interested housing authority to convey or “sell” the building—but typically not the land—to the LLP. When undertaken with RAD, the agency is required to take an ownership position or otherwise maintain control over a property through the life of the LLP and beyond. When the LLP terminates, an agency can exercise its ownership or controlling interest to re-assume full ownership of the property, or it may choose to seek needed additional investment under a new LLP structure—assuming the LIHTC or similar benefits are available to potential investors at that time. Nonprofit and for-profit owners of affordable housing—and many housing authorities using HUD’s Mixed-Finance Program for many years—have routinely used the LLP structure and such control measures to generate needed equity investments and retain ownership control over the property long-term. RAD merely makes accessing LIHTCs simpler and less costly for interested agencies while assuring long-term public stewardship over public assets.
RAD also does not require participating housing authorities to “privatize” property management or other staff in favor of capable agency personnel. Most conversions of assistance under RAD continue to rely on current PHA staffing, accommodating labor or other personnel agreements that may be in place. And when housing authorities opt to participate in tax credit LLPs with private development and management partners, more often than not, such partners look first to continue to engage the agencies’ already-in-place management and site staff. They are the most experienced in running the property and working with residents. They afford seamless operating capacity at a site even if they require training on transitioning from public housing systems and processes to the Sec. 8-based operating platform.
At the same time, transitioning agency staff will be expected to perform to “market” or comparable standards of other surrounding housing—managing the property to budget, meeting leasing and occupancy targets, providing responsive maintenance, and coordinating resident supports common to other LIHTC-supported multifamily properties. If a property is poorly managed under a LLP structure, investors and other partners can face substantial tax-related and economic losses. So typically a housing authority’s site team will be expected to demonstrate a solid record or strong potential in managing the property to needed standards. Failing this, the agency’s partners will likely insist on alternative property management or other staffing arrangements.
Continuing to rely on public employees or introducing private property management under a tax credit partnership formed to generate funding needed to preserve “public” housing assets is a reasonable policy debate. But there is no question that when thousands of deteriorated public housing units are demolished each year, site-based jobs are permanently lost. By generating investments to preserve and improve—rather than lose—public housing, tax credit partnerships used in conjunction with RAD actually help to also preserve and grow jobs. According to standard multipliers, every $1 million of construction activity in affordable housing generates an estimated 20 jobs in a local economy. With more than $2 billion in construction funding for RAD projects already circulating in local economies, 40,000 new jobs are in the works. If RAD continues to generate this level of construction funding across all 185,000 units of its current authority, it could potentially create nearly a quarter-of-a million jobs in a matter of a few years. That’s quite an economic stimulus effect—all at no additional public cost.
Another misconception about RAD is that it allows housing authority owners or their partners in tax credit LLPs the ability to “opt out” of a Sec. 8 contract at the end of its initial 15- or 20-year term, as has been the case under some multifamily-assisted housing programs. However, RAD Sec. 8 contracts must be renewed at the end of their initial term, along with companion-use restrictions. Unlike conventional public housing use agreements that can expire after an initial 30-year period if no additional federal funds have been applied to a property, RAD’s use agreements and Sec. 8 funding are perpetually renewable.
Finally, RAD does not seem to be “creaming” the public housing inventory as some vocal but perhaps not fully informed skeptics have claimed. While about one-third of housing authorities have RAD rents at or above their local fair market rents (FMRs), two-thirds don’t. Regardless of RAD-to-FMR rent margins, agencies are nimbly using long-term Sec. 8 contracts to fill in gaps and meet deeper capital needs even in high-cost markets. More than half of all RAD projects closed to date have involved capital repairs of greater than $25,000 per unit.
With considerable leadership from Mayor Edwin Lee and his Office of Housing, the San Francisco Housing Authority is preserving nearly all of its aging public housing inventory that was not recently rebuilt, using RAD and other public housing resources to leverage $1 billion in private capital along with a reasonable measure of local funds. Likewise, the Cambridge Housing Authority in Massachusetts is preserving its entire 2,129-unit inventory with smart and replicable financing that taps 4% LIHTC acquisition and rehab credits with tax-exempt bonds. The Housing Authority of the City of El Paso impressively knit together tax-exempt bonds and 4% LIHTCs as well as applied 9% LIHTCs where most needed in an effort to preserve and replace 6,100 units of its public housing. Plus, RAD is enabling other agencies to replace obsolete or highly deteriorated housing with newly constructed housing—both on and off-site to reduce densities and transfer RAD operating subsidies to developments in better neighborhoods. About 17% of RAD transactions closed to date are new construction. These results suggest less creaming and more elasticity and creativity to RAD in practice than perhaps could have been imagined in policy analysis.
