Public housing authorities (PHAs) are under growing pressure to reinvest in aging properties while navigating rising costs and an increasingly competitive funding environment. Pairing HUD’s Rental Assistance Demonstration (RAD) program with the Low-Income Housing Tax Credit (LIHTC) has become a powerful strategy to help PHAs recapitalize older portfolios, maximize available resources, and build capital structures that support long-term stability. When used thoughtfully, RAD and LIHTC can move projects beyond short-term repairs toward durable, sustainable preservation.
To better understand how these tools work together in today’s market, HAI Group spoke with Project Coordinator Elizabeth Murphy and Affordable Housing and Repositioning Manager Aisha Turner, both from Baker Tilly. Drawing on Baker Tilly’s experience advising public and affordable housing owners nationwide, they share insights on using 4% and 9% LIHTCs alongside RAD to navigate financing trade-offs, competitive allocation processes, and evolving market conditions.
The 4% LIHTC program is generally noncompetitive and available for projects paired with tax-exempt private activity bonds, providing a subsidy for up to around 30% of a project’s total cost. This often requires substantial additional funding (permanent debt financing, soft loans, grants, etc.). Applications occur on a rolling basis, allowing more flexibility for RAD project timelines. Their noncompetitive nature generally makes them the “workhorse” for large-scale RAD portfolio conversions where speed and predictability are important.
The 9% LIHTC program is highly competitive, requiring projects to achieve the highest possible score within the state’s QAP, and provides a subsidy for up to 70% of project costs. These scoring parameters vary by state, and consider everything from population to affordability levels to project design. The higher subsidy allows the project to support deeper affordability.
The level of rehabilitation required is a determining factor, along with timing and feasibility. The 4% LIHTC program is likely better suited for moderate rehabilitation or smaller developments, offering more predictability when bond cap is available. The 9% LIHTC program is necessary where a higher amount of subsidy is needed, but is tied to the application cycle. Also, regarding new construction, in many state projects, 50 to 80 units would fit within the 9% program, as the amount of annual 9% credits is capped by each state. Larger new construction projects would utilize the 4% credit.
In some cases, a blend of 4% and 9% LIHTCs can support large, complex projects with multiple phases and assets with different needs. Owners can also utilize 4% acquisition credits paired with 9% LIHTC program for rehabilitation.
For projects with low contract rents, 9% LIHTCs are more prudent. 9% LIHTCs support projects with rents at or below 60% AMI, and pair well with soft funding sources such as HOME, CDBG, and AHP.
Higher equity from 9% LIHTCs provides flexibility to address long-term asset needs. This is particularly vital for RAD properties where the contract rents may not be high enough to support a large commercial mortgage. 9% equity fills that gap and allows for:
PHAs are examining their portfolios to determine which properties need immediate repairs versus large-scale rehabilitation requiring relocation and extensive cost.
For buildings within the portfolio requiring less rehabilitation and debt that can be supported by RAD rents, a 4% LIHTC application may be prudent. Buildings with high capital needs may require more equity that can be gained from the 9% LIHTC program.
For LIHTC, the maximum developer fee for both 4% and 9% LIHTC is determined by the state housing finance agency (typically 12-15% of the eligible basis). The developer fee payment schedule is negotiated with the investor and often impacts equity pricing. A deferred developer fee (DDF) loan can be utilized to offset project costs if necessary to cover any shortfalls, and in some state HFAs, are required as part of a LIHTC capital stack.
Developer fees in RAD/LIHTC transactions must balance HUD reasonableness standards, state agency limits, and investor feasibility concerns. To avoid “over deferring”, PHAs should ensure the project’s debt service coverage ratio (DSCR) is strong enough to pay back the deferred portion within the standard 10 to 15-year requirement.
PHAs and developers should consider whether a DDF loan is necessary or if the project is feasible with the bulk of the developer fee coming in at stabilization, in line with HUD requirements.
Investors want developer fees paid as they look to pay fees to the housing authority developer as another contingency to the project. Developer fee paid is unrestricted.
The One Big Beautiful Bill Act (OBBBA) increased state 9% LIHTC allocations and reduced private activity bond (PAB) financing requirement from 50% to 25%, expanding access to the 4% LIHTC program. While these changes will allow more tax credit projects to move forward in 2026, interest rates and equity pricing are driven by market conditions and investor appetite.
However, strong RAD subsidy, predictable cash flow, and deeper affordability levels can make these projects desirable for state HFAs and equity investors.
Gap financing in a LIHTC/RAD project’s gap varies by project type, local priorities, and the availability of complementary sources.
HOME Investment Partnerships and the Community Development Block Grant programs are the most common sources, as they are federal programs administered by HUD. These programs blend well with RAD/LIHTC transactions, due to the alignment of requirements for these programs. HOME and CDBG funds are typically structured as soft loans in LIHTC/RAD projects with deferred or below-market interest.
Local housing trust funds are another widely used source. Availability and competitiveness depend on the state or municipal housing priorities but are typically flexible with a forgivable or deferred loan or extremely low interest rate. This flexibility makes them particularly valuable for RAD/ LIHTC projects that require deep subsidy layering to achieve feasibility.
The Federal Home Loan Bank (FHLB) Affordable Housing Program (AHP) is also commonly layered into RAD/LIHTC transactions for both 4% and 9% LIHTC projects. AHP is administered by the project’s regional FHLB district, and awards are made through an annual competitive cycle. Scoring criteria vary by region, but projects serving lower income households or incorporating deeper affordability often score well.
Some PHAs also leverage Moving to Work (MTW) reserves. PHAs with MTW designation have unique flexibility to use their reserves for capital investment. MTW funds can be utilized as soft loans or grants depending on the PHA’s MTW plan and HUD approvals, though their use is mostly based on the specific project.
