What Affordable Housing Investors Should Know About the Rental Assistance Demonstration (RAD) Program
Rental Assistance Demonstration, or RAD, is a Department of Housing and Urban Development (HUD) program, which seeks to help investors preserve affordable housing across the U.S. To do this, the RAD program allows investors using four HUD legacy programs the ability to convert their housing into long-term Section 8 contracts. This helps investors by giving them more flexibility in terms of acquiring the financing to repair their properties, including making it easier to apply for the LIHTC (Low-Income Housing Tax Credit Program).
Eligible Programs Under Rental Housing Demonstration
Specifically, the RAD program allows property owners/investors in 4 different legacy programs the ability to convert into Section 8 contracts. These programs are:
Rental Supplement (Rent Supp)
Rental Assistance Payment (RAP)
Section 8 Moderate Rehabilitation (Mod Rehab)
Section 202 properties with Project Rental Assistance Contracts (PRACs)
Specifically, residents in RAD properties will continue pay 30% of their income towards housing. By law, these Section 8 contracts must be renewed, so they provide a large degree of stability for both residents and landlords.
Rental Assistance Demonstration and the HUD 221(d)(4) Program
For many borrowers who wish to upgrade a property currently involving in one of the HUD legacy programs mentioned above, combining a RAD conversion with HUD 221(d)(4) financing is an ideal fit. Borrowers can use this funding to finance substantial rehabilitations to their property. In general, properties with 90% or more low-income units (such as RAD conversions) are allowed LTVs up to 90%. In addition, rental assistance properties are permitted DSCRs as low as 1.11x. Finally, borrowers for Section 8 properties are eligible for a low 0.45% mortgage insurance premium (MIP), which is significantly lower than MIP for market-rate or affordable properties. Plus, HUD 221(d)(4) loans have 40-year, fixed-rate terms, which makes it one of the longest term self-amortizing loans in the entire industry.
In addition, HUD 223(f) financing may also be a good option for certain RAD owners, especially if their property is currently being funded with another type of loan with a higher interest rate and they would like to refinance. HUD 223(f) loans also permit LTVs up to 90% and DSCRs as low as 1.11x for subsidized properties. HUD 223(f) loans can also be used if a borrower would like to acquire a property with a HUD legacy program, such as the ones mentioned above, and then have it converted to Section 8 housing under the RAD program.
Rental Assistance Demonstration and Low-Income Housing Tax Credits (LIHTC)
The LIHTC program, which permits investors in affordable properties to take a 10-year income tax credit, may also be combined with RAD, as well as with the HUD 223(f) or HUD 221(d)(4) loans mentioned above, to maximize financial benefits for investors. The U.S. government offers a specific amount of credits to each state, based on population, so the program can be competitive. However, being part of the RAD program can certainly give a property a leg up during the application process.