Rental Assistance Demonstration: HUD Needs to Take Action to Improve Metrics and Ongoing Oversight

HUD administers the Public Housing program, which provides federally assisted rental units to low-income households through PHAs. In 2010, HUD estimated its aging public housing stock had $25.6 billion in unmet capital needs. To help address these needs, the RAD program was authorized in fiscal year 2012. RAD allows PHAs to move (convert) properties in the public housing program to Section 8 rental assistance programs, and retain property ownership or transfer it to other entities. The conversion enables PHAs to access additional funding, including investor equity, generally not available for public housing properties.

GAO was asked to review public housing conversions under RAD and any impact on residents. This report addresses, among other objectives, HUD's (1) assessment of conversion outcomes; (2) oversight of resident safeguards; and (3) provisions to help preserve the long-term affordability of units. GAO analyzed data on RAD conversions through fiscal year 2017; reviewed a sample of randomly selected, nongeneralizable RAD property files; and interviewed HUD officials, PHAs, developers, academics, and affected residents.

The Department of Housing and Urban Development (HUD) put procedures in place to evaluate and monitor the impact of conversion of public housing properties under the Rental Assistance Demonstration (RAD) program. RAD's authorizing legislation requires HUD to assess and publish findings about the amount of private-sector leveraging. HUD uses a variety of metrics to measure conversion outcomes. But, the metric HUD uses to measure private-sector leveraging—the share of private versus public funding for construction or rehabilitation of assisted housing—has limitations. For example, HUD's leveraging ratio counts some public resources as leveraged private-sector investment and does not use final (post-completion) data. As a result, HUD's ability to accurately assess private-sector leveraging is limited.

HUD does not systematically use its data systems to track effects of RAD conversions on resident households (such as changes in rent and income, or relocation) or monitor use of all resident safeguards. Rather, since 2016, HUD has required public housing agencies (PHA) or other post-conversion owners to maintain resident logs and collect such information. But the resident logs do not contain historical program information. HUD has not developed a process for systematically reviewing information from its data systems and resident logs on an ongoing basis. HUD has been developing procedures to monitor compliance with some resident safeguards—such as the right to return to a converted property—and begun a limited review of compliance with these safeguards. However, HUD has not yet developed a process for monitoring other safeguards—such as access to other housing voucher options. Federal internal control standards require agencies to use quality information to achieve objectives, and obtain and evaluate relevant and reliable data in a timely manner for use in effective monitoring. Without a comprehensive review of household information and procedures for fully monitoring all resident safeguards, HUD cannot fully assess the effects of RAD on residents.

RAD authorizing legislation and the program's use agreements (contracts with property owners) contain provisions intended to help ensure the long-term availability of affordable units, but the provisions have not been tested in situations such as foreclosure. For example, use agreements between HUD and property owners specify affordability and use restrictions that according to the contract would survive a default or foreclosure. HUD officials stated that HUD intends to develop procedures to identify and respond to risks to long-term affordability, including default or foreclosure in RAD properties. However, HUD has not yet done so. According to federal internal control standards, agencies should identify, analyze, and respond to risks related to achieving goals and objectives. Procedures that address oversight of affordability requirements would better position HUD to help ensure RAD conversions comply with program requirements, detect potential foreclosure and other risks, and take corrective actions.

GAO makes five recommendations to HUD intended to improve leveraging metrics, monitoring of the use and enforcement of resident safeguards, and compliance with RAD requirements. HUD agreed with our recommendations to improve metrics and build on existing oversight.

In 2011, the Department of Housing and Urban Development (HUD)  reported that its public housing stock had approximately $25.6 billion in  backlogged capital needs, with an average repair need of about $23,365  per unit, and according to HUD these figures have increased since then.  HUD’s Rental Assistance Demonstration (RAD) program was created, in  part, to address these capital needs. Under the traditional public housing  program, public housing agencies (PHA) generally cannot use private  funding sources to address the capital needs of their properties.  Furthermore, HUD estimates 10,000 units of public housing are  demolished or disposed of each year due to disrepair. RAD allows PHAs  to access other programs that create incentives for private investments,  such as the Low-Income Housing Tax Credit (LIHTC) program or insured  loans available through the Federal Housing Administration (FHA), or  conventional loans to address capital needs. In RAD, properties move  (convert) from the public housing program into Section 8 rental assistance  programs. RAD also permits PHAs to transfer ownership of the public  housing property as long as ownership or control of the Section 8  assisted units is by a public or nonprofit entity, although PHAs may elect  to retain ownership. If approved by HUD, the PHA can transfer the public  housing property to a for-profit entity to facilitate private investment  through tax credits provided that the PHA preserves its interest in the  property.

You asked us to examine the public housing component of the RAD  program to determine if it is achieving the goals it was enacted to  accomplish, including the long-term preservation of affordable units and  protection of residents. This report examines (1) HUD’s assessment of  the physical and financial outcomes of RAD conversions to date; (2) how  RAD conversions affected residents and what safeguards were in place  to protect them, including while temporarily relocated; (3) what  challenges, if any, PHAs faced in implementing RAD; and (4) the extent  to which RAD provisions are designed to help preserve the long-term  affordability of units.

To examine physical and financial outcomes in properties, we obtained  and analyzed RAD data on conversions as of September 30, 2017. We  assessed the reliability of the data by verifying that data fields—such as  the total number of units converted, dates for conversions, and financial  information—were reasonable and consistent with our data request, and  by reviewing internal HUD procedures and data dictionaries, and  determined that the data were sufficiently reliable for the purposes of  describing rehabilitation and new construction in RAD projects and  evaluating RAD leveraging metrics. In addition, we obtained HUD  documentation to review the methodology used to calculate RAD  leverage metrics. We also reviewed RAD documentation and selected  conversion files. We randomly selected a nongeneralizable sample of  files for converted properties (31 files closed as of July 19, 2017) that  planned to incur construction costs (undergo rehabilitation or new construction). We reviewed published RAD evaluations and metrics. We  interviewed PHAs at each of eight locations we visited and developers at  five of those locations (some PHAs acted as the developer). We selected  site visit locations to include a range of PHA sizes from small to large,  and PHAs that proposed a range of construction costs for RAD  conversion (from no construction costs to $594 million in construction  costs). Using a nonprobability sample based on PHA size, RAD subsidy  type, planned rehabilitation and resident relocation, number and size of  RAD transactions, transaction closing dates, construction costs, and  location we selected and spoke with an additional 10 PHAs by telephone  about HUD postclosing monitoring. We also reviewed HUD’s postclosing  procedures and interviewed HUD officials about their processes.

To determine how RAD affected residents in converted units, we  analyzed HUD public housing and Section 8 household data before and  after conversion including demographic characteristics of residents and  changes in rent, income, and household location. We determined that  some statistics were sufficiently reliable for the purpose of describing  some characteristics of RAD households, while others were not. We  discuss our assessment of household data reliability later in this report.  Further, for additional information on our data reliability assessment and  determination see appendix I. To describe safeguards for residents, we  reviewed legal requirements in HUD notices and HUD documentation on  RAD monitoring and compliance procedures. We also reviewed selected  conversion files to help determine how HUD implemented safeguards and  interviewed HUD about its implementation of resident safeguards. Finally,  we held focus groups with residents during our site visits to better  understand any effects on their living conditions.

To determine challenges PHAs faced in implementing RAD, we reviewed  HUD guidance and related documents for PHAs in the program. We also  interviewed 8 PHAs during our site visits and spoke with another 10 PHAs  by telephone about the benefits and challenges of participating in the  RAD program.

To examine provisions designed to help preserve long-term affordability  of units, we reviewed the RAD authorizing statute and amendments and  HUD notices. For a nongeneralizable sample of 31 randomly selected  properties, we examined templates for contractual agreements for RAD  closings and analyzed closing contracts to determine if agreements  matched program requirements. We interviewed HUD staff and staff of 18  PHAs (8 site visit PHAs and 10 by teleconference) to obtain their views  on the potential strengths or weaknesses of preservation provisions in the  case of default or foreclosure.

We conducted this performance audit from February 2016 to February  2018 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.

The RAD program was authorized by Congress and signed into law by  the President in November 2011 under the Consolidated and Further  Continuing Appropriations Act, 2012 with amendments in 2014, 2015,  2016, and 2017. The RAD program consists of two components. The  first component of the RAD program—and the focus of our review— provides PHAs the opportunity to convert units subsidized under HUD’s  public housing program and owned by the PHAs to properties with long- term (typically, 15–20 years) project-based voucher (PBV) or project- based rental assistance (PBRA) contracts. These are two forms of  Section 8 rental assistance that tie the assistance to the unit to provide  subsidized housing to low-income residents. In a RAD conversion, PHA- owned public housing properties can be owned by the PHA, transferred to  new public or nonprofit owners, or transferred to private, for-profit owners  when necessary to access LIHTC financing, if the PHA preserves its  interest in the property in a HUD-approved manner. The second  component of RAD converts privately owned properties with expiring  subsidies under old rental assistance programs to PBV or PBRA in order  to preserve affordability and encourage property rehabilitation.

