The HUD Rental Assistance Demonstration (RAD) program is entering its second major phase with a full head of steam. The program’s initial cap of 60,000 units has tripled and now sits at 185,000. What’s more, the proposed 2015-16 federal budget would impose no limit at all on the program going forward.
The rising popularity of the program speaks to its effectiveness as a means of converting the public housing stock of this country to private ownership. The driver is the program’s design: Allowing existing subsidies the projects are receiving through housing authority budgets to be transferred to direct rent payments. This enables private investors to take part in recapitalizing and modernizing the rental housing inventory by partnering with PHAs. They can finance the improvements with market rate debt, Low Income Housing Tax Credits (LIHTC), and/or other state or local subsidies when they are made available.
In addition, the cost of that capital is particularly enticing. The market rate financing is most often insured with FHA multifamily mortgage insurance, which results in very low interest rates. This incentivizes investors to borrow as much as they can to maximize the repairs and improvements and boost their own returns.