The Department of Housing and Urban Development (HUD) issued updated guidance in January for its Rental Assistance Demonstration (RAD) program, and the updates provide a mixed bag of changes. HUD’s guidance in this “Supplemental Notice 4C” includes updates impacting rent adjustments, environmental review requirements, and other aspects of public housing conversions.
RAD/Section 18 Rents Limited to OCAF-Only Adjustments
Under Supplemental Notice 4C, RAD/Section 18 blends will utilize one combined RAD HAP (Housing Assistance Payment) contract in public housing RAD conversions. RAD/Section 18 blends are a tool intended to boost overall rent potential and facilitate underwriting. While RAD rent levels in public housing conversions typically hover around 80% of the HUD-established fair market rent (FMR), Section 18 units are eligible for tenant protection vouchers that can be project-based at the contract administrator’s payment standard, which is typically 110% of the FMR. RAD/Section 18 blends combine RAD and Section 18 rent-setting rules, and HUD recently increased the percentage of units eligible for Section 18 in RAD/Section 18 blends (see more on this topic below).
Previously, RAD/Section 18 blends resulted in two HAP contracts: a RAD HAP contract that followed RAD rules and a normal project-based voucher (PBV) HAP contract for the Section 18 units that followed normal PBV rules. Rents on the new combined contract will now be “blended” based on the unit-weighted average contract rent by bedroom size. The new combined contract structure also means that all units in a RAD/Section 18 blend project (instead of just the RAD units) are eligible for RAD rehab assistance payments that provide subsidies for units vacant during the rehabilitation scope. HUD also provides a new option, allowing RAD/Section 18 blends to opt for project-based rental assistance (PBRA) rather than PBV, which can be beneficial in some circumstances.
However, combining into one RAD HAP contract means all RAD/Section 18 blend units are subject to RAD’s rent adjustment rules, limiting annual increases to the HUD-determined Operating Cost Adjustment Factor (OCAF). Previously, the Section 18 units subject to a PBV HAP followed normal PBV rent adjustments, which, in most cases, permitted greater increases commensurate with FMR increases. This change could mean financial trouble for RAD transactions down the road, as rents may not be able to keep up with expenses. Many early RAD projects that converted before the RAD/Section 18 blend tool was established and have all contract rents tied to OCAF only are struggling to keep up with rising costs. This change could similarly burden many more RAD public housing transactions going forward.
It had been widely hoped that this latest supplemental notice would establish a different operating cost factor as an alternative to OCAF for RAD transactions. The supplemental notice stops short of establishing an alternative operating cost factor, but it does permit some projects to seek such an alternative through a waiver. HUD refers to projects in “extraordinary circumstances,” which is not defined, and the agency is working to develop further guidance on the process and requirements for seeking this waiver, which will be critical to understanding the benefit of this change.
In a separate notice in late 2024, HUD updated its Section 18 public housing demolition and disposition guidance. In that notice, HUD increased the number of units that could qualify for Section 18 in RAD transactions and increased the number of factors that trigger the highest percentage of Section 18 (see table). As a result, more units in RAD transactions will be eligible for higher rents, and more RAD transactions should pencil out and reach closing faster. The changes help offset opportunities lost when HUD suspended its Streamlined Voluntary Conversion program.
| Triggering Factors | Benefit | Previous Guidance |
| Construction costs > 90% of housing construction cost (HCC) | Up to 90% Section 18 | Up to 60% Section 18 |
| Demolition and new construction | Up to 90% Section 18 | Not previously an independent trigger |
| Transfer of assistance | Up to 90% Section 18 | Not previously an independent trigger |
| Small PHA blends (≤ 250 units) | Up to 90% Section 18 | Up to 80% Section 18 |
| Construction costs > 60% HCC | Up to 60% Section 18 | Up to 40% Section 18 |
| Construction costs > 30% HCC | Up to 30% Section 18 | Up to 20% Section 18 |
Part 50/HEROS Review Required for All Public Housing Conversions
Another major change in Supplemental Notice 4C is the new requirement that environmental review for all public housing conversions follow 24 CFR Part 50 (Part 50). HUD conducts Part 50 reviews through the HUD Environmental Review Online System (HEROS). Previously, certain transactions were subject to alternative environmental review under 24 CFR Part 58 (Part 58). While the substantive requirements of both reviews are intended to be identical, Part 58 reviews can, in certain circumstances, be accomplished in less time.
The guidance also advises that multiphase transactions should submit Part 50/HEROS review for all phases at the first phase submission. While not framed as a change in policy, this has not necessarily been the practice previously and may impose additional costs and delays. The supplemental notice also clarifies that the recent Federal Flood Risk Management Standard floodplain guidance applies to RAD transactions.
The changes detailed here reflect HUD’s ongoing efforts to refine the RAD program and address challenges that public housing agencies and their partners face. We see many positive aspects in HUD’s updated guidance. However, stakeholders who were hoping for wider-ranging rent adjustments beyond OCAF-only were left disappointed. In addition to the major changes reviewed above, HUD’s supplemental notice makes a number of additional updates. Participants in the RAD program should review those changes carefully to understand their impact.