The goals of the RAD program include preserving the affordability of  federally assisted rental properties and improving their physical and  financial condition. Specifically, postconversion owners (PHAs, nonprofits,  or for-profit entities) can leverage the subsidy payments under the newly  converted contracts to raise capital through private debt and equity  investments, or conventional private debt, to make improvements. The  RAD program provides added flexibility for PHAs to access private and  public funding sources to supplement public housing funding. These  financing sources may include debt financing through public or private  lenders; mortgage financing insured by FHA; PHA operating reserves;  replacement housing factor funds; seller or take-back financing; deferred  developer fees; equity investment generated by the availability of 4  percent and 9 percent LIHTC; or other private or philanthropic sources.

PHAs also may pursue various options for their conversions, which often  depend on property needs and available financing, including property  rehabilitation or new construction. Additionally, PHAs may undertake  conversion involving no property rehabilitation or new construction to  meet certain financial goals or for future rehabilitation or new  construction, as long as the PHA can demonstrate to HUD that the  property does not need immediate rehabilitation and can be physically  and financially maintained for the term of the Section 8 Housing  Assistance Payment contract (HAP contract).

The RAD authorizing legislation and RAD Notice also specify  requirements for ownership and control of converted properties. That is,  converted properties must have public or nonprofit ownership or control,  with limited exceptions. The RAD authorizing legislation, RAD Notice,  HAP contracts, and RAD Use Agreement also establish procedures to  help ensure that public housing remains a public asset should challenges  arise, such as default, bankruptcy, or foreclosure.

Oversight of RAD conversion and properties is primarily divided among  three HUD offices. The Office of Recapitalization is responsible for  administering the conversion process but generally does not oversee  converted properties. Before conversion, the Office of Public and Indian  Housing oversees the properties. After conversion, oversight remains with  Public and Indian Housing for properties that convert to PBV contracts  and transfers to the Office of Multifamily Housing Programs for PBRA.

The RAD program has been implemented and expanded in phases.  Since its authorization, the RAD unit cap gradually increased from 60,000  units in 2011 to 225,000 units in May 2017. The RAD program is currently  fully subscribed with all 225,000 units allocated. As of September 30,  2017, 689 conversions were closed that involved a total of 74,709 units  (see fig. 1 for a breakdown by fiscal year). Additionally, 706 conversions  involving 79,078 units were in the process of structuring conversion plans.  The remaining conversions under the cap were allocated to specific  properties and in the process of having commitments issued or reserved  under multi-phase or portfolio awards, according to HUD officials.

RAD conversions begin with the submission of an application by PHAs  after which they are notified of selection. The PHA is then required to  submit a financing plan within 180 days or a later deadline based on the  nature of the financing proposed.

A RAD conversion is considered closed when the HAP contract is signed  and financial documents are executed. The properties are considered  converted to Section 8 assisted housing on the effective date of the HAP,  which is generally the first day of the following month. Once the RAD  conversion is closed, the PHA or ownership entity can move forward with  its submitted proposals or RAD-related rehabilitation or new construction  and is responsible for complying with RAD requirements and associated  contracts. In some cases, rehabilitation can take place in advance of  conversion closing if public housing funds are being used.

Most RAD Conversions Involved Construction and Tax Credits, but HUD’s Leveraging and Construction Metrics Are Limited

Most RAD Conversions Involved Property Rehabilitation or New Construction, and Financing Often Included Tax Credits

Most Conversions Involved Construction and Many Used Tax Credits

Most RAD conversions involved some type of construction. Our analysis  of HUD data showed that as of September 30, 2017

417 of 689 closed conversions (61 percent) involved planned  rehabilitation to the property, 86 (12 percent) new construction, and  186 (27 percent) no construction; and

361 of 706 active RAD conversions (51 percent) involved planned  rehabilitation, 89 (13 percent) new construction, and 256 (36 percent)  no construction.

HUD officials stated that they approve conversions that involve no  immediate planned rehabilitation or new construction as long as the  property has no immediate needs to be addressed. Such conversions  allow PHAs to better position themselves to access additional capital to  address future rehabilitation or construction plans.

Our review of 31 conversion files also showed that the scope of proposed  physical changes varied among RAD conversions. For properties that  included scope of work narratives, physical changes included renovations  to mitigate hazardous materials, aesthetic renovations, code and  accessibility compliance, and construction of new buildings, among other  changes.

Financing for RAD conversions involved multiple public and private  sources, but many conversions used LIHTC. Our analysis of HUD data  showed that as of September 30, 2017, 173 of 689 closed RAD  conversions (25 percent) utilized 4 percent LIHTC, 99 (14 percent)  utilized 9-percent LIHTC, and 416 (60 percent) did not use LIHTC. By  dollar amount, major financing sources were 4 percent LIHTC at $2.4  billion; new first mortgages at $1.8 billion; and 9 percent LIHTC at $1.1  billion.

Construction costs constituted the highest-dollar use of financing for RAD  conversions, but not all conversions incurred construction costs, as  discussed earlier. On average, construction costs per closed conversion  were $6.4 million (ranging from no construction costs to $236 million) and  nearly $60,000 per-unit converted to RAD. Construction costs  represented the highest-dollar use of financing for closed RAD  conversions at $4.4 billion followed by building and land acquisition costs,  and developer fees. For more information on financing sources and uses,  see appendix II.

Stakeholders Cited Various Factors Influencing Financing for RAD Conversions

PHA officials and developers we interviewed cited various factors that  influence financing sources needed for RAD conversions. For example,  property needs assessments help establish the level of rehabilitation or  new construction that would address the capital needs of the property. In  turn, needs assessments can derive from physical assessment results  and incorporate federal, state, or local compliance requirements. For  instance, rehabilitation or construction would need to address the  accessibility requirements of the Americans with Disabilities Act and local  building codes, among other requirements.

PHA officials and developers we interviewed also said they had to  consider competition or access to financing for RAD conversions. For  example, PHAs noted that tax credit applications and other financing had  to be competitive. Some PHAs we interviewed also noted that while the 9  percent LIHTC provides more equity to finance low-income units  (finances 70 percent of the costs of the units), there is more competition  for the 9 percent LIHTC, while the 4 percent LIHTC can be automatically  awarded for certain deals involving tax exempt bonds and federally  subsidized projects. Thus, while some PHAs and developers might prefer  to obtain 9 percent LIHTC, they often apply for 4 percent LIHTC to  increase the chances of obtaining some tax credit equity. For example,  one particular PHA that had used both 4 percent and 9 percent LIHTCs  noted that in one transaction it had to compete against 74 applicants for  25 available awards of 9 percent credits.

HUD’s Metric for Financial Outcomes—the RAD Leverage Ratio—May Not Be Accurately Calculated, Partly because Final (Postcompletion) Financial Information Is Not Used

The RAD Leverage Ratio Does Not Reflect the Amount of Private-Sector Leveraging

The RAD authorizing statute requires HUD to assess and publish findings  regarding the amount of private capital leveraged as a result RAD  conversions. A leverage ratio relates the dollars other sources provide to  the dollars a program provides to an institution or a project. HUD uses  various quantitative, qualitative, and processing and efficiency metrics to  measure conversion outcomes. To meet the RAD statutory requirement,  HUD published an overall RAD leverage ratio that has fluctuated between  19:1 and 9:1 since 2014. HUD’s most recent leverage ratio in fiscal year  2017 was 19:1, nearly double what the agency reported the prior year.  We asked HUD officials why the leverage ratio nearly doubled between  2016 and 2017 and received conflicting information during the course of  our audit.

Initially, officials noted that the ratio was intended to replicate the  methodology used by PD&R in its September 2016 report.

Subsequently, the officials clarified that they did not follow PD&R’s  methodology for categorizing financial source data. Specifically,  officials did not review or make manual adjustments to the financial  data PHAs entered in open source fields to ensure sources actually  represented public, private, or other funding categories when  calculating the leverage ratio.

Finally, they noted that they disagreed with the methodology used in  the PD&R September 2016 report and stated that there are various  ways to calculate leverage. For the purposes of announcing the most  recent leverage ratio in 2017, HUD officials decided that a leverage  ratio comparing federally appropriated public housing resources would  reflect the amount of financing leveraged had RAD not existed.

We found, and officials from HUD acknowledged, three limitations to the  RAD leverage calculation. First, HUD generally had data on funding  sources and amounts a RAD conversion proposed to use (at the time of  its application to HUD and at the time of closing of construction financing)  rather than data after construction is completed on funding sources and  amounts. HUD officials stated that they were reviewing final closing  packages to confirm that the data reflect the latest reported information  on sources and uses of funds for each conversion at closing. However,  sources and uses of funds and amounts at the time the RAD conversion  is closed may differ from amounts upon completion of construction. In  October 2017, HUD implemented procedures to verify completion of  planned construction activities and costs, which we discuss later in this  report.

