Physical Conditions and Financial Viability of Early Rental Assistance Demonstration (RAD) Projects Show Some Improvements

A recent report from HUD, Final Report: Evaluation of HUD’s Rental Assistance Demonstration (RAD), aims to evaluate the extent to which the RAD program has achieved its affordable housing preservation goals and improved the financial viability of participating projects. A previous Memo article discussed the tenant survey included in this report (see Memo, 10/28). This article focuses on three other sections of the report: the comparative improvement of physical conditions in RAD projects, the impact of RAD conversions on the financial standing of participating projects, and the extent of private-sector leveraging as a result of conversion. The RAD projects under examination saw a decrease in short-term capital needs and improved financial viability. The authors estimate the RAD program has leveraged $0.29 in “non-governmentally subsidized” funds for every dollar of “governmentally subsidized” funds contributed.

Congress created RAD in FY12 as a demonstration to test whether public housing agencies (PHAs) could leverage Section 8 rental assistance contracts to raise private debt and equity to make public housing capital improvements (improving the physical conditions of the properties) and thereby preserve low-income housing.

For the assessment of the impact of RAD on projects’ physical condition and financial viability, the authors selected 24 RAD projects and a matched sample of 48 non-RAD projects. The RAD projects included in this report are from the first cohort of RAD projects, the 132 properties that had either closed or reached the RAD Conversion Commitment (RCC) stage by December 31, 2014, so the results are representative of only “early adopters” of the program. Given the changes to the RAD program since its inception, the significant expansion of the program, adjusted program provisions, and the subsequent changes to the mix of participating PHAs, there are limitations to what can be inferred about RAD generally on the basis of this small sample of early adopters.

The report evaluated the effects of RAD on the physical condition of converted housing stock using physical condition assessments. The short-term capital needs of the projects (estimated repair and rehabilitation needs in the next 36 months) is used as a measure of physical condition. RAD projects were assessed before and after conversion; non-RAD projects were assessed twice at a similar interval. The analysis finds that average short-term capital needs per unit for RAD projects decreased by 65% after conversion, from $12,981 to $4,608. In contrast, the short-term capital needs per unit for non-RAD projects increased by 133%, from $3,740 to $8,710. The need for repairs in RAD projects declined across all categories, including building exteriors and interiors, safety equipment, and heating and cooling systems. 

At the end of the evaluation period, the remaining “critical capital needs” (health, life, and safety deficiencies) between RAD and non-RAD projects also diverged. RAD projects had an average of $190 in critical needs per unit, while non-RAD projects had an average of $693. The authors state that the program enabled public housing authorities (PHAs) to fix the deficiencies that needed to be addressed immediately and to make some of the capital investments that were needed within three years. This study does not address how PHAs could completely meet remaining short-term capital needs of RAD-converted projects, which must be corrected for the affordable housing stock to be preserved.

The authors also analyzed the financial performance of converted projects, collecting financial statements to compare differences in revenue, expenses, net operating income, and net cashflow. Sufficient financial information was available for 18 RAD projects and 46 non-RAD projects. These 18 RAD projects marginally improved on measures of liquidity and viability after the conversion, while the 46 non-RAD properties showed decreases in liquidity and viability. The liquidity score measures a PHA’s ability to cover its current obligations, and the viability score measures the PHA’s ability to operate using its net available unrestricted resources without relying on additional financing. 

The authors also provide information about the amount of private-sector leveraging that resulted from the conversions. As noted previously, one primary purpose of RAD is to enable PHAs to leverage private investments to rehabilitate and preserve affordable homes. To assess RAD’s effectiveness at leveraging private-capital funding, HUD used funding data from all 956 project conversions completed through October 2018. The RAD statute requires evaluation of the amount of private-sector leveraging as a result of conversions, and the authors identified two leverage ratios as most closely aligning with this statutory requirement. First, the Publicly Held Funds ratio measures the amount of privately held funding, including FHA-insured and other commercial mortgage debt, investor equity, deferred developer fees, and other funds from private sources, relative to all funds contributed by public entities. This ratio treats tax credits as private equity investment because the funds are from private sources. By that measure, RAD conversions leveraged $1.59 in privately held funding for every dollar of publicly held funding invested in these projects. 

The Publicly Subsidized Funds ratio, in contrast, treats tax credits as public funds because they are considered a tax expenditure under federal budget-scoring rules. The Publicly Subsidized Funds ratio measures the amount of private unsubsidized funds raised for every dollar of governmentally subsidized investment. Governmentally subsidized funding includes investor equity subsidized through tax expenditures such as Low Income Housing Tax Credits, appropriated funds, and other resources from public entities. Private unsubsidized funding includes FHA-insured and other commercial mortgage debt, deferred developer fees, and other private sources. The report finds that RAD conversions secured $0.29 in private unsubsidized funds for every dollar of governmentally subsidized funding. 

Read the full report at: