Evergreen’s Jewell Walton’s article is featured in Novogradac's Journal of Tax Credits. Titled "RAD After Ten Years: Five Lessons Learned From A Longtime Practitioner," this article offers valuable insights into the Rental Assistance Demonstration (RAD) program. Whether you're a seasoned practitioner or just getting started in the field, we believe you'll find this article incredibly helpful.
For affordable housing professionals who have worked on RAD developments since the program’s inception, this milestone is an opportunity to reflect on this important initiative and all it has allowed the affordable housing community to accomplish for low- income households over the past decade. Looking back on a decade of RAD implementation, there are many challenges and achievements to reflect upon. Below is a look at five key strategies and approaches for successful RAD conversions from the vantage point of both public housing authorities (PHAs) with a diverse portfolio of assets as well as private affordable housing developers:
1. Establish a Pool of Prequalified Development Partners and Teams
Most PHAs have a range of building types and conditions within their housing portfolio. Some properties might be best suited for a cosmetic level of renovation, where kitchen and bathroom fixtures are replaced. Others require an overhaul of building systems that could result in temporary resident relocation, at best. The latter, especially if there are multiple properties with significant rehabilitation needs, is a heavy lift for any PHA to facilitate the financing and guarantees, construction management and sequencing, and logistical coordination required for a successful redevelopment effort.
Issuing a request for qualifications multiyear solicitation to have a prequalified pool of developer or co-developer partner teams allows a PHA to have a roster of qualified professionals on deck for complicated projects and streamlines the bidding process to secure a team without duplicative processes. Piecemealing the bidding process by issuing a request for proposals for each development tends to lengthen the evaluation and procurement process and potentially misses important windows to maximize planning and seasonal construction activities.
2. Insist on a Comprehensive Physical Condition Needs Assessment (PCNA)
Rehabilitation comes with its own set of surprises and, given the significant rise in post-pandemic construction costs, minimizing the number and severity of unforeseen issues has never been more critical.
One of the approaches to mitigating the number of mid- construction surprises is to invest in a comprehensive physical condition needs assessment (PCNA) upfront. While HUD has tools to determine the expected useful life and associated costs for multiple building components and systems, conducting a thorough assessment of those systems is critical, especially if records of past capital work are not sufficiently documented and tracked.
Specifically, PHAs can benefit from a closer evaluation of roofs, building envelopes, domestic water and sanitary lines, mechanical systems and emergency power systems to produce a robust PCNA that more accurately projects reserve coverage and better informs an asset maintenance and management schedule. Infrared moisture scans of the roof, selective destructive testing of the building envelope, televised scoping of sanitary lines and emergency generator load testing are examples of deeper-dive assessments that admittedly are more expensive than the standard PCNA but can identify looming issues and ideally control them until there are sufficient reserve funds available to make repairs.
3. Build Replacement Reserves Liberally
Over the 10-year life of the RAD program, the country has experienced considerable political and economic volatility, including a global pandemic. The standard PCNA and replacement reserve schedule for the RAD program is 20 years, and the unpredictability of the last decade should be enough to at least consider a more aggressive stockpiling of reserves above standard minimums.
Generous reserve building is particularly important where comprehensive rehabilitation is not taking place. For example, many of the Chicago Housing Authority’s early RAD transactions were considered “RAD-o- Matic deals” where no debt and limited to no rehab was required. The RAD conversion was conducted to improve the property’s financial and operational position. Reserves in the 20-year PCNA schedule were budgeted for approximately $1,000 per unit annually–nearly three times the regulatory minimum at the time to provide coverage for future capital projects. Ultimately, the additional cushion proved to be an unintended buffer to cover skyrocketing hard construction costs for improvements scheduled for five to seven years post-closing.
While there’s a counterargument to be made that “padding” reserves reduces capacity for a larger first mortgage, if there are major building systems that will remain untouched as part of the initial RAD rehab work, larger per-unit set-asides for replacement reserves should be considered where they can be afforded. Economic cycles and downturns are par for the course, but like the effects of climate change, we may be headed for more volatile cycles than previously experienced.