Second, HUD’s leverage ratio, published in 2017, did not manually adjust  funding source data to accurately account for all sources in calculating  the leverage ratio for RAD. Specifically, HUD did not isolate funding  sources that were federally appropriated, contributed by the PHA, or  contributed by state or local municipalities to calculate leverage. For  example, among approximately $2 billion from other financial sources,  HUD included Moving to Work (MTW) funding (which may include public  housing capital funds, public housing operating funds, and voucher funds)  and tax credit equity as leveraged sources. However, these are not  necessarily private sources, which we explain later in this report. As a  result, HUD’s current calculation does not reflect the amount of private- sector leveraging. HUD calculated and published a RAD leverage ratio in  May of 2017 using the following formula:  Total leverage ratio = (total dollars from all sources – public housing dollars)

To calculate the RAD leverage ratio, HUD uses some but not all financial  source data it collects (see app. II for a list of data fields collected by  HUD). For example, HUD mistakenly excluded data that capture private  funds, reducing the amount of total sources in the numerator. HUD  calculates “public housing dollars” by adding data that capture  replacement factor funds, public housing operating reserve funds, and  prior-year public housing capital funds. HUD considers tax credit equity,  new first mortgages, and “other funding” data to be non-public housing  dollars (see app. II for a list of fields in HUD’s calculation). PHAs enter a  description and amount for other funding sources in “other funding” data  fields (see app. II). For example, a PHA may enter a federal financial  source in one of the open-entry “other funding” data fields, requiring a  manual adjustment to properly account for the financial source.   According to HUD, additional fields were included in mid-2016 to better  differentiate certain sources such as from the HOME Investment  Partnerships Program (HOME) and seller take-back financing. Prior to  this point, these financial sources were placed into “other” fields, and the  standard resource desk report had not been updated until mid-2017 to  include all of these fields.

Third, HUD does not categorize and report its leveraging by private and  public sources. According to HUD officials, informative leverage  methodologies could calculate the ratio based on the leveraging of public  housing program funds, the leveraging of all federally appropriated funds,  or the leveraging of PHA funds (i.e., sources in the transaction that have  come from the PHA itself even if not federally appropriated through the  public housing program), among other methodologies. The RAD  authorizing statute requires HUD to assess and publish findings on the  amount of private-sector leveraging. In addition, Standards for Internal  Control in the Federal Government require agencies to communicate  quality information with external parties, such as other government  entities, to make informed decisions and evaluate the entity’s  performance in achieving key objectives.

HUD also does not use final (postcompletion) funding data in another  metric of RAD leveraging. Specifically, in June 2017 HUD publicly  reported that RAD “has leveraged more than $4 billion in capital  investment in order to make critical repairs and improvements.” HUD  calculates this figure by summing the construction costs—a  subcomponent of total costs—with data from the time a conversion closes  and not upon completion of construction. HUD officials we spoke with  clarified that this metric solely reports construction investments and does  not reflect any conclusion regarding private leverage of public funds. But,  HUD publically characterized this measure in different ways, including as  the amount of “public-private investment in distressed public housing,” the  amount of “construction achieved under RAD,” and the amount of “new  private and public funds leveraged by RAD.”

HUD’s 2016 interim report calculated and published multiple leverage  ratios, but chose to highlight a RAD leverage ratio that is consistent with  ratios used for other HUD programs. However, the ratio does not  specifically follow the prescribed ratio language in the authorizing statute  because the report states that the ratio represents the amount of private  and public external sources invested for every dollar invested by PHAs  but the statutory language only discusses private-sector leveraging.  Officials further noted that the statute does not require a particular  methodology and HUD relies on PD&R—and its independent contractor— to determine the appropriate methodology for purposes of compliance  with the statute. Lastly, the statute does not preclude the use of other  leverage metrics for other purposes, such as using the ratio to measure  the amount of nonpublic housing funds leveraged in RAD transactions  that would not be available to the property absent RAD. As a result,  HUD’s leverage metrics announced in May 2017 do not accurately reflect  the amount of private-sector leveraging achieved through RAD, do  include public funding as private sources, and inconsistently measured  sources that were federally appropriated or contributed by PHAs,  potentially under- or over-reporting the program’s performance.  Additionally, in October 2017, HUD began implementing procedures to  collect data after construction is completed and is not yet able to calculate  a leverage metric using final (postcompletion) financial sources rather  than the financial sources collected at closing. The lack of a consistent  metric for private leveraging could also lead to inconsistent reporting of  the leverage ratio, as has occurred in prior years.

Recalculations, Including of Funding Sources, Can Increase Accuracy of the RAD Leverage Ratio

We recalculated RAD leverage ratios in a number of different ways,  including to correct errors we identified during our review. For example,  HUD’s 2016 interim report noted that data on closed transactions do not  provide detailed description of “other sources,” requiring a crosswalk  between applications and closed transactions to develop estimates for the  allocation of “other sources” across financial source categories.  Abbreviated descriptions are provided in the form of notes that are not  always clear and consistent; therefore public housing sources may  include federally appropriated sources, as well state, city, or county  sources. Through our estimates, we found that the overall leverage ratio  could range from 7.44:1 for a ratio recalculating HUD’s leverage ratio to  1.23:1 for a ratio estimating private-sector leveraging.

Recalculation with HUD methodology and financial source  recategorization. As discussed previously, HUD’s methodology does  not account for all financial data collected by HUD and includes  “other” funding sources erroneously considered as leveraged funds.  Thus, we manually adjusted RAD funding source data and found that  nearly $1.2 billion were erroneously considered leveraged funds  because they are not private funds. For example, HUD included MTW  funds; public housing operating reserves; public housing capital funds;  replacement housing factor funds; other federal funds; other state,  local, or county funds; and take-back financing funds as leveraged  financial sources. For more information, see appendix II.

We obtained documentation from HUD to replicate their methodology and  recategorized financial sources that corrected errors in the data, and  found that the RAD leverage ratio was less than half of HUD’s most  recently publicly reported leverage ratio (19:1), approximately 7.44:1 (see  app. II).

Recalculation to exclude LIHTC and other federal sources. We  previously reported that LIHTCs are considered a federal source  because tax credit equity represents foregone federal tax revenue  and, therefore, are a direct cost to the government. Accordingly, we  recalculated the RAD leverage ratio by excluding all federal funding  sources and obtained a ratio of approximately 1.43:1 (see app. II).

Recalculation of private-sector leveraging. Lastly, the RAD  authorizing statute requires HUD to assess and publish findings on  the amount of private-sector leveraging, but HUD’s current calculation  does not present the amount of private-sector leveraging and does  not include all available data (for example, the “Other Private” funds  collected by HUD). We estimated the amount of private-sector  leveraging by grouping public housing sources, other public sources,  and private sources, resulting in a leverage ratio of approximately  1.23:1 (see app. II).

HUD Implemented Procedures to Verify Completion of Planned Construction Activities and Costs in October 2017, but Does Not Collect Final Comprehensive Financial Data

In October 2017, HUD implemented procedures to certify completion after  developers finish RAD-approved rehabilitation or construction. Previously,  HUD had a limited ability to monitor and evaluate final (postcompletion)  physical and financial changes in RAD projects with existing data.  According to HUD officials, HUD did not implement completion  certification procedures before October 2017 because it had been  addressing what it considered to be the highest risks first (such as  clarifying requirements for RAD participants, resident safeguards, and  other procedural and administrative requirements).

HUD’s October 2017 completion certification procedures include  instructions for owners to report final construction costs and  documentation on completion of repairs or construction within 45 days of  the completion date recorded in the RAD Conversion Commitment. More  specifically, HUD requires owners to list a final construction cost  amount—a subcomponent of total costs—in the RAD resource desk,  describe variances from the approved construction cost amount in a  comment box, and describe how increases in costs were addressed.  Additionally, a third-party must certify that the repairs in the scope of work  were completed by providing an attestation to HUD.

However, HUD’s procedures do not require documentation from the  owners to support the final total cost figures, which include not only  construction costs but also building and land acquisition costs, and  developer fees, among others as noted earlier in this report. These  procedures also do not require a certification from owners on all financing  sources and costs recorded in the RAD Conversion Commitment.

Standards for Internal Control in the Federal Government require that  management implement control activities through documented policies  and procedures to provide reasonable assurance that the objectives of  the agency will be achieved, and also communicate quality information  with external parties to make informed decisions and evaluate the entity’s  performance in achieving key objectives.

While HUD now has certification completion procedures in place, this  process provides the agency limited financial information from owners. As  a result, HUD is unable to report metrics that reflect final (postcompletion)  RAD financial outcomes after construction is completed. Furthermore,  HUD is limited in its ability to effectively oversee conversion budget and  cost variances, and expenditures that require HUD approval. Lastly, the  RAD authorizing statute requires that the Secretary of HUD demonstrate  the feasibility of the RAD conversion model to recapitalize and operate  public housing properties under various situations and by leveraging other  sources of funding to recapitalize properties. Without metrics that reflect  the final (postcompletion) financial outcomes of RAD after construction is  completed, HUD and congressional decisionmakers are unable to make  informed decisions concerning the RAD program.

