Friday, August 29, 2014

RAD isn’t as radical as it sounds

By Ethan Handelman, National Housing Conference

The name of HUD’s Rental Assistance Demonstration (RAD) has a phonological connection to “radical,” but it’s far from it in practice.  Mostly, it’s trying proven techniques for financing and renovating older affordable housing and applying them to public housing properties that all agree need attention.  It’s still a pilot program, and rightly so, but over time I expect it will prove to be the future direction for fixing up long-neglected public housing.  

Recent coverage of RAD by the American Prospect highlights the concerns of some tenant organizations advocates who worry that changes to the financing and ownership structure of public housing may affect tenants’ rights and property operations over the long term.  These concerns come in part from a complicated history around affordable housing marred by too-abrupt property conversions, explosive politics, poorly planned demolitions and redevelopment and enough bad actions to create distrust on all sides.  I expect that implementation of the program will calm many of these fears as residents see property improvements and a continued commitment to maintaining affordable housing properties in these communities.

The American Prospect article missed a few points on the potential benefits of RAD bringing private capital to public housing:

1.   Public housing authorities (PHAs) can continue to own and operate the properties after they go through RAD.  RAD allows a private developer to come in, but it does not require it.  PHAs with the capacity to do the financing transaction and continue operating the property can do so, and many are.  Depending on the specifics of the transaction, a technical sale of the real estate may be necessary, but even then, it can be to a new entity controlled by the PHA.

2.   There are proven benefits to having private capital in affordable housing.  The default rate for Low Income Housing Tax Credit properties is well below 1 percent (even during the financial crisis), in large part because you have an investor, often a syndicator, and a lender all focused on the success of the property.  That level of oversight and asset management is far more than public-sector bureaucracy has ever provided with past programs like public housing, Section 202, Section 236, Section 221d3 and the like.

3.   HUD's Section 236 mortgages were 40 years with a prepayment option at 20 years.  The article misstates this as 30-year mortgages.  This is a minor factual point, but it’s a reminder that past approaches to creating affordable rental properties aimed at very long term commitments without providing an effective source of capital to renovate properties over time.  Indeed, that’s why NHC has been researching lifecycle underwriting as a way to think constructively about the long-term sustainability of affordable housing.

In short, RAD isn’t radical.  The Low Income Housing Tax Credit program has relied on private capital for more than 25 years, and it is a singularly successful affordable housing tool, and RAD builds on that success and the lessons learned.  NHC has been working with lenders, PHAs, developers and HUD to iron out key program details that affect the permanent mortgage debt for these properties.  As the pilot moves forward, let’s watch it closely and make sure we get it right without letting our fears get in the way.

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