4. Structure Transactions to Maintain Property Tax Exemptions and Long-Term Affordability
The RAD program allows for private investment and ownership that was previously not possible or extremely limited for public housing with standard HUD Declaration of Trust and/or Declaration of Restrictive Covenants agreements. As demonstrated over the past decade, that allowance for private investment can create huge opportunities.
While some PHAs have opted to transition out of the ownership and management of formal public housing, there are often benefits for PHAs that retain an ownership stake within a RAD-repositioned property. The primary argument for PHA ownership is property tax exemptions. In Chicago, publicly owned properties are property tax exempt as of right and are only responsible for a payment in lieu of taxes (PILOT) for federally subsidized units, which is considerably less than standard property taxes, even with reduced affordable housing assessed valuations. Many other municipalities have similar tax benefits for municipally owned affordable housing. Additionally, because of the RAD program’s budget- neutral design in transitioning to Section 8 funding from a public housing subsidy model, RAD rents do not inherently incorporate an allowance for standard property taxes, so any carryover or placement of RAD units into a new property should continue to carry the property tax exemption.
Another fundamental reason for PHA ownership of RAD properties is assured preservation of long-term affordability and oversight. While PHAs are certainly within the affordable housing development business, their ultimate role is arguably to be in the affordable housing compliance business. PHAs should be positioned to have adequate oversight and administrative control of RAD-converted properties and RAD units, regardless of ownership status.
While an ownership stake is a formidable way to establish control, there will be occasions where PHA ownership won’t apply. When it is not applicable or sensible, RAD regulations allow for a “control agreement” as a mechanism for PHAs to manage their oversight of the properties’ operational performance. As an example, Evergreen’s Encuentro Square, an 89-unit property with 55 “Faircloth-to-RAD” units (units that are built as public housing units and, post-construction, undergo a RAD conversion), the underlying land was previously owned by the city of Chicago, not CHA, and was deeded to a low-income housing tax credit (LIHTC) entity including Evergreen partners and a local nonprofit organization at closing. An asset management agreement–a version of a control agreement–between the CHA and the ownership entity was a recorded closing document that established CHA’s responsibility for certain tasks, such as waitlist management, grievance processing and other legal support, program compliance, and financial monitoring. It included an associated annual fee to be paid to CHA to cover those administrative costs, allowing the agency to maintain some level of operational control of the property.
5. Consider Transfer of Assistance as an Option for Expanding Supply
Before 2021, when Faircloth-to-RAD became the latest option to build new RAD units, there was the predecessor approach called transfer of assistance (TOA), which is the ability to use a RAD transaction to transfer subsidy from existing public housing units to another property or development as project-based rental assistance.
At one point, TOA was the only bona fide pathway to establish new RAD units, as the RAD program at its core is a preservation program. For a property like Lathrop Homes, a 925-unit family development in Chicago that is one of the oldest public housing communities in the country, a long-term strategy was implemented to reposition the property as mixed-income housing and convert its remaining public housing units into RAD project-based voucher units. The resulting plan was to retain 401 RAD units on-site and transfer the assistance for 524 units to other locations. Over the course of seven years, 10 new properties across Chicago totaling more than 700 units were built with development partners; more than 400 of these units were RAD TOA units. Of the 10 developments, RAD TOA facilitated the development of four Evergreen Real Estate Group properties: Oso Apartments; Northtown Apartments and Independence Apartments, both of which have ground- floor public libraries; and Ravenswood Senior Living. All helped to diversify housing options for waitlisted families and seniors.
Beyond simply replacing deteriorated housing, there are three lesser recognized benefits to the TOA approach that may make it the preferred option for PHAs. First, TOA helps deconcentrate public housing units, which was a priority for the CHA at Lathrop. Second, TOA units typically have higher rent profiles in comparison to newly constructed units created through Faircloth- to-RAD, as older, existing public housing units often receive higher capital subsidies from HUD that are then transferred to the receiving site, increasing cash flow. Finally, TOA provides relief to traditional project-based voucher programs, as funding for TOA units stems from existing public housing dollars.
The next 10 years will be interesting. Some of the early RAD deals will be through their first full RAD term. Replacement reserves balances will be tested against rising construction costs. And the PCNAs’ predictability will be evaluated against the actual realized needs of buildings. No longer functioning like a demonstration program, RAD will continue to evolve and course-correct as one of many solutions to address the nation’s affordable housing crisis.