HUD Has Not Systematically Analyzed Household- Level Data on Residents in RAD Conversions or Monitored Implementation of Some Resident Safeguards

HUD has not systematically tracked or analyzed household data on  residents in RAD-converted units that are available from its public  housing or Section 8 databases or from PHAs or other postconversion  owners—the main sources of resident data for the RAD program. In  addition, HUD has not yet developed monitoring procedures for all the  resident safeguards in the RAD program. Finally, residents told us of  some concerns about information they received on RAD conversions,  communications opportunities, and the relocation process.

HUD Has Not Systematically Analyzed Household-Level Data on the Effects of RAD Conversion on Residents

HUD officials told us that the agency does not systematically track or  analyze household-level data on residents in RAD-converted units across  existing program databases (HUD maintains household data for the  public housing and Section 8 rental assistance programs in two  databases). In particular, HUD does not track changes in household  characteristics before and after conversion, such as changes in rent, as  well as relocations or displacement of individual households.

However, according to HUD officials, their databases are not designed to  track the impact of RAD conversion on residents and they are unable to  electronically link household information submitted before RAD  conversion to information submitted after conversion. Once a property is  converted, the property and corresponding household information are  removed from the public housing database. Owners of converted  properties are to use software to manually enter household information  into the databases for the Section 8 program when submitting tenant  certifications and information for assistance payments. This procedure  is the standard for administration of all project-based Section 8 properties.  HUD officials stated that they have explored the possibility of transferring  household data from one system to another at the time of a property’s  conversion.

While HUD has not systematically analyzed household information from  its public housing and Section 8 databases, we were able to perform a  limited analysis. We requested and received data from HUD on the  households affected by RAD. Using the data provided that were current  as of June 2017, we were able to identify about 26,000 households that  lived in units that were converted to a PBV subsidy, but we were unable  to identify the total number of households converted to a PBRA subsidy.  Based on our analysis of 26,000 PBV households, we found about 2,700 (about 11 percent of) households were headed by an about 6,800 (about 26 percent of) households were headed by an  individual with a disability; about 2,700 households (about 10 percent of) households were  headed by an elderly person who also had a disability; over half (about 14,000 or 54 percent) of the households were headed  by an individual identified as black; close to 11,000 households (about  41 percent) were identified as white; and about 1,000 households  (about 4 percent) were identified as Asian. Close to 3,100 households  (about 12 percent) were headed by an individual identified as  Hispanic; about half (about 49 percent) of the PBV households were single- person households;  the median annual income of PBV households both before and after  RAD conversion was about $10,000; and about 5,300 (about 20 percent) of households were paying a flat rent  rather than income-based rent before RAD conversion.

However, the data on PBV households were not comprehensive. For  example, while about 10,000 residents (about 57 percent) experienced a  rent increase following RAD conversion under PBV, we could not  determine if the rent increase was the result of an increase in resident  income. We also could not determine changes in location among the PBV  households following RAD conversion.

Rather than relying on the public housing and Section 8 databases for  tracking household information during conversion, HUD officials indicated  that the agency will rely on locally maintained resident logs, which contain  household information collected by property owners, as the starting point  when HUD determines a compliance review is warranted. The logs will be  the primary way the agency collects household information for  compliance reviews under the RAD program, according to HUD officials.  In November 2016, HUD issued a notice, which requires the PHA or other  postconversion owner to maintain a log about every household at a  converting project, including information on race and ethnicity, household  size, and disability. The notice also requires owners to track residence  status throughout the relocation process, including whether the resident  has returned, moved elsewhere, was permanently relocated or evicted;  relocation dates; and details on any temporary housing and moving  assistance provided. Owners are required to make the information  available to HUD upon request for audits and other purposes. According  to HUD officials, the agency expects the information in the resident logs  to be more robust than what they would collect through the public housing  and Section 8 databases, which do not track residents while they are  relocated.

HUD officials stated that the agency plans to review selected resident  logs as part of an ongoing limited compliance review of about 90 RAD  conversion projects. HUD officials told us they are developing procedures  for performing compliance reviews—such as developing a mechanism to  review a sample of logs on a periodic basis—but they have not yet done  so because they have been focusing on developing procedures for  activities that present a high risk to the program as described in the  following section. HUD has not established a time frame for developing  these procedures. However, HUD officials indicated that they plan to  select resident logs for review based on risk of noncompliance and do not  plan to analyze program-wide information currently collected in the public  housing and Section 8 databases for program monitoring. HUD officials  also noted that that PD&R is planning to track a sample of residents  through its evaluation of the program, which we previously mentioned.

While HUD has decided to rely on resident logs because of the difficulty  of tracking household information across its program databases, using  resident logs to assess the effects of the RAD program on residents has  limitations. While the resident logs would contain detailed household  information, they were not required prior to November 2016 and may not  contain information on households converted before that date (RAD  conversions started in 2013). HUD’s public housing and Section 8  databases contain information on such households. Second, as  previously mentioned, HUD plans to review resident logs only when there  is a risk of noncompliance, but they collect household information in their  databases on a rolling basis. Standards for Internal Control in the Federal  Government require agencies to use quality information to achieve their  objectives, and obtain and evaluate relevant and reliable data in a timely  manner for use in effective monitoring.

Without a comprehensive review of household information—one based  on information in HUD data systems as well as resident logs—HUD  cannot reasonably assess the effects of ongoing and completed RAD  conversions on residents and compliance with resident safeguards, as  discussed in the next section.

HUD Has Been Developing Procedures to Monitor Some RAD Resident Safeguards

HUD has not yet developed monitoring procedures for certain resident  safeguards under the RAD program. RAD requirements include those  intended to ensure that residents whose units are converted through RAD are informed about the conversion process;  can continue to live in a converted property following RAD conversion; are afforded certain protections carried over from the public housing are afforded a phase-in of any rent increases under Section 8  program requirements.

Currently, based on HUD notice requirements, PHAs must document  compliance with three safeguards (PHA plan amendments, resident  notification, and procedural rights) in their RAD application and other  conversion paperwork. For example, PHAs must submit comprehensive  written responses to resident comments received in connection with the  required resident meetings with their RAD application. For one safeguard,  PHAs are not required to report to HUD but must retain documentation of  compliance to be made available to HUD as part of the monitoring for the  program. For others, the HUD notice does not specify reporting and  monitoring requirements.

Based on our review of files for selected conversions, which we  previously discussed, we found PHAs generally submitted documentation  of their efforts to inform residents about RAD conversion, such as  providing evidence to HUD of meetings with residents and written  responses to resident questions as required. However, the specific  documents for these requirements were not available from HUD in all  cases. HUD’s review of amendments to PHA plans was documented in all  but one of the conversions we reviewed. Documentation requirements for  resident relocations have changed since RAD was introduced, which  made the documentation more difficult to assess.

HUD developed and started implementing procedures in October 2017  that require owners to certify and provide data supporting compliance with  the resident right-to-return requirements. For example, owners must  certify the number of residents who exercised their right to return to a  converted property compared with the number of residents who did not  return. HUD is also developing standard operating procedures to review  each conversion for compliance with RAD relocation provisions.  Specifically, the procedures would describe the review steps required at  different stages of the conversion process, a process for identifying risks,  and how to address instances of noncompliance with RAD requirements.  Additionally, HUD noted that they have 2 compliance reviews under way  including 1 involving a set of HUD requirements that affect relocations of  more than 1 year and the limited compliance review of 90 projects that we  previously described.

HUD officials noted that they are developing additional guidance in other  areas. First, HUD officials indicated that as part of an overall update of  RAD standard operating procedures, they are developing additional  protocols on resident notification and how residents’ comments are  addressed through conversion planning. Second, the agency had not  been consistently collecting required documentation on “house rules,”  which describe the conditions and procedures for evicting residents and  terminating assistance at RAD PBRA properties, so it has developed and  implemented additional legal review procedures as part of the  implementation of RAD resident eviction and grievance procedural rights  requirements. According to HUD officials, they have been focusing  primarily on right-to-return and relocation requirements because they  represent areas of highest risk.

HUD has not developed separate monitoring procedures for other  resident safeguards—the phase-in of tenant rent increases, resident  representation through tenant organizations, and choice mobility  requirements. However, HUD officials told us that they plan to assess  how administrative data can be used to monitor choice mobility as part of  the planning for a separate PD&R evaluation of this safeguard. HUD  officials also indicated that there are procedures for residents to report  complaints to HUD if resident representation and organization  requirements are not met. Standards for Internal Control in the Federal  Government require agencies to implement control activities through  documented policies and procedures to provide reasonable assurance  that agency objectives will be achieved. These standards also require  agencies to design procedures to achieve goals and objectives, and  identify, analyze, and respond to risks related to achieving the defined  objectives. Table 1 includes a description and information on  implementation of resident safeguards that most directly affect residents’  experience with the conversion process and ability to live at the property  following conversion. Appendix III describes these and other RAD  resident safeguards.

HUD officials indicated that the safeguards for the phase-in of tenant rent  increases, resident representation, procedural rights, and choice mobility  presented a lower risk than the right-to-return requirements, so they were  a lower priority, and in some cases were addressed through general  monitoring of the Section 8 program. For choice mobility options, HUD  indicated that its data systems are not designed to track whether  residents are able to exercise these options, such as tracking whether  residents left a property to exercise choice mobility or for other reasons.

