In December 2024, the Housing Authority of the City of Charleston (CHA) in South Carolina closed on the financing and has since begun construction on a transformative project that will revitalize Kiawah Homes into modern, affordable housing.
This unique deal utilizes the Department of Housing and Urban Development’s (HUD’s) Rental Assistance Demonstration (RAD) and Section 18 programs with a rarely used debt tool—essential function bonds. This project offers a potential blueprint for other public housing authorities navigating similar challenges.
Leveraging Public and Private Funds Through a RAD/Section 18 Blend
A 61-unit property with mostly two- and three-bedroom duplexes, Kiawah Homes had been in disrepair for decades. Built over 60 years ago, the complex suffered from deferred maintenance, making it unsafe for its low-income residents. The housing authority struggled to maintain the property, which required frequent emergency repairs.
Originally part of CHA’s public housing program, the project’s conversion to Section 8 housing under the RAD/Section 18 blend program provided an opportunity to leverage public and private funds for renovation and long-term sustainability.
The RAD/Section 18 conversion allows public housing authorities to convert low-income public housing units into Section 8 housing, providing operational flexibility and access to more sustainable funding sources. This conversion typically relies on 4% low-income housing tax credits (LIHTCs), which were not readily available in South Carolina due to the credits being oversubscribed. As a result, the CHA had to find an alternative financing solution.
Rather than relying on 4% LIHTCs, which typically make up 30% of the capital stack, CHA issued essential function or revenue bonds—a rarely used debt product for housing—to finance the project. This essential function bond issuance was a key component in the deal’s success, providing the necessary capital for the renovation without needing equity financing generated from the 4% LIHTCs.
Peter Sherman, director of development for CHA, was first introduced to the essential function bonds by an investment banker.
In Baker Tilly’s recent BuzzHouse podcast, Sherman noted that the banker’s concept “was not to use these (essential function bonds) with RAD or Section 18, but to use these to buy other existing market-rate housing and utilize our issuer’s credit rating to get a fair interest rate and then be able to convert some of these units to workforce housing. The concept, of course, was of interest to me.”
However, when asked why they had not previously gone down this route with RAD or Section 18, the banker didn’t offer a particularly convincing reason. So, after discussing the matter, CHA decided to give it a try.
Utilizing Essential Function Bonds
The housing authority issued approximately $15 million in essential function bonds, backed by its broader portfolio of properties. By leveraging its own balance sheet, CHA was able to secure debt at a highly favorable interest rate of 4.85%. In today’s market, similar projects would typically expect interest rates above 6%, making this deal a rare example of low-cost public housing debt financing.
The key advantage of these essential function bonds is that they allow public housing authorities to issue debt based on the rating of the agency overall, rather than the performance of a single property.
Rating and Debt Structuring
A critical aspect of the deal was CHA’s ability to secure a credit rating from a major rating agency. Most public housing authorities are not rated, but CHA worked with experts to undergo the rating process. This rating was essential for securing the low interest rate on the bonds, making it possible to move forward with the deal.
That said, the journey to getting rated was not a simple one.
“The process was, as one can imagine, rather torturous, taxing, challenging,” Sherman said on the BuzzHouse podcast. “It’s a lengthy process but worthwhile at the end. It worked out.”
CHA earned an A+ credit rating. An A+ rating falls in the middle of the investment-grade category, indicating some, but low, credit risk. Following the rating process, Sherman noted: “We moved forward with trying to get the analysis performed to see if it would work with Kiawah. So, we reached out to our analysts at Baker Tilly, and they put together a pro forma—and it worked!”
Structuring the debt was a key component to determining if the essential function bonds would work for the project. The project financing was carefully structured to ensure that the debt could be serviced based on the projected income and expenses. CHA worked with a bond underwriter to ensure that the amount of debt issued was reasonable, taking into account the rental subsidies provided through the Section 8 program. By structuring the deal conservatively, the team ensured that the risk was manageable.
Navigating Challenges
Although the innovative use of essential function bonds allowed the deal to work financially, the deal was not without its challenges. One significant concern was how HUD would react to the use of essential function bonds for a RAD/Section 18 conversion. It was the first time such a combination had been used (as far as we know), and there were questions about how the process would interact with the new debt structure.
Fortunately, through proactive communication with HUD and careful planning, the agency approved the transaction, allowing it to move forward.
Another challenge was the inherent risk of using CHA’s entire portfolio to back the debt. While this allowed for a favorable interest rate, it also meant that the housing authority was taking on a higher level of responsibility. The team addressed this by sizing the bond issuance conservatively to a 1.10 debt-coverage ratio ensuring that the project could cover its debt obligations through rental subsidies alone.
Future public housing authorities considering this approach will need to carefully evaluate their portfolios to ensure they can support the debt.
A New Model for Public Housing Financing
The Kiawah Homes deal closed in December 2024, and construction is underway to transform the property into safe, affordable housing. This successful project highlights the potential of using essential function bonds in conjunction with the RAD and Section 18 programs on existing public housing assets, offering a blueprint for other public housing authorities in similar markets.
The key lessons from this project include the importance of finding creative financing solutions, understanding the balance between risk and reward, and working closely with rating agencies and HUD.
Equally critical is assembling the right project team—engaging experienced consultants, bond underwriters, and bond counsel—to help navigate the complexities of financing and deal structuring. Baker Tilly’s public housing specialists have the expertise to guide housing authorities through this process, from financial modeling and credit rating preparation to securing the right debt structure.
Public housing authorities with strong financial portfolios may find that issuing their own bonds, backed by their broader property holdings, offers a cost-effective way to finance renovations and conversions. In a time when affordable housing is in short supply and resources such as low-income housing tax credits are very competitive, this deal offers a new pathway for revitalizing aging public housing stock.
CHA has proven that with the right combination of factors, even properties with very high capital needs can be transformed into high-quality, affordable housing for communities in need.
“[This was the] first time for us going through the process, of course,” Sherman said, noting that he prefers this process for renovation projects, rather than new redevelopments. “[We] learned a lot. When we do another issuance, it should be far more streamlined. But really, no regrets.”
