Evaluation of HUD’s Rental Assistance Demonstration (RAD): Interim Report

Evaluation of HUD’s Rental Assistance Demonstration (RAD): Interim Report

Congress authorized the Rental Assistance Demonstration (RAD)in 2012 to stem the potential loss of public housing and other subsidized housing units because of the growing backlog of unfunded capital needs. RAD is a voluntary program that allows public housing agencies (PHAs) to convert public housing properties to project-based Section 8 contracts — either project-based vouchers or project-based rental assistance. RAD is aimed at providing PHAs with a more predictable long-term annual funding stream by converting these properties to the Section 8 program. This should, in turn, allow PHAs to leverage external sources of capital to pay for rehabilitation costs or create capital reserves to ensure that a property remains financially and physically viable. HUD has contracted for a 5-year evaluation of RAD to determine whether this novel approach to improving assisted housing is addressing capital needs, whether it is physically and financially stabilizing properties, and how the program affects tenants living in converting properties.

On September 21, 2016, HUD published the interim report on the first phase of the evaluation of RAD. The interim report documented some important observations so far:

• RAD has been successful at helping sites leverage external resources.
• RAD is being used in numerous ways, such as for moderate rehabilitation, new construction, and conversion of properties to Section 8 contracts with little or no rehabilitation.
• An in-depth look at four RAD project pro formas makes a compelling case for long-term budget stability and improvement.

Interim Findings

The report describes the success properties have had raising funds for RAD conversions. By October 2015, 185 projects had converted 19,255 public housing units to project-based Section 8 contracts. These projects raised $2.2 billion of funding from external sources on top of $250 million from internal public housing resources for a total leverage ratio of roughly 9:1.

The ways in which RAD is being used vary considerably. Of the 185 projects that had closed, 62.7 percent will pursue some level of rehabilitation, and another 18.9 percent will pursue new construction. The remaining 18.4 percent do not plan to do major capital investment upon conversion.

To see whether certain types of projects are more likely to use RAD, the report compares RAD-converting properties with nonparticipating properties.

• First, the report compares PHAs participating in RAD with those that are not. Interestingly, medium and large PHAs are more likely to participate in RAD, but small PHAs are more likely to convert a larger portion of their portfolios.
• Among PHAs participating in RAD, many have chosen to convert some of their properties but not others. The following variables appear to increase the likelihood that a project will be submitted for RAD conversion: a lower median household income for residents of the development, a lower poverty rate in the surrounding neighborhood, and a stronger financial position of the development (higher per-unit operating funds and lower per-unit operating expenses).
• Finally, of the projects selected to be converted, it is likely that only some will be able to complete the conversion process in a timely manner. There were 278 projects that received Commitments to Enter into Housing Assistance Payments Contracts, or CHAPs, by the end of 2013. Of those, 130 had finished conversion by October 2015, whereas 148 had not closed by that date despite having sufficient time for even the most complicated financial strategies. The following factors increased the likelihood that a project would reach closing by October 2015: higher scores on Real Estate Assessment Center physical inspections; converting to project-based voucher contracts rather than project-based rental assistance contracts; not converting as part of a portfolio application, in which a single award is used to convert multiple projects; more total financing and any use of 9 percent LIHTC; and a lower reliance on 4 percent LIHTC and mortgage debt (as a percentage of total financing).

Researchers surveyed both participating and nonparticipating PHAs From these interviews, we learned the following:

• Of the respondents from PHAs participating in RAD, 100 percent said they would use RAD again if given the opportunity.
• Many PHAs participating in RAD expressed a preference for Section 8 contracts over public housing. They believe that Section 8 has less burdensome regulatory and administrative requirements, allows them to streamline operations, and will provide more stable long-term funding.
• Some PHAs participating in RAD complained that RAD contract rents would be inadequate to support the capital needs of a development that they would like to convert if the contract rents were higher. PHAs also noted that RAD can have significant startup costs, and the lack of dedicated funding to shoulder the administrative burden of conversion is a challenge.
• PHAs not participating in RAD gave several reasons for not doing so, including the fact that RAD contract rents would not be sufficient, uncertainty because of the program’s status as a demonstration program, the complexity of the program, and concerns that it would threaten their operations (such as by eroding their tenant base or undermining their control over their housing).

The report presents four case studies of actual RAD projects and compares their project financing plans to hypothetical alternatives that attempt to achieve the same redevelopment scope without RAD. The case studies examine both the development budget and the long-term operating pro forma in detail. The analysis illustrates the significant promise that RAD offers:

• Even when a RAD project pursues minimal construction or rehabilitation, RAD can have a considerable impact on long-term financial stability. RAD contract rents are projected to increase 2 percent annually due to the operating cost adjustment factor, whereas public housing funds (operating and capital funds) are assumed to decline by 1 percent annually. In the case of the 197-unit nonfinancial transaction, this results in the RAD project accruing an additional $7.6 million ($38,562 per unit) over the course of 20 years compared with a non-RAD counterfactual.
• In the other three case studies (all “financial transactions” involving a combination of mortgage debt, LIHTC, and gap financing), RAD helps to leverage significant funding for upfront capital investments. The hypothetical scenarios generally assume grants and “soft money” to fill the void of financing enabled by RAD; and yet, even accounting for debt service payments that RAD developments must pay, the financial outlook of these three projects is better under RAD than under the alternative scenario.

Summary, Progress and Next Steps

The interim report demonstrates that the RAD program has been successfully applied to a range of existing public housing properties nationwide, and PHAs have taken advantage of outside financing sources to meet their growing need for capital improvements. Participating PHAs point to the program’s ability to leverage funding that can be used to improve and preserve public housing units. PHAs that chose not to participate in RAD commonly cited concerns about debt financing, a lack of projects in their portfolios with capital needs, and limited staff capacity.

The interim report analyzed data through October 2015. Since then, the RAD program has continued to convert public housing units. As of September 2016, 359 projects have converted 39,042 public housing units through RAD. The final report, expected in December 2018, will offer a comprehensive assessment of RAD’s impact on physical and financial outcomes for participating properties as well as an analysis of the effects of RAD conversion on tenants.