All but two of the resident safeguards do not take effect until after a  property has been converted and is part of the Section 8 program. For  example, residents are only eligible to use vouchers through choice  mobility after they have lived in the converted property for 1 or 2 years  depending on the assistance contract involved (PBV or PBRA). Moreover,  certain RAD safeguards are not typically available for Section 8 residents.  For example, RAD establishes resident representation provisions and  procedural rights that are more in line with public housing rather than  Section 8 requirements. While HUD has indicated that the Section 8  program has experience administering different types of assistance  contracts, RAD nonetheless creates separate requirements for certain  provisions from the public housing and Section 8 programs.

As previously mentioned, RAD conversions have been completed at an  increasing pace in the last 5 years. However, because HUD has not yet  developed separate monitoring procedures for certain requirements—the  phase-in of tenant rent increases, resident representation through tenant  organizations, and choice mobility requirements, many of which take  effect after a conversion—and without using all available household data,  the agency will not be able to reasonably ensure that these safeguards  were implemented.

Residents Described Mixed Experiences during the RAD Conversion Process

Residents who participated in our focus groups expressed some  concerns about information they received on RAD conversions,  communications opportunities, and the relocation process. Residents  indicated that they were notified about RAD conversion in a variety of  ways. Residents in 5 of 14 focus groups found the information presented  to them on RAD to be helpful. Residents in 7 of 14 focus groups indicated  that the information they received was not helpful. Across these focus  groups, a range of concerns was expressed, including that the  information provided was not always clear or reflective of the final  changes resulting from RAD conversion, and that the PHA and  management were not always forthcoming with information about the  RAD changes.

Residents in some focus groups also indicated that they were not  involved in the RAD conversion. Residents in 5 of 14 groups indicated  that they were not given the opportunity to provide input into the RAD  changes, while residents in 6 of 14 groups indicated that their concerns  were not addressed and their suggestions were not incorporated.

Residents also described problems with relocations. Some of the  concerns expressed by resident focus groups on relocation related to the  location of the temporary units (3 of 14 focus groups), the timing of  relocation or amount of notice given (7 of 14 focus groups), and moving  issues (such as items damaged during moves).

Residents were asked to describe ways in which RAD conversion  improved or harmed their living conditions. Residents in several focus  groups indicated that RAD improved their living conditions, including both  the condition (7 of 14 focus groups) and appearance of their units or the  property in which they lived (6 of 14 focus groups). Some of the changes  residents liked included the installation of new appliances, mold and pest  removal, and safety and energy efficiency improvements. However,  residents in several of the focus groups identified problems with their  living conditions following RAD conversion. The problems residents  identified included security concerns (10 of 14 focus groups); renovations  that were of poor quality (6 of 14 focus groups); and other problems with  the units (10 of 14 focus groups), such as pest problems; decreased  amenities (8 of 14 focus groups), such as the removal of common areas  or in-unit washing machines; and issues with property management (11 of  14 focus groups). For example, in several instances, residents stated that  new managers or owners in place following RAD conversion were not  responsive to their needs or concerns.

During our site visits, residents described other experiences with RAD  conversion. Residents in all of the groups identified being notified about  RAD. Residents in 9 of 14 focus groups indicated that their rent was the  same following RAD conversion. Residents in a few focus groups  indicated that their rent had increased because of changes in their  income or conversion from a flat rent. However, residents in a few focus  groups experienced challenges in how their income was certified for the  purpose of calculating rents, such as problems with requests for  information (2 of 14 focus groups) and other issues with the process (4 of  14 focus groups). For example, residents reported having to provide the  same paperwork multiple times. No instances in which residents were  permanently involuntarily displaced were reported. One resident  organization expressed concerns about fewer eviction protections and  resident representation after RAD conversion.

PHAs Identified Benefits and Challenges of RAD Participation

We spoke with 18 PHAs, some of which cited benefits as well as several  challenges of RAD participation and some noted HUD responsiveness to  their circumstances and concerns. According to many of the PHAs we  spoke with, benefits of participating in the RAD program included  reducing administrative requirements in Section 8 programs and opening  avenues for additional sources of funding. In particular, many of the PHAs  noted that RAD allowed them to access tax credit equity and other  funding to complete the bulk of their repairs and renovations at once.  Over half of the PHAs we spoke with also found HUD to be flexible and  responsive to individual PHA circumstances. The majority of PHAs we  spoke with indicated that remaining in the public housing program was  not tenable because funding for the public housing program was not  enough to meet their long-term capital needs.

PHAs we contacted also noted several challenges of participating in RAD:  financing constraints, timing challenges, and evolving requirements.

Financing constraints. Some PHAs noted that program rent  requirements can limit PHA participation in RAD. Each year, HUD  calculates a contract rent—the total rent for a unit, including operating  subsidy and resident contribution. PHAs must use the contract rent to  calculate Section 8 subsidies for properties converting under RAD.  According to HUD and several PHAs, contract rents for RAD-converted  Section 8 units are lower than rents in traditional Section 8 assisted units,  and are almost always lower than market-rate rents. Several PHAs and  HUD officials have described the difficulty of converting units from the  public housing program with this rent limitation. For example, when the  cost of needed rehabilitation or construction is high, low allowable  contract rents might not be sufficient to access appropriate capital for the  conversion.

In certain localities, PHAs have found solutions to augment rents and  have used RAD flexibilities to allow them to convert and plan for operating  expenses. For example, the PHA in Tacoma, Washington, used the  Moving to Work program flexibilities to increase contract rents and  housing officials in San Francisco used an allowable procedure to transfer  RAD assistance from converted buildings to properties throughout its  portfolio (each is a blend of traditional project-based vouchers with higher  contract rents and RAD assistance). In Montgomery County, Maryland,  the PHA similarly included RAD assistance in some mixed-finance  properties that contain other high-rent subsidies and market-rate rents.

Timing challenges. Some PHAs said they faced major challenges in  coordinating RAD timelines with HUD, lenders, or other parties or with the  requirements of the LIHTC process. HUD officials acknowledged that  PHAs with more complex transactions, including those involved in the  LIHTC process, struggle to implement their conversion plans within RAD  time frames. HUD officials noted that because there is a statutory cap on  the number of units that can be converted under RAD, they have  established time frames to stay under the cap and ensure that PHAs that  are planning to convert are ready to participate in the program.

Additionally, according to HUD, it has made technical assistance  available to all PHAs that receive a Commitment to enter into a Housing  Assistance Payment contract during the RAD process to help ensure their  readiness for RAD closing and to meet remaining conversion deadlines.

On the other hand, some PHAs expressed concern to us about delays in  the conversion process that put them at risk for missing state LIHTC  deadlines. HUD officials described putting conversions on a fast-track on  a case-by-case basis to meet LIHTC deadlines. For example, in one case  a PHA relocated residents before closing and without HUD approval.  HUD required the PHA to fund an escrow account until it was able to  determine any payments that might need to be made to residents and any  other necessary corrective action. This was done so that HUD could look  into the issue while mitigating additional harm to the residents and  continuing to move the PHA toward closing and aligned with tax credit  application deadlines.

The timing of conversion can also create gaps in the payment of Section  8 funds to PHAs. Section 8 funding should begin in January of the year  following conversion. PHAs rely on annual public housing subsidies for  the conversion year—public housing program funds are paid to PHAs  annually and are not recaptured by HUD following RAD conversion.  However, according to some PHAs we interviewed, Section 8 funding did  not begin on time. For example, in Baltimore, Maryland, subsidy flow after  conversion had not begun as of June of the following year. HUD officials  told us inadequate guidance from HUD and confusion from PHAs  regarding the necessary steps to request payment in a timely manner  have been the major cause of the problems. HUD has tried to remedy  delays and updated its notice to provide clearer guidance on the timing of  subsidy flow around the time of conversion to Section 8. Moreover, HUD  officials indicated that there has been confusion among PHAs on how to  request funds, so HUD is currently revising and updating the guidance on  steps PHAs must take to request payment under the PBRA program.  HUD officials also indicated that it has begun monitoring whether new  participants are taking the steps needed well before their first request for  funding.

Some PHAs we contacted also mentioned difficulty in coordinating with  HUD on fulfilling internal RAD requirements and reviews. According to  some, the different offices involved in RAD conversions within HUD were  not well aligned and had different interpretations of the rules. For  example, some RAD conversions require a civil rights review by HUD’s  Office of Fair Housing and Equal Opportunity Office, including those  transactions that require new construction or resident relocations. Some  PHAs indicated that such reviews occurred too late in the conversion  process even after other HUD offices had approved the conversion. HUD  officials acknowledge that different HUD offices have different objectives  in the RAD process. HUD officials indicated that the agency is trying to  coordinate more effectively among these offices and streamline the  conversion process as much as possible.

Evolving requirements. While the majority of PHAs with which we spoke  said that HUD provided clear, sufficient, and timely information, some  PHAs noted that it also was challenging to adapt to evolving  requirements.

