The Rental Assistance Demonstration (RAD) is inching close to hitting its cap under the program’s first component involving public housing and Sec. 8 Moderate-Rehab properties.
Approximately 57,000 of these units have received initial reservations for the program as of Dec. 31, just 3,000 units short of the program’s limit.
The Department of Housing and Urban Development (HUD) has authority for 60,000 units to take part in the first component. The agency has received applications for more than 176,000 units to convert to long-term Sec. 8 rental assistance contracts under the program.
HUD officials have been seeking to lift the cap, but that has yet to happen. The recently approved fiscal 2014 budget failed to increase authority for this part of RAD.
The second program component allows Rent Supplement, Rental Assistance Payment, and Mod-Rehab properties to convert tenant-based vouchers to project-based assistance. These platforms have been known as the “orphan” rental assistance programs because they have not benefitted from the usual renewal provisions of expiring project-based Sec. 8 contracts and have been unable to take advantage of a normal recapitalization cycle.
As of the end of 2013, HUD provided approvals to 75 projects with more than 8,300 units under the second component
The program has been extended through Dec. 31, 2014, and HUD expects to release guidance on how to submit new second component requests under the extended authority.
Michael Bodaken, president of the National Housing Trust/Enterprise Preservation Corp., is encouraged by RAD. But, at the same time, he and others recognize that new RAD deals are one more group searching for limited financing.
“We’re seeing more and more RAD deals coming into the system and seeking either 9 percent or 4 percent housing tax credits,” Bodaken says. “There’s at least some additional pressure on housing finance agencies to figure out which preservation deals to fund. To the extent RAD transactions can use 4 percent credits, there is less pressure on HFAs to use already scarce 9 percent competitive funds for the preservation of public housing.”
Of the first component projects using low-income housing tax credits (LIHTCs), about 72 percent will use 4 percent credits and 28 percent will use 9 percent credits, according to the latest HUD update.
Understanding the environment
In this budget-constrained age, there’s more rigorous examination of rent levels, says Stephen Whyte, managing director of Vitus.
With HUD acting cautiously, developers can’t be assumptive about rent levels. They must work proactively to introduce a project to HUD and not incur significant real estate risk before HUD has had its say in the deal.
When developers improve a property, they often seek an increase in rent. The difference between $1,000 per month rent and a $1,150 rent can be significant in shaping a deal, says Whyte. If HUD decides to study the request, it can also take time that a developer wasn’t expecting.
“It’s important for developers to be mindful of the regulatory environment,” Whyte says.
To finance several recent deals, Vitus turned to a bond structure that combines short-term cash-backed tax-exempt bonds with taxable loan sales.
Using a combination of short-term “cash-backed” tax-exempt bonds and taxable long-term loan sales can help projects using Federal Housing Administration (FHA) financing or certain Fannie Mae and Freddie Mac moderate-rehab loans reduce their all-in borrowing costs, and in the case of FHA-backed Sec. 221(d)(4) projects, potentially eliminate devastating construction period negative arbitrage, says Wade Norris, a partner at Eichner Norris & Neumann (ENN), a Washington, D.C.-based law firm specializing in bond financings.
The firm explored the structure during the financial crisis in 2008, and it has been used on approximately 75 to 100 deals since then, according to Norris, who estimates that a strong majority have been preservation projects. The use of the structure, which includes 4 percent LIHTCs, has been increasing with roughly 40 deals using the formula last year alone.
Tom Feusse, CEO and co-owner of Wallick, says another problem that has hindered preservation deals has been the shrinking availability of soft funds, particularly HOME funds. But Wallick has found HUD’s Mark-to-Market program to be an effective tool to aid preservation, either on its own or down the road coupled with tax credits.
If a project has previously gone through the Mark-to-Market program, with some rehab work done at that time, developers can subsequently apply for tax credits to do more substantial work on the project. “You can work with HUD and assume a good chunk of the Mark-to-Market debt on the project, which effectively acts as soft debt,” Feusse says.