The Rental Assistance Demonstration (RAD) Program Allows Subsidized Properties to Convert to New Section 8 Contracts
HUD enacted the Rental Assistance Demonstration (RAD) program in 2012 to increase the amount of deeply affordable Section 8 properties in the United States. By allowing public housing authorities to convert their units to new Section 8 contracts, it makes it far easier for them to obtain private capital. For private investors utilizing specific HUD legacy programs (Rent Supplement, Rental Assistance Payment, and Section 8 Moderate Rehabilitation) RAD also allows these investors to convert their properties into new, long-term Section 8 contracts.
Fannie Mae Multifamily, driven by the increased need for affordable housing, is redirecting some of its focus toward providing RAD property rehabilitation financing. As part of its effort, Fannie Mae has funded several large projects the last year. For example, in December 2018, Fannie Mae, along with Hunt Real Estate Capital, provided a $120.6 million rehabilitation loan for a portfolio of 39 multifamily properties owned by the New York City Housing Authority (NYCHA). These 39 properties consisted of 1,088 units that are now slated to be converted to new Section 8 contracts via the RAD program. In certain situations, a project may even be able to secure funding to demolish obsolete units and replace them entirely.
According to Fannie Mae, there may be as much as a $70 billion backlog when it comes to repairing and rehabilitating America's public housing. Most of these public housing units are occupied by individuals and families (including many senior citizens), making less than 50% of the area median income (AMI). Without access to public housing, they would be forced to pay much of their income towards rent, with potentially disastrous consequences.
In Fannie Mae has become such a fan of RAD that they've completed 20 RAD transactions in the last few years, in a variety of large, medium, and small markets. Many projects eligible for Fannie Mae RAD financing are owned directly by public housing authorities, but some may also be owned by private investors. Regardless of ownership, property financials and management are important-- as both owners and managers should have some experience with the Section 8 program.
Finally, in order to facilitate greater outreach to public housing authorities across the U.S., Fannie Mae started a public housing authority advisory council this year. Plus, Fannie has set aggressive goals to increase the velocity of its RAD financing programs and plans to purchase 20 loans backed by RAD properties in 2020 alone. In the end, Fannie Mae realizes that the Section 8 program has not grown substantially since the 1970s, and they want to be part of expanding the program to meet America's constantly growing affordable housing needs. For public housing authorities, this is excellent; and, for investors currently utilizing one of HUD's legacy programs, it could also be a great opportunity.