Some PHAs noted that as HUD identified problems in the early years of  the program, it would change the guidance in response. For example,  HUD officials explained that it had clarified fair housing review  requirements in response to PHA concerns that the fair housing review  occurred too late in the process and could affect successful conversion of  projects. The most recent RAD notice (effective January 2017) is the third  version since 2013 and revisions have involved substantial changes.  For example, this notice provided PHAs with greater flexibilities on the  funding sources they can use to raise initial contract rents and the ways  they can demonstrate ownership and control of a converted property. In  addition, HUD introduced a notice in November 2016 to strengthen  resident protections.

Some PHAs told us they found the pace or timing of the evolving  requirements difficult to manage and also noted confusion about  conversion instructions and guidance due to changing requirements. For  example, one PHA indicated that the agency had problems reporting  information into a new RAD data field in HUD’s Voucher Management  System because there was no guidance at the time on how to complete  this field. However, HUD has since included additional instructions in the  user’s manual that became effective in April 2017.

Strength of Protections Intended to Preserve Affordability Is Unknown and HUD Does Not Have Procedures to Address Preservation Risks

RAD Provisions and Use Agreements Have Not Been Tested

The Committee has included language to establish procedures that will ensure  that public housing remains a public asset in the that  event that the project  experiences problems, such as default or foreclosure.

In each RAD conversion, HUD and the property owner execute a use  agreement, which specifies affordability and use restrictions for the  property. The use agreement generally exists concurrently with the HAP  contract, which is executed to govern the provision of either the PBRA or  PBV subsidy for the unit. The use agreement must be recorded in a  superior position to new or existing financing or other encumbrances on  the converted property. Under a Section 8 HAP contract, residents pay  30 percent of adjusted household income. In the absence of the HAP  contract, the use agreement is set up to control the amount paid:  If the HAP contract is removed due to breach, noncompliance, or  insufficiency of appropriations, under the use agreement new  households in all units previously covered under the HAP contract  must have incomes at or below 80 percent of the area median income  for households of the size occupying an appropriately sized unit for  their family size at the time of admission, and rents may not exceed  30 percent of 80 percent of area median income for the remainder of  the term of the use agreement.

For new residents at or below 80 percent of the area median income,  under the use agreement the resident rent contribution without a HAP  contract generally would be higher than that paid under a HAP  contract, which is based on household income instead of the  universally determined area median income.

Although the use agreement maintains some level of affordability, the  owner receives no subsidy under PBRA or PBV without a HAP contract  and resident rent contribution is not tied to individual household income  but rather based on a universal area income calculation (see fig. 3).

According to HUD officials, other program requirements support the goal  of long-term preservation:

HAP contracts are executed for 20 years for PBRA or 15–20 years for  PBV properties and compliance with all affordability requirements in  the HAP and statute and regulation governing the PBRA and PBV  programs must be maintained while the contract is in force.

According to the authorizing statute, PHAs (for PBV contracts) and  HUD (for PBRA contracts) shall offer and project owners shall accept  a renewal contract at the expiration of the initial HAP contract and at  each subsequent renewal. Each renewal contract will be subject to a  RAD use agreement, governing the use of the property consistent  with HUD requirements.

According to the RAD notice, the project owner also is to establish  and maintain a replacement reserve to aid in funding extraordinary  maintenance and repair and replacement of capital items. The reserve  account must be built up to and maintained at a level determined by  HUD to be sufficient to meet projected requirements. According to  HUD officials, during the conversion, HUD staff review each capital  needs assessment to try to determine whether a property’s capital  needs can be addressed over the forthcoming 20-year period.

We reviewed 31 completed conversion files, the set of documentation  required by HUD to enable a PHA to convert units from public housing to  a Section 8 subsidy, and associated RAD contracts. In each file, key  contractual protections appeared consistent with program requirements.  Specifically, in all cases executed use agreements (which included  requirements to limit residency eligibility to households making less than  80 percent of area median income) were included and not altered from  the HUD template. In most files we reviewed, we found foreclosure riders  were included and that they stated that use agreements would survive  foreclosure, meaning that any new owners would take ownership subject  to the agreements. Executed HAP contracts, requiring that residents’  contributions be set at 30 percent of adjusted household income, also  were present in all files we reviewed.

According to HUD officials, PHAs, and two housing groups we spoke  with, provisions in the RAD use agreement to keep units affordable  appear to be strong, with use and affordability protections designed to  survive foreclosure, but the strength of provisions cannot yet be fully  determined because the provisions have not yet been tested in  foreclosure proceedings or in courts. According to HUD officials, as of  October 2017 no RAD properties had entered foreclosure.

The RAD authorizing statute requires that ownership be transferred to a  capable public entity or, if not one, a capable entity as determined by  HUD, or if necessary to fulfill LIHTC requirements for the property, to a  HUD-approved for-profit entity (provided the PHA retained sufficient  interest in the property). HUD also subjects any subsequent transfer of  the property to HUD review and requires the successor ownership to  meet these same requirements. As stated in the use agreement, a lien  holder must give HUD notice prior to declaring a default and provide HUD  concurrent notice with any written filing of foreclosure (providing that the  foreclosure sale must not be sooner than 60 days after the notice), but  the use agreement does not prohibit a lien holder from foreclosing on the  lien or accepting a deed in lieu of foreclosure. The RAD use agreement,  which is recorded superior to other liens and places use and affordability  restrictions on the property, survives foreclosure. With or without a HAP  contract in place, the lender or new owner must maintain the units for low- income households according to the terms of the use agreement.  Therefore, according to HUD officials, the lender or new owner has an  incentive to identify an appropriate owner and secure HUD approval to  avoid a default under the HAP contract, which provides a Section 8  subsidy to the owner. That is, if no HAP contract were in place, the owner  would collect only the tenant rent contribution (30 percent of 80 percent of  area median income), rather than the tenant rent contribution plus the  subsidy.

HUD has discretion to enforce or waive certain use and affordability  protections.

According to the authorizing statute, in the case of foreclosure,  bankruptcy, or termination and transfer of assistance for material  violation or substantial default, the priority for ownership or control  must be provided to a capable public entity, or, if no such entity can  be found, to a capable entity as determined by the Secretary of HUD.

Additionally, the statute allows the transfer of property to for-profit  entities to facilitate the use of LIHTC financing, with requirements to  maintain the PHA’s interest, which was discussed above. As of  September 30, 2017, about 40 percent of RAD conversions involved  LIHTC financing.

According to the RAD notice, in the event of a default of a property’s  use agreement or HAP contract, HUD may terminate the HAP  contract and transfer assistance to another location to retain  affordable units. HUD will determine the appropriate location and  owner entity for the transferred assistance consistent with statutory  goals and requirements for RAD.

The RAD use agreement will remain in effect even in the case of  abatement or termination of the HAP contract for the term the contract  would have run, unless HUD agreed differently in writing. In this case,  the RAD notice limits HUD discretion to terminate the use agreement  to only cases involving a transfer of assistance to another property.

HUD Does Not Have Procedures in Place to Identify and Respond to Preservation Risks

HUD has not yet developed procedures to monitor RAD projects for risks  to long-term affordability of units, including default or foreclosure. HUD  officials described an ongoing effort to develop oversight procedures it  would need to reasonably ensure compliance with RAD agreements and  avoid risks to long-term affordability once conversions closed and units  moved to Section 8 but, as previously discussed, the agency has not yet  completed this effort or fully implemented a monitoring system.

HUD officials told us they also planned to develop protocols to more  closely monitor properties at risk of foreclosure, including developing  indicators, procedures, roles, and responsibilities within HUD, but they  have not finalized the design of procedures or fully implemented them. To  develop protocols, HUD created an asset management working group in  September 2016. The officials also stressed that no one can take  possession of or foreclose on a property without HUD involvement and  approval. For example, HUD officials said they expect few foreclosures  among RAD-converted properties because lenders tend to communicate  with the agency early so that it can become involved to prevent  foreclosure. HUD officials pointed to a robust structure to oversee  program properties in the PBRA program, but stated PBV property  oversight continues to be developed by the Office of Public and Indian  Housing.

According to Standards for Internal Control in the Federal Government,  agencies should design procedures to achieve goals and objectives, such  as the preservation of unit affordability, and respond to risks, in this case  the risk of default or foreclosure or noncompliance with program  requirements. Additionally, management should identify, analyze, and  respond to risks related to achieving its goals and objectives. According  to HUD officials, the agency had not yet fully developed and implemented  oversight procedures for postconversion monitoring because since 2012,  the agency has focused on RAD start-up and review and oversight  procedures for the conversion process. HUD officials also said that many  projects would receive ongoing monitoring from other parties, which also  could serve as a safeguard for unit affordability and help ensure the  appropriate financial and physical condition of the property after RAD  conversion. For example, just under half of all RAD properties use LIHTC  financing as part of financing packages, which can also include local and  state bonds. According to HUD officials, oversight by tax credit allocating  agencies, investors, and lenders, while not alone sufficient, helps secure  affordable units in a property for the long-term. However, tax credit  allocating agencies, investors, and lenders are not signatories to the HAP  contract or use agreement and have no formal role in reasonably  ensuring that properties meet requirements exclusive to RAD.