Challenges and Prospects Ahead
So far, RAD seems to be measuring up to Congress’s main charge—generating additional funding for public housing to help take down its capital backlog and preserve stock without additional public funding—all while not allowing any further diminishment of the inventory or displacement of residents in the process. These are no small feats, particularly when compared with the HOPE VI program, which poured billions of additional public funds into public housing yet regrettably resulted in too many residents being displaced and an unacceptable reduction in the public housing inventory.
Yet RAD is by no means a magic bullet or a perfect program. It requires additional or better-aligned HUD subsidies to address higher-cost projects and make its choice-mobility option truly viable for residents. Temporary construction-related relocation will inconvenience residents beyond what is reasonable. There have been and will continue to be start-up and processing bottlenecks and delays along the way. Housing authorities must retrain staff to new budgets, systems, and reporting processes under RAD.
A few policy and program steps can be taken to even out inevitable bumps and make RAD an even more promising demonstration. Some helpful additional actions would include:
· Eliminate the RAD cap. The initial 60,000-unit cap on public housing conversions under RAD, the subsequent buildup of 125,000 units on a waiting list with an uncertain fate, the increase of the cap to 185,000 units to accommodate only those on the initial waiting list, and a subsequent buildup of another queue with an equally unclear fate are not the ways to run a true demonstration. It forces housing authorities to execute RAD within arbitrarily constricted and unrealistic development timeframes rather than allowing them to prudently plan and sequence improvements to their inventories over a reasonable time horizon. It unnecessarily bunches up and then sputters the demand for LIHTCs and other affordable housing capital funds that are typically rationed out in annual funding cycles—along with having to quickly ratchet up, then unpredictably and inefficiently wind down needed internal capacity and that of transactional partners, which may soon be required to be ratcheted up again. It also needlessly raises the hopes of residents waiting for their apartments to be repaired or replaced, then either dashes them again like other promised HUD programs or requires them to accommodate hurried construction-related relocation schedules.
All of this is beginning to affect an uncertainty fatigue among housing authorities and their partners. It is understandably discouraging agencies from submitting applications into a queue that could be prolonged once again, or lead to nothing. In response, current HUD secretary Julian Castro has called for eliminating the RAD cap and its circumscribed timelines so that housing authorities and their partners can appropriately plan and pursue RAD conversions according to a reasonably sequenced development schedule. Secretary Castro’s call should be heeded, rather than calls by some to see how RAD fares longer term before eliminating the cap. Without RAD, we have more than enough long-term proof that desperately needed affordable housing will continue to be lost and residents with few other housing options will be hurt.
· Allow the demonstration to demonstrate. Despite having dedicated HUD’s new Recapitalization Office within Multifamily Housing to process RAD conversions of assistance to project-based Sec. 8 contracts and systems—and having built up considerable and able capacity within it for the job—many housing authorities, their partners, and counsel report moving approved RAD applications through to final approval and closing to be a time-consuming labyrinth of multi-office reviews, questionable paper work, and check-offs. HUD’s public housing office reportedly now subjects RAD transactions to 20-point public housing risk analysis before completing its role in RAD-subsidy conversions. Different HUD offices have important inter-office support roles to play in helping establish mechanisms to convert one subsidy system to another under RAD. But the demonstration’s potential cannot be fully realized if multiple HUD offices continue to review RAD transactions through long-established intra-office lenses and processes devised for non-RAD purposes.
Congress prescribed fairly detailed basic requirements for RAD but then clearly charged HUD with making it a flexible demonstration. It allowed HUD considerable waiver authority to cut through bureaucratic rules and regulations in charting a new path for public housing. RAD is guided by a thorough implementing notice that has been revised to make needed changes along the way, which required official clearance by major HUD offices and the Office of Management and Budget each time it was revised. Moreover, an underlying principal of RAD was to allow individual transactions to be subjected to the rigorous scrutiny and underwriting of investors and public and private lenders participating—and assuming a fair measure of risk—in a RAD project, much in the way that they do in other affordable housing transactions.
