There is a new iteration of transactions coming out of the Rental Assistance Demonstration (RAD) program, which has been transforming public housing for over a decade now. Increasingly, public housing authorities (PHAs) and developer partners are seeking to redevelop properties that have already converted assistance through RAD. These post-RAD transactions are not contemplated in the RAD Notice that governs the program and can be trickier to accomplish than they may first appear.
PHAs and developers most often seek post-RAD transactions for developments that originally converted their public housing (Section 9) funding to the Section 8 platform through RAD without undertaking a major recapitalization. These types of conversions are sometimes referred to as “no debt,” “subsidy swap,” or “straight conversion” deals.
When closing a no-debt deal, the Department of Housing and Urban Development (HUD) still required the PHA to provide a capital needs assessment and a 20-year operating pro forma in order to demonstrate that the converted project would be sustainable for the 20-year term of the Housing Assistance Payment (HAP) contract. Before HUD would authorize the conversion, the deal’s financing plan must have demonstrated that the needs of the converted project could be adequately addressed without taking on new financing.
Increasingly, however, PHAs and developers are revisiting these properties and deciding that a recapitalization is needed. In some cases, the capital needs or operating costs of the properties may have been underestimated. Circumstances may have changed since the RAD conversion. And, in other cases, PHAs are realizing that their land is underutilized and redevelopment presents an opportunity to produce a significant amount of additional affordable housing.
It is important to realize that RAD HAP contracts cannot be voluntarily terminated, renewed, and marked up to market like non-RAD PBRA (project-based rental assistance) HAP contracts. Nor are rent-boosting tools available—for example, RAD/Section 18 blends are available to increase a development’s overall rent potential in an initial RAD conversion, but this tool is not available in post-RAD transactions.
The rents for former public housing properties that converted through RAD are stuck where they are, except for annual Operating Cost Adjustment Factor increases. In addition, the project must maintain at least the same number of units, and the number of units subject to a RAD HAP contract, and RAD use agreement cannot change.
Because these properties are subject to a RAD use agreement and other restrictions, HUD review and approval for these post-RAD transactions are necessary. The RAD use agreement prohibits any transfers of interest without HUD consent; this includes not only acquisitions but also mortgages and refinancings. In other words, you cannot transfer or place a lien on a RAD property without HUD consent. Furthermore, the RAD statute contemplates that RAD HAP contracts would be renewed upon expiration so that they would be essentially in place in perpetuity.
The first important distinction that any party considering a post-RAD transaction must focus on is whether the original RAD conversion resulted in a project-based voucher (PBV) or PBRA contract. For PBV properties, HUD’s Office of Public and Indian Housing (PIH) reviews and approves post-RAD PBV refinancing requests. For PBRA properties, HUD’s Office of Multifamily Housing (MFH) asset management staff is the main point of contact for post-RAD requests.
HUD has not yet finalized comprehensive, standardized public guidance for post-RAD transactions. The department is still working out the details on the extent to which and under what circumstances it will allow such recapitalizations.
However, it has provided some initial guidance applicable to post-RAD processing and is working on additional guidance. HUD issued a RAD Post-Conversion Processing Guide in 2020, and while much of it deals with other post-closing issues, some of it speaks to post-RAD transactions. That guidance also references other draft post-RAD guidance from HUD’s PIH for properties that converted to PBV. While the PIH guidance is still in draft, it does give parties a good sense of the kinds of things PIH will want to review in order to approve any request.
In general, HUD will want to review the proposed transaction to ensure that it maintains compliance with RAD rules and does not create a back-door workaround for RAD requirements.
The PIH memo for post-RAD PBV transactions lists items such as a sources and uses statement, operating pro forma, and information on the project ownership structure, and specifically references continued compliance with the property’s RAD conversion commitment.
For post-RAD PBRA transactions, MFH asset management treats refinancings that include transfers of ownership, for example transfer to a newly created low-income housing tax credit ownership entity, as a HAP assignment, but it has an additional level of review tied to the RAD aspects of the transaction.
Whether PBV or PBRA, one aspect of HUD’s review will be to ensure that the “ownership and control” provisions of the RAD program continue to be satisfied in a post-RAD transaction. The RAD statute requires that former public housing RAD projects remain subject to public or nonprofit ownership and control. In most cases, this will mean that the PHA continues to play a substantive role in the future of the property. While there are a number of ways that ownership can be structured to accommodate this requirement, PHAs and their partners need to ensure that HUD’s requirements are taken into account as they proceed.
Finally, there are extra considerations if the redevelopment will require demolition or taking units offline. In this case, the project owner’s obligations under the HAP contract cannot continue to be met during the post-RAD redevelopment construction period. Where HUD determines that the redevelopment is worthwhile, additional arrangements will be necessary to avoid default under the contract, preserve funding, and document the parties’ expectations. HUD published a Federal Register Notice in 2021 describing a RAD interim agreement to take the place of a HAP contract during the redevelopment construction period for this purpose.
Post-RAD redevelopments were not originally contemplated in the RAD Notice, but they are being increasingly pursued. Anticipating HUD’s involvement in the review and approval of these transactions can help avoid confusion and frustration as they move forward.