Although other entities may exercise some oversight of properties, by not  developing and implementing procedures for ongoing oversight, HUD in  its role as program administrator will not be able to reasonably ensure  that properties adhere to requirements or meet basic program goals.  Furthermore, without such monitoring HUD would be limited in its ability  to identify and assist with properties at risk of foreclosure.

RAD was created to demonstrate the feasibility of converting public  housing units to other rental assistance programs to help preserve  affordable rental units and address the significant backlog of capital  needs in the public housing program. However, demonstrating the  feasibility of RAD conversion is contingent on collecting and assessing  quality information about the conversion projects. HUD has an opportunity  to improve the demonstration’s metrics. For instance, implementing  robust postclosing oversight and collecting information on financial  outcomes upon completion of construction would not only improve HUD’s  oversight capabilities but also allow it to report quality information.  Moreover, limitations in HUD’s methodology for calculating leverage  ratios for RAD may obscure the effect of funding sources used to help  fund RAD conversions, potentially under- or over-reporting the program’s  capital leveraging. By collecting comprehensive information on final  (postcompletion) financing sources and costs and developing quality  metrics, HUD would be better positioned to more accurately report the  results of the demonstration program.

Additionally, a focus on the conversion process itself (and less on its  results), and limitations in HUD’s data have contributed to limited  monitoring by HUD in other areas. Specifically, by not developing and  implementing monitoring procedures to assess the effect of RAD on  residents HUD cannot ensure compliance with resident safeguards.  Further, HUD collects and maintains household data for the public  housing and Section 8 programs, yet it does not systematically use this  information to ensure that resident safeguards are in place. Finally, HUD  could benefit from additional procedures to assess RAD properties for  risks to long-term preservation to be able to respond to property default or  foreclosure.

We are making the following five recommendations to HUD:  HUD’s Assistant Secretary for Housing should include provisions in its  postclosing monitoring procedures to collect comprehensive high quality  data on financial outcomes upon completion of construction, which could  include requiring third-party certification of and collecting supporting  documentation for all financing sources and costs. (Recommendation 1)

HUD’s Assistant Secretary for Housing should improve the accuracy of  RAD leverage metrics—such as better selecting inputs to the leverage  ratio calculation and clearly identifying what the leverage ratio  measures—and calculate a private-sector leverage ratio.  (Recommendation 2)

HUD’s Assistant Secretary for Housing should prioritize the development  and implementation of monitoring procedures to ensure that resident  safeguards are implemented. (Recommendation 3)

HUD’s Assistant Secretary for Housing should determine how it can use  available program-wide data from public housing and Section 8  databases, in addition to resident logs, for analysis of the use and  enforcement of RAD resident protections. (Recommendation 4)

HUD’s Assistant Secretary for Housing should prioritize the development  and implementation of procedures to assess risks to the preservation of  unit affordability. (Recommendation 5)

We provided a draft of this report to HUD for comment. HUD provided  written comments on the draft report, which are summarized below and  reproduced in appendix IV. HUD also provided technical comments,  which we incorporated as appropriate.

In its comment letter, HUD stated that it agreed with our findings that  HUD can improve metrics used to assess program impact and build on  existing oversight structures. HUD described actions it intends to take to  implement our recommendations to the extent possible and consistent  with resource limitations.

More specifically, HUD agreed with our first recommendation to ensure it  collects comprehensive quality data on financial outcomes in its  postclosing monitoring procedures (which could include supporting  documentation for all financing sources and costs). HUD agreed it should  routinely collect an updated list of funding sources and uses and related  documentation when projects had cost overruns or other significant  changes. HUD intends to review and revise, as appropriate, required  postcompletion certifications. HUD added that in most cases, funding  sources and uses do not materially change between closing and  construction completion. HUD stated that securing the postclosing  information in such cases might be of minimal benefit relative to the  additional reporting burden. However, it is not clear how HUD would  determine if projects had significant changes in costs or uses because  HUD lacks postcompletion information that would show the magnitude of  changes. In relation to reporting burden, HUD already has implemented  procedures to collect limited financial information following the completion  of construction in October 2017. We believe any additional reporting  would not be disproportionate to the benefits of improving HUD's  oversight capabilities through project completion and enhancing its  reporting to more accurately reflect the results of the demonstration  program.

For our second recommendation to improve the accuracy of RAD  leverage metrics and calculate a private-sector leverage ratio, HUD  agreed that RAD leverage metrics can be improved. HUD will ensure that  the private-sector leverage ratio required by statute is clearly identified  and included in its RAD evaluation. HUD also intends to identify a small  number of relevant leverage ratios with distinct methodologies and will  routinely publish these ratios with clear identification and explanations. In  relation to our finding of misidentified funding sources, HUD plans to re- examine its chart of accounts and review prior transaction records to  address errors and properly classify transaction sources.

In response to our third recommendation to prioritize the development  and implementation of monitoring procedures for resident safeguards,  HUD agreed that it is important to better document and expedite  development and implementation of monitoring procedures. HUD also  agreed that additional monitoring was needed to ensure the right of  residents to request and move with a tenant-based voucher after a period  of residency (choice-mobility). HUD noted that its Office of Policy  Development and Research is seeking funding for additional research on  RAD with a focus on the use and effect of choice-mobility options, which  would inform HUD's monitoring efforts. Finally, while HUD said that we  did not find the safeguards to be weak or inadequate, we did not perform  an audit designed to assess the safeguards and therefore cannot opine  on their adequacy. On the basis of our findings, we found that HUD’s  implementation of these safeguards could be strengthened.

Regarding our fourth recommendation that HUD determine how it can use  available program-wide data and resident logs for analysis of RAD  resident protections, HUD agreed to examine how it could use its existing  data systems to further enhance its monitoring efforts. HUD added that  the systems have limitations, so that the agency also uses other  mechanisms to track and monitor implementation of resident protections.

For our fifth recommendation to prioritize the development and  implementation of procedures to assess risks to the preservation of unit  affordability, HUD agreed that it is important to assess and mitigate risks  to unit affordability. HUD stated that it employs robust underwriting  standards prior to permitting conversion, and relies on existing  procedures to conduct ongoing oversight of Project-Based Rental  Assistance (PBRA) properties, which we discussed in the draft. However,  as we noted, HUD has not yet developed procedures to more closely  monitor RAD properties at risk of foreclosure, though it plans to establish  indicators of foreclosure risk and oversight roles and responsibilities  within HUD. HUD said that since the summer of 2017, it has been  evaluating what additional oversight procedures might be needed for RAD  Project-Based Voucher properties. HUD also described plans to augment  its existing oversight procedures to preserve affordable units in the event  of foreclosure by developing protocols in the following areas: transfer of  property ownership to a capable entity, transfer of the rental assistance to  another site, and protection of residents in the event a Housing  Assistance Payment contract was terminated.

As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Secretary of Housing  and Urban Development and other interested parties. In addition, the  report will be available at no charge on the GAO website at  http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (202) 512-8678 or garciadiazd@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs are listed on the last  page of this report. GAO staff who made major contributions to this report  are listed in appendix IV.

Appendix I: Objectives, Scope, and Methodology

This report examines aspects of the Department of Housing and Urban  Development’s (HUD) Rental Assistance Demonstration (RAD) program.  More specifically, this report addresses (1) HUD’s assessment of the  physical and financial outcomes of RAD conversion to date; (2) how RAD  conversions affected residents and what safeguards were in place to  protect them, including while temporarily relocated and during conversion;  (3) what challenges, if any, public housing agencies (PHA) faced in  implementing RAD; and (4) the extent to which RAD provisions are  designed to help preserve the long-term affordability of units.

To address all four objectives, we analyzed agency documentation and  interviewed officials from HUD. The documentation we reviewed included  policies and procedures for RAD; manuals describing HUD data systems;  draft policies and procedures for implementing postclosing oversight; and  reports on RAD performance. We interviewed HUD headquarters officials  from the Office of Recapitalization within the Office of Housing, which  oversees the administration of RAD, and the Office of Policy  Development and Research (PD&R). We also interviewed PHA officials  and developers involved in RAD transactions, as well as selected experts  and other stakeholders to obtain their perspectives on RAD. Additionally,  we conducted a literature search to identify publications related to RAD.

We visited a nonprobability sample of eight PHAs in Maricopa County,  Arizona; Alameda County, California; Montgomery County, Maryland; and  in the cities of San Francisco, California; Baltimore, Maryland; New Bern,  North Carolina; El Paso, Texas; and Tacoma, Washington, to observe  housing units before, during, or after renovation when possible as well as  common areas that had planned or undergone renovation. We selected  sites to include varying PHA sizes, RAD subsidy types, planned  rehabilitation and resident relocation, numbers and sizes of RAD  transactions, closing dates, constructions costs, and geographic locations  across the United States. At each site, we conducted semistructured  interviews with PHA officials and, when available, developers (5 sites).

