Rental Assistance Demonstration Could Constrain Future Tax Credits

An article in Cityscape examines the role of the Low-Income Housing Tax Credit (LIHTC) in the conversion of public housing to project-based Section 8 in HUD’s Rental Assistance Demonstration (RAD) program. The article, “The Rental Assistance Demonstration Program and Its Current and Projected Consumption of Low-Income Housing Tax Credits,” finds that RAD makes significant use of LIHTC and, if current trends continue, RAD could significantly constrain future LIHTC preservation and production efforts outside of the RAD program.

The RAD program was launched in 2012 to preserve public housing units in the face of mounting preservation needs and declining support for appropriations in Congress. RAD allows public housing agencies (PHAs) to convert public housing and some housing from older HUD project-based programs to project-based Section 8. Operating public housing under project-based Section 8 allows properties to access private loans and other funding sources such as LIHTC to finance the cost of capital improvements. Congress initially limited the number of public housing units eligible for RAD conversion to 60,000 in 2012, then expanded to 455,000 units in 2018.

The authors report that 139,694 public housing units completed RAD conversion between 2013 and 2020, accounting for 88% of the total decrease in the public housing stock during that period. Texas, Georgia, North Carolina, and Tennessee, the four states with the most conversions, account for 31% of all public housing units converted through RAD. The authors further estimate that the public housing stock will have declined by 41% once the RAD program reaches its current 455,000-unit limit.

RAD relies heavily on LIHTC funding: approximately 43% of public housing units converted by 2020 were in properties that received LIHTC. Thirty-three percent were in properties with allocations of 4% credits and tax-exempt bond financing, while 11% of converted public housing units were in properties that received 9% credits.

Using RAD and LIHTC data from 2014 to 2017, the latest year for which the authors had LIHTC data, they estimate the RAD program utilized 25% of all 4% credits and 10% of 9% credits. Extrapolating from this, they project that RAD will absorb 26% of all 4% credits and 7% of all 9% credits by the time the program reaches its 455,000-unit limit. If the remaining public housing units were converted, as proposed in the Obama and Trump Administrations, RAD could absorb 61% of 4% credits and 20% of 9% credits over a ten-year period.

The authors conclude that RAD could significantly constrain future LIHTC preservation and production efforts outside of the RAD program at a time when preservation needs are growing within the existing LIHTC stock. Their potential policy responses include states increasing the allocation of tax-exempt private activity bonds used for low-income rental housing, increasing the amount of money available to states for tax-exempt private activity bonds or LIHTC, providing subsidies other than LIHTC to support public housing preservation needs, or directly increasing appropriations for the Public Housing Capital Fund to cover the current $70 billion backlog. 

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