As public housing authorities (PHAs) move to tap new resources to build and rehabilitate housing, they are creating new competition for private developers, but they also offer opportunities for collaboration in addressing the large unmet need for rehabbing and replacing their aging apartments.

Despite cuts in their federal capital and operating funds, PHAs still enjoy a steady flow of federal support, not to mention their control over federal housing vouchers and land holdings as well as access to the tax-exempt bond market.

A relatively small number of pioneering PHAs are actively seeking private-sector partners, particularly those with strong balance sheets who can help get private financing. They are using bonds, federal low-income housing tax credits, and other tools to rehab or redevelop their ailing public housing.

It appears that there is a large untapped need for PHAs to take on such projects. The public housing stock is generally very old, and only a handful of the nation?s 3,400 agencies have done so-called mixed-finance deals that involve some public housing units and their accompanying subsidies as well as non-public housing units with other subsidies (like tax credits) and private investors. In its fiscal 2007 budget, the Department of Housing and Urban Development (HUD) reported that only 126 PHAs are currently utilizing its Capital Fund Financing Program (CFFP). The CFFP allows them to borrow from banks or issue bonds using future Capital Fund grants as collateral or debt service, and along with housing vouchers is one of their primary housing subsidy tools.

Progress has been slow, largely because HUD is making a lot of decisions about such deals on an ad hoc basis, without formal guidelines or regulations, but with fairly detailed and time-consuming reviews of each proposed deal, according to Sunia Zaterman, executive director of the Council of Large Public Housing Authorities. For example, HUD has yet to issue several key rules governing the use of capital funds or operating subsidies in mixed-finance projects.

PHAs do not want HUD to issue highly specific regulations. What they do want are ?safe harbor? guidelines that give PHAs and private investors some assurance that they could move forward with a project meeting certain general guidelines without getting HUD?s approval in advance, Zaterman said. While the largest PHAs in cities with strong markets have the staff and experience to contend with HUD?s review process, smaller PHAs do not, Zaterman said. For them to be able to tap mixed-finance methods, HUD must make transactions easier and cheaper to do, with less review time.

Another concern is reduced funding for Capital Fund Grants, HUD?s primary pot of money for repairs, major replacements, upgrading, and other non-routine maintenance. In fiscal 2002, it was funded at $2.84 billion. The figure shrank to $2.46 billion in fiscal 2006. For fiscal 2007, at press time, the figure stood at $2.18 billion.

The National Association of Housing and Redevelopment Officials estimated that $4.5 billion per year is needed for such work.

Progress on public-private collaborations has also been slow because it involves government bureaucrats at desks in Washington trying to direct how PHAs interact with private lenders, investors, and developers in the fast-moving private real estate markets.

For example, HUD?s Office of Inspector General has made repeated findings of misuse and/or misallocation of public housing funds by local agencies, according to Housing Update, a newsletter published by Washington, D.C., law firm Pepper Hamilton, LLP.

These findings are often based on ?outdated authority as well as misunderstanding and misapplication of both the law and basic cost accounting principles by OIG auditors,? according to Housing Update.

HUD regulators also have trouble understanding private markets. Initial drafts of guidance on PHA use of affiliated entities for mixed-finance deals ?indicated a substantial misunderstanding of how public/private private partnerships actually operate,? according to the law firm.

?If read narrowly, [the policy could appear as] a proposal to smother any spark of combined public/private initiative with absolute application of broad public housing regulations to every development activity that might show any tenuous connect with a local PHA.?

On the other hand, regional HUD offices have a fair amount of discretion, and some of them understand the needs of PHAs.

And even HUD headquarters appears to be moving ever so slowly in the right direction, some believe. Later drafts of the requirements for affiliated entities were much improved, the Pepper Hamilton newsletter added. On Dec. 27, HUD issued a proposed rule to ease up on the amount of paperwork PHAs must submit with mixed finance project proposals.

Surviving without HOPE VI

The biggest challenge for PHAs with large projects in need of redevelopment is the lack of HOPE VI funding. After losing out in the competition for a shrinking pot of HOPE VI funds, the San Francisco Housing Authority (SFHA) turned to The John Stewart Co. to help it redevelop the Hunter?s View project.

SFHA Executive Director Gregg Fortner calls it HOPE for San Francisco. ?HOPE originally stood for Housing Opportunities for People Everywhere, and that?s what we want to provide,? he said.

Fortner and Stewart both recognize that the project will take many years to come together because of the difficulty in finding funds to cover the predevelopment costs that are not possible to finance with a loan, costs that might have been covered by a HOPE VI grant if one were available.

To fill the gap, Stewart has landed a $2 million program-related investment and $200,000 grant from the Ford Foundation and substantially smaller commitments from the Fannie Mae Foundation and others. Stewart hopes to get at least 12 foundations on board.

With that soft money, plus a predevelopment loan from the San Francisco Mayor?s Office of Housing, the goal is to use tax-exempt bonds with 4 percent tax credits to finance the rental component.

Another key element is to use the profits from the sale of a for-sale housing component to help finance the entire project. Stewart, a rental housing developer and manager, is looking for a partner for that part of the program.

Many PHAs are diversifying into affordable housing ventures that are independent of the public housing program. Some are even taking existing public housing out of the program.

A key motivation is to increase the percentage of their portfolios that are not dependent on HUD operating subsidies and not subject to public housing rules.

?We?re not in any kind of financial crisis because we diversified,? said Perry O?Malley, executive director of Carbon County Housing Authority in Lehighton, Pa. The authority, which manages 500 public housing apartments, is rapidly growing its business and has developed about 300 new units of affordable housing in the last five years alone. Most of these were financed with 9 percent low-income housing tax credits, but the authority has also developed 10 supportive-housing apartments using the federal McKinney-Vento program and is now closing the financing to preserve 52 units of aging, privately owned affordable housing using tax-exempt bond financing and 4 percent tax credits.

The San Diego Housing Commission is developing a plan to provide Sec. 8 vouchers for tenants in its 1,366 public housing units and to convert them to non-federal affordable housing.

The commission reported that recent cuts in its capital funding and operating funding from HUD are just too big to allow continued operation of the apartments as public housing. The idea is that after tenants with vouchers vacate units, they would be rented to people earning as much as 80 percent of median income, and the housing could become self-supporting.