We also conducted one or two focus-group interviews with groups of 6– 15 residents who lived at the converted properties to obtain their  perspectives and experiences. In each location, we asked the PHAs to  invite residents to participate in the focus groups based on their  availability. We also met with the Resident Advisory Board in each  location that had one. For 7 of 8 site visits, we selected two RAD  properties to conduct resident focus groups (in Alameda County,  California we held one focus group). We conducted a content analysis  based on resident focus group interviews to describe resident  experiences and the RAD program’s effects on residents. Utilizing the  selection criteria noted above, we conducted semistructured telephonic  interviews with an additional nonprobability sample of 10 PHAs in Fresno,  California; Fort Collins, Colorado; Dekalb County, Georgia; Chicago,  Illinois; Ypsilanti, Michigan; Cuyahoga County, Ohio; Philadelphia;  Pennsylvania; Spartanburg, South Carolina; McKinney, Texas; and  Yakima, Washington. Because we selected a non-probability sample of  PHAs to visit and interview, the information we obtained cannot be  generalized more broadly to all PHAs. However, it provides context on  RAD particularly on implementation challenges and perspectives on  physical and financial impacts, long-term affordability, and resident  protections.

We also selected the following 11 individuals and organizations as  experts and stakeholders:  1.  Council of Large Public Housing Authorities  2.  National Association of Housing and Redevelopment Officials  3.  Center on Budget and Policy Priorities  4.  Public Housing Authorities Directors Association  5.  National Housing Law Project  6.  Community Legal Services of Philadelphia  7.  Maryland Legal Aid  8.  Disability Rights Maryland  9.  Jaime Alison Lee, Associate Professor of Law and Director,  Community Development Clinic, University of Baltimore School of Law  10. Yumiko Aratani, Assistant Professor, Columbia University Mailman  11. University of California, Berkeley, Terner Center for Housing  We interviewed experts and stakeholders on resident impacts and  implementation challenges associated with RAD. The entities may not  represent all views on these topics, but their views provide insights on  RAD. To select these individuals and groups, we met with three major  PHA associations and two resident advocacy groups, and asked for  referrals for organizations or individuals with expertise in RAD.

We also selected a nonprobability, random sample of 31 RAD conversion  files to review. Utilizing HUD RAD Resource Desk data, we randomly  selected 31 RAD files for properties that had closed conversion as of  June 30, 2017 and that planned to incur construction costs. We used the  files to help us determine physical changes to RAD conversions and the  impacts of RAD on residents through, for example, relocation. We  excluded RAD conversions with no construction costs from the random  sample because they would not have physical changes and no resident  relocation would occur before or during our review.

To address our first objective on the physical and financial outcomes of  RAD conversion to date and how HUD measured these outcomes, we  first obtained and analyzed HUD data on RAD conversions since RAD’s  authorization (from fiscal years 2013 through 2017). We assessed the  reliability of these data by reviewing system documentation, interviewing  knowledgeable officials about system controls, and conducting electronic  testing. We determined that the data were sufficiently reliable for the  purposes of describing rehabilitation and new construction in RAD  projects and evaluating RAD leveraging metrics. We included in our  analysis all RAD conversions that were active or closed. We used these  data to determine the number of closed RAD conversions, associated  financial sources and uses, subsidy types, and type of construction  (rehabilitation, new construction, and no rehabilitation or new  construction). In addition, during our interviews with PHAs and  developers, we obtained their perspectives on potential contributing  factors to financial decisions and type of construction pursued through  RAD conversion. As noted earlier, we also reviewed 31 randomly  selected files of converted properties with construction costs to describe  property physical changes in RAD conversions.

Furthermore, we reviewed HUD documents, such as HUD and PD&R  evaluations, publications, and policies and procedures to gain additional  context for how HUD measures RAD outcomes. We also interviewed  HUD officials, including PD&R and Office of Recapitalization officials, on  RAD data and metrics, as well as other performance monitoring activities.  We further analyzed data from the HUD RAD Resource Desk to  determine how these data support HUD’s metrics and performance  monitoring activities. As previously mentioned, we determined that these  HUD data were sufficiently reliable for the purposes of this report.  Specifically, we assessed and calculated RAD leverage ratio and  construction activity. We assessed HUD’s performance monitoring  activities and reporting against the RAD authorizing statute, Standards for  Internal Control in the Federal Government.

To recalculate estimates of the RAD leverage metric, we obtained  documentation from the Office of Recapitalization to review the  methodology used to calculate their most recent leverage ratio. We  aligned the methodology they provided with RAD Resource Desk  Transaction Log data that was downloaded on August 7, 2017. We  replicated HUD’s methodology and matched the data utilized with the  descriptors from the Transaction Log. To isolate financial sources and  manually adjust the “other source” data, we compiled matched  descriptors and funding amounts and categorized each observation  based on the funding source description, as a federal source,  state/county/city source, or PHA source, among others. For additional  information and results, see appendix II.

To determine how RAD affected residents in converted units, we  analyzed HUD public housing and Section 8 household data before and  after conversion (demographic characteristics of residents and changes in  rent, income, and location). Specifically, we examined data from 2013— when the first transactions closed—through June 30, 2017. HUD  compiled and provided custom extracts of data on households in RAD- converted properties from the Inventory Management System/Public and  Indian Housing Information Center (IMS/PIC) (public housing and Section  8 PBV) and Tenant Rental Assistance Certification System (Section 8  PBRA). We assessed the reliability of the data extracts provided by HUD  by (1) performing electronic testing of required data elements, (2)  reviewing existing information about the data and the system that  produced them, and (3) interviewing agency officials knowledgeable  about the data. We determined the data on PBV households were  sufficiently reliable for the purposes of our reporting objectives, but that  the data on PBRA households was not sufficiently reliable for purposes of  describing some characteristics of RAD households. For example, in  trying to determine participation in the RAD program by year, we received  several thousand PBRA entries that preceded the establishment of the  RAD program. Moreover, as we previously mentioned, the  postconversion household data for PBRA conversions is in a separate  data system, so some variables, such as those related to race, ethnicity,  rent, and income, differ from the other household data for that program.  Because of these limitations, the data for PBRA households were not  reliable for purposes of comparing RAD household characteristics before  and after conversion as we had intended. To describe safeguards for  residents and help ascertain how HUD implemented protections, we  reviewed legal protections and requirements in HUD notices, reviewed  selected conversion files, and interviewed HUD officials about monitoring  and compliance processes. Finally, as previously described, we held  focus groups with residents to better understand any effects on their living  conditions and quality of life.

To determine challenges PHAs faced in implementing RAD, we reviewed  HUD guidance and related documents for PHAs in the program. We also  interviewed eight PHAs during our site visits and spoke with another 10  PHAs by telephone about the benefits and challenges of participating in  the RAD program.

To examine provisions designed to help preserve long-term affordability  of units, we reviewed the RAD authorizing statute and amendments and  HUD notices and interviewed HUD staff to verify our understanding of  agency affordability protections. For a sample of 31 randomly selected  properties, we examined templates for contractual agreements for RAD  closings and analyzed closing documents and contracts to determine if  agreements matched program requirements. We interviewed HUD staff  and staff of 18 PHAs to obtain viewpoints on the potential strengths or  weaknesses of preservation in the case of default or foreclosure.

We conducted this performance audit from February 2016 to February  2018 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.

Appendix II: HUD’s Reported Leverage Ratios and Our Recalculation Estimates

The Department of Housing and Urban Development’s (HUD) Office of  Recapitalization collects financial sources and use data from Rental  Assistance Demonstration (RAD) participants. Table 2 lists the financial  source fields collected by HUD.

Table 3 lists the financial cost fields collected by HUD.

Table 4 provides additional financial source detail pertaining to HUD’s  leverage ratio calculation.

Table 5 and Table 6 show the total financial source amounts collected by  HUD. Specifically, Table 5 shows total financial source amounts prior to  recategorization, while Table 6 shows total financial source amounts after  manual adjustments. Manual adjustments included isolating funding  source observations in “other funding” fields 1-6 and incorporating them  into existing fields, as appropriate.

Table 7 replicates HUD’s methodology for calculating the RAD leverage  metrics after manual adjustments in HUD data. See Table 4, above, to  compare changes in each category.

Table 8 recalculates the leverage ratio by deducting federal sources as  leveraged sources.

Table 9 recalculates the leverage ratio by deducting public sources as  leveraged sources (compare to Table 8 above).

Appendix III: RAD Resident Safeguard and Monitoring Requirements

The Rental Assistance Demonstration (RAD) program has numerous  requirements intended to ensure residents whose units are converted  through RAD receive certain protections. The following is a description of  these safeguards and their reporting and monitoring requirements.

Appendix IV: Comments from the Department of Housing and Urban Development

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Appendix V: GAO Contact and Staff Acknowledgments

In addition to the individual named above, Paul Schmidt (Assistant  Director), Julie Trinder-Clements (Analyst in Charge), Meghana Acharya,  Enyinnaya David Aja, Alyssia Borsella, Juan J. Garcia, Ron La Due Lake,  Amanda Miller, Marc Molino, Barbara Roesmann, Jessica Sandler,  MaryLynn Sergent, Rachel Stoiko, and William Woods made major  contributions to this report.