These measures should allow HUD’s Recap Office to devise and manage a crisp internal review and decision-making process for RAD transactions—ideally one guided by a multi-point “demonstration” analysis. Unforeseen policy issues may require other offices to be re-engaged beyond this process when needed. But RAD transactions proceeding according to already-prescribed notice requirements and reviews should not.
· Smartly deploy other available resources. Building on what it was able to facilitate in San Francisco, Cambridge, and El Paso, HUD should continue to advance ways to combine RAD with other HUD resources to help housing authorities with older, more-troubled properties with deeper capital needs, particularly in higher-cost markets. Until Congress finds a way to offer such agencies incremental subsidy assistance to offset their higher costs, too many housing authorities are precluded from using RAD as a good if not completely sufficient resource. One relatively doable step within reach—i.e., statutory authority exists and a governing notice is under active review—would be to better align the public housing Sec. 18 “Demo/Dispo” program to help recapitalize deeper-needs properties for housing authorities seeking to convert larger portfolios.
Sec. 18 enables agencies to demolish or dispose obsolete public housing properties, use disposition proceeds to develop other forms of affordable housing, and receive operating subsidies aligned to local market costs to help displaced tenants. Housing authorities can fuse such subsidies into current resources to support long-term Sec. 8 PBV contracts, which are similar to RAD-generated Sec. 8 PBV contracts, except that agencies can set rents relative to local market conditions, which are typically higher than allowed RAD rents. Currently, HUD makes the Sec. 18 program available mostly to housing authorities with properties that meet a somewhat opaque mathematical formula designed to measure physical obsolescence independent of other market factors—a policy and formula that many criticize. Too often, Sec. 18 is used to reduce the public housing inventory instead of helping to preserve it where and when it makes good sense to do so.
Although the Sec. 18 program works reasonably well with three or four HUD Choice Neighborhoods transactions each year, it could be better aligned in support of dozens of larger RAD portfolio transactions. Revised Sec. 18 criteria could prioritize deeper capital needs properties in large portfolios where it’s critical to replace troubled properties or take on higher cost rehab—similar to what was done in San Francisco—but also likely helpful in Seattle, Portland, Los Angeles, New York City, Boston, and some other higher-cost markets—where other properties in the portfolio are economically feasible to preserve using RAD. Or another Sec. 18 priority could be targeted to help redevelop larger, individual public housing developments that are troubled and not economically feasible under RAD. Applying Sec. 18 demolition or disposition actions to such properties would enable them to be replaced in neighborhoods of opportunity or local revitalization areas, while RAD could be used where feasible on other area properties under a concerted strategy.
· Support residents in using RAD’s mobility provisions. RAD’s transfer of assistance and new “choice-mobility” provisions afford public housing residents new housing choices, particularly as housing authorities try to deconcentrate overly dense developments or multiple projects in a defined area. These provisions can be used to help residents move to “neighborhoods of opportunity” or access employment or educational opportunities of their own making for their families in other communities. Here is a perfect chance for national and local philanthropy to assure continued or offer new funding to organizations that offer mobility counseling, relocation assistance, and other supports to families and individuals opting to take advantage of these new policies. Mobility studies show that low-income residents transitioning to new communities—and schools, churches, and service agencies—fare much better with well-planned and responsive mobility supports.
Building on a solid start three years in, with an additional policy push or two by Congress in the year ahead, and a continued record of responsive implementation, RAD promises to go well beyond its original statutory charge of generating additional capital to preserve and improve a modest amount of public housing. It could well become a true demonstration of what can result when HUD—or any federal agency for that matter—leads with vision, minds what works, and is given the freedom to bend what hasn’t to a better standard. That standard may well become the accepted practice.
Patrick Costigan was formerly a senior adviser to HUD secretary Shaun Donovan charged with getting RAD launched. He is a principal in CF Housing Group and serves as a strategic adviser to the RAD Collaborative.