Community Developments Investments (March 2017)
HUD’s Rental Assistance Demonstration Program Creates Opportunity
Freddie MacFort Henry Gardens, in Arlington, Va., is a Rental Assistance Demonstration program project financed by Freddie Mac. Its units are restricted to households earning no more than 60 percent of the area median income.
Virginia Flores, Recapitalization Specialist, U.S. Department of Housing and Urban Development
The U.S. Department of Housing and Urban Development’s (HUD) Rental Assistance Demonstration (RAD) program was created to give rental housing owners the opportunity to preserve and rehabilitate vulnerable affordable housing properties. HUD estimates that every year an average of 10,000 public housing units are lost to disrepair or demolition.
RAD allows public housing agencies to access private capital to address a $26 billion nationwide backlog of deferred maintenance. RAD also provides private owners of rental projects assisted under three HUD “legacy” programs—Rent Supplement, Rental Assistance Payment, and Section 8 Moderate Rehabilitation—the opportunity to enter into long-term contracts that facilitate the financing of improvements.
Through RAD, public housing developments and privately owned legacy properties are able to convert their HUD assistance to long-term Section 8 rental contracts. These long-term contracts provide more stable funding and enable owners to leverage additional financing to complete capital repairs. Public housing conversions are limited to 185,000 units, but demand for the program continues to grow. Two recent RAD deals highlight the involvement of large banks in helping to preserve affordable housing resources for families across the country.
HUDHunters Point East/West Apartments, a 62-year-old San Francisco Housing Authority project, was renovated with funds from the Rental Assistance Demonstration program and other sponsors.
San Francisco’s Re-Envisioning Plan
In 2013, the city and county of San Francisco engaged HUD staff to re-envision the future of San Francisco’s public housing developments, culminating in the San Francisco Housing Authority’s (SFHA) Public Housing Re-Envisioning Plan. City and SFHA staff met with more than 70 organizations and 20 city departments during this process to discuss the importance of preserving and improving these developments to better serve residents and the community.
Through RAD, the SFHA plans to transform 1,400 public housing units in partnership with Freddie Mac and Bank of America Merrill Lynch, the lender and low-income housing tax credit (LIHTC) investor. The Public Housing Re-Envisioning Plan, which is Bank of America Merrill Lynch’s largest affordable housing investment, will provide financing for seven development partners across 15 projects. Financing totaling almost $760 million will comprise the following:
In November 2015, the SFHA closed on the first phase of its RAD transactions including Holly Court, a 118-unit public housing development built in 1940 (one of the oldest public housing developments on the West Coast), and 990 Pacific, a 92-unit development built in 1969 that serves primarily Chinese-speaking senior residents. Both developments were in need of extensive rehabilitation that far exceeded SFHA’s available funds, including mold remediation and seismic retrofit. Financing secured through RAD will enable the SFHA to make these repairs and many others to ensure that these properties remain affordable housing resources in San Francisco’s tight rental housing market.
The SFHA closed on its second phase of RAD transactions in late 2016. For more information about the SFHA transaction, see “Freddie Mac’s Role in Preserving Multifamily Affordable Rental Housing” in this edition of Community Developments Investments.
Using New FHA Products in Kentucky
Centre Meadows, in Lexington, Ky., formerly known as Pimlico Apartments, was one of the first RAD transactions financed with a Federal Housing Administration (FHA) 221(d)(4) mortgage—FHA’s mortgage insurance program for new construction or substantial rehabilitation of rental housing. The 206-unit apartment complex receives rent subsidies through a project-based voucher contract, and the Lexington Housing Authority (LHA) renovated the development.
The property had significant capital needs and was so deteriorated that, at the time of the RAD application, it was thought to be housing of last resort for people who had no other housing options. Approximately 20 units were in danger of losing federal subsidy due to poor physical condition. Without RAD, it was quite likely that the property would have been demolished. Through RAD, the LHA obtained an FHA-insured mortgage from Wells Fargo to finance physical improvements and preserve the complex as long-term affordable housing.
The $30.3 million development budget was funded by cash collateralized tax-exempt bonds (with the FHA-insured loan from Wells Fargo as the permanent first mortgage),