Q&A: Fannie Mae’s RAD Financing Push
- Jun 19, 2019
The Rental Assistance Demonstration or “RAD” is a Department of Housing & Urban Development program that allows public housing authorities to access private capital for the renovation and replacement of residential communities through conversion to Section 8 contracts.
While RAD has been around since 2012, Fannie Mae and its DUS lender network have stepped up their RAD financing efforts due in part to the mounting capital needs of public housing authorities. Two recent Fannie Mae-supported RAD financings took place in New York City, where the use of the program was approved late last year. Combined they will facilitate the renovation of more than 1,300 affordable units.
Commercial Property Executive spoke to Bob Simpson, Fannie Mae’s vice president of the Affordable and Green Financing, about the GSE’s commitment to the program and about the vast opportunities it presents private lenders and development partners.
The RAD program is not new. Why the increased interest for Fannie Mae?
From an affordable debt perspective, we have been active for a number of years supporting Section 8 financing throughout the country. Public housing has always been separate―it has its own funding mechanism. It hasn’t really been eligible for secondary market financing or for private capital to commit to public housing. We’ve always seen public housing deals around the markets but have never really had much of an opportunity to participate until a few years ago with the RAD program. What really drives our interest in this program is just the sheer amount of need that exists to revitalize and rehabilitate our nation’s public housing stock. I’ve seen estimates that the backlog is as high as $70 billion.
Prior to the RAD program, public housing authorities were really limited in addressing those repair and renovation needs. What’s especially impactful and meaningful to us is the fact that the folks who are living in public housing communities are folks that don’t make more than 50 percent of Area Median Income. It really is a renter population where there is a significant amount of need. You have very low-income families, seniors—folks that, were it not for public housing, would be paying a significant amount of their annual income toward rent. Being able to renovate these units, keep them affordable, and keep them from going into obsolescence is a critical part of our mission. But it also ties into something that we do and know very well, which is putting secondary market financing on Section 8 deals.
How does RAD Work?
RAD basically allows public housing authorities to leverage private debt by moving those units to a Section 8 platform. That allows us to come in with our DUS lender network (private capital) and leverage those Section 8 contracts so the public housing authorities can get the proceeds that they need to renovate the properties through significant moderate rehab improvements. Therefore, the properties are not going to go into obsolescence, and it’s good for the health and life safety issues for the residents. Or, in some instances, RAD allows us to work with public housing authorities and their private-sector partners to take those units down completely and build new units in their place. It is not often, but that has happened in the past. You can actually replace those units and put a new Section 8 contract on them through the RAD program.
Over the past couple of years, we’ve been ramping up our internal expertise so that we can understand the program in order to provide as much value as possible―not just for our lenders but also for public housing authorities and the developers they bring in from the private sector. All of the public housing authorities are unique, and they are dealing with unique situations in their communities. By understanding the program and the needs of the communities, we can make our commitments as flexible as possible.
We’ve been slowing ramping up and now we are at the point where we are running at full speed. We’ve done 20 RAD transactions over the past couple of years―28 properties in 11 states from California to Michigan to New York City. Basically, all across the country in cities as small as Greensboro, N.C., to places as big as New York City. We’re very excited about the program. We think it’s a tremendous opportunity for us to work more closely with public housing authorities to improve affordable rental housing for folks who, quite frankly, need it in a very significant and meaningful way.
How would underwriting a public housing community be different than underwriting a privately-owned property?
That’s one of the great things about the RAD program. Because the public housing authorities’ properties are being moved under a Section 8 contract, we’re able to use the same underwriting that we would for a typical Section 8 property. Oftentimes the public housing authority has been working in partnership with a private developer. From a property owner/management perspective, we obviously look at who is going to be owning the property and who is going to be managing the property. It is just making sure the person who is going to be ultimately responsible for managing the property understands the Section 8 program and that they have a good track record of managing properties in a way that is beneficial to the people living there.
You talk about special expertise. What type of special expertise would you need?
I think for us it’s really making sure we really understanding how public housing authorities work―we make sure we understand how they look at their properties and what their markets look like—and understanding the RAD program itself. You have to understand there are different types of properties and they each get treated a little differently.
We put together a public housing authority advisory council this year that consisted of public housing authority directors from across the country, so we can meet with them on a regular basis to understand what is going on in their communities and the challenges they are facing. Also, are there areas where Fannie Mae has tried to make an impact, where we’re missing the mark? And what can we do to fix that to make sure that we’re meeting our mission and fulfilling our charter requirements to provide affordable rental housing finance in these places where we haven’t in the past because of the limitations of the public housing program?
How has the reception from the lender community been?
It has been outstanding. From an affordable business perspective, we have a significant number of new units that are coming into the Section 8 program, which hasn’t grown. Essentially, Section 8 programs have been flat since the ‘70s. I think that creates an opportunity for lenders who understand how to underwrite Section 8 housing to provide additional financing. Like us, they recognize when you have a backlog of unmet capital close to $70 billion, you need to be able to leverage private capital to get that done and lenders are very good at being able to do that. I definitely think this is a growing part of the affordable market that will continue to grow.