For RAD projects financed with tax-exempt bonds or ACC-backed debt, meeting the 25% test allows the project to automatically qualify for 4% LIHTC. This reduces the need for traditional bank debt but requires careful alignment with ACC debt service expectations and long-term operating assumptions.
Finally, seller notes are commonly used as an internal gap funding source in RAD conversions. The PHA effectively “loans” the value of the property to the new ownership entity, creating a soft debt source of funds that doesn’t require actual cash at closing.
Efficient capital stacks prioritize long-term performance. RAD subsidy provides predictable revenue, which strengthens the operating pro forma and helps sizing for LIHTC equity and permanent debt. Once those primary sources are maximized, soft funds such as HOME, CDBG, or local trust funds are layered in as deferred or low-cost loans to close remaining gaps without creating unsustainable debt service.
Special attention must be paid to each funding source’s requirements, ensuring affordability levels are compatible, and avoiding over-leveraging the project with subordinate debt. This allows the project to close financial gaps while maintaining stable operations throughout the compliance period.
Investors require a single-purpose entity to own the project, so RAD/LIHTC deals use a Limited Liability Company (LLC) with the PHA serving as the managing member, or a Limited Partnership (LP) structure in which the PHA’s nonprofit affiliate serves as the general partner (GP). Using an affiliate protects the PHA’s core assets from project-specific liability and meets investor requirements.
A nonprofit-controlled GP can make the project more competitive for soft funds (HOME, CDBG, local housing trust funds, AHP, etc.) and have QAP scoring advantages in some states, while also aligning with HUD requirements.
A well-drafted partnership agreement defines governance, major decision controls, and long-term ownership projections. Additionally, the PHA retains the right of first refusal (ROFR) to buy out the investor after the 15-year compliance period, preserving the property for the community. PHAs should pay special attention to ensure that the affiliate structure is compliant with all entities involved in the deal.
Securing soft funding can be the most time-consuming part of an affordable housing transaction due to its competitive nature and application cycles. PHAs should aim to get commitments early to keep transactions on track. Early communication with funders, investors, and lenders about the competitiveness and feasibility of a project will prepare the PHA for the funding cycle and, eventually, finance closing.
Once a project has been deemed ready for an application, capital needs assessments, environmental reviews, and financial feasibility should be completed within six months of the deadline to demonstrate project readiness and meet application requirements. These and other reports required by the state HFA and/or HUD can take several weeks to prepare, so early planning is essential.
Early communication with HUD field office representatives and engagement with RAD coordinators about the funding cycle for an upcoming application can ensure alignment on timing for approvals and requests for information.
Early planning and assessment of the needs of a PHA portfolio can ensure that specific needs are understood, such as the level of rehabilitation for existing buildings, the desire to expand or add units, and occupied units that require relocation. Initial rehabilitation scopes should assess critical systems first, then assess whether other work is necessary for the long-term sustainability of the asset.
PHAs may have different assets with varying needs in their portfolio and may call for a phased redevelopment or modernization across multiple buildings. This may require several RAD transactions and a blend of 4% and 9% LIHTCs, depending on the scope.
PHAs should assess the most optimal use of existing resources, such as MTW reserves, operating reserves, and capital funds, to fill funding gaps. Additionally, PHAs should consider a RAD/Section 18 Blend, and convert 25-80% of units via Section 18 Disposition rather than RAD. By shifting some units to Section 18, PHAs can access higher rents, which allows the property to support a larger first mortgage, naturally filling the gap.
Underestimating the scope of a PHA portfolio rehabilitation can lead to future capital repairs. To avoid this, the PHA should commission a third-party capital needs assessment (CNA) early in the process and consult with a general contractor to obtain a rough estimate of repairs and options if a gut rehab is necessary.
Scheduling can be impacted by the timing of various funding applications, which are sometimes unpredictable and require going through several rounds before receiving an award. PHAs should partner with a developer and financial advisor experienced with LIHTC and typical soft funding sources to ensure that the most competitive application is submitted.
Relocation plans should be aligned with construction sequencing and funding requirements. It is recommended to work with a relocation specialist to ensure not only that the relocation requirements are being met, but determining if a relocation schedule is feasible with HUD timing and finance closing for LIHTC and other soft funding sources.
PHAs should build HUD review time into schedules, particularly for RAD Commitment to Enter into a Housing Assistance Payment Contract (CHAP), RAD Conversion Commitment (RCC), and closing submissions, as a delay can derail a project to the extent that a funding application deadline is missed or prolongs closing.
Ensuring that the project is feasible by meeting early with lenders and investors can help to avoid potential coordination and compliance issues. RAD rent levels, capital needs assessment-driven scopes, and LIHTC underwriting are interdependent and rely on all parties being aware of expectations. If there are any differences between HUD, lender, and investor requirements, these issues should be reconciled early in the process to avoid delays in applications or financial closing.
HUD approval processes often do not align with the LIHTC application cycle or closing deadlines. Common mismatches include:
Compliance setbacks often occur when a PHA fails to meet resident requirements. HUD requires at least two resident meetings before a financing plan is submitted, and additional resident meetings for significant changes in scope. Best practice is to engage residents early and consistently, particularly around relocation, construction impacts, and long-term affordability commitments.
And don’t just meet—document: Keep detailed minutes, and written responses to resident comments.
PHAs should utilize a project team with experience managing a RAD/LIHTC deal, including a developer and financial consultant. General contractors should also be aware of the challenges regarding relocation rules, compliance paperwork, and potential delays or setbacks due to application cycles and closing timelines, and be realistic about general requirements and overhead.
Partnering with an investor and lender early in the process and maintaining open communication about market fluctuation that impacts interest rates and equity pricing will allow the project team to adapt to new financial assumptions and determine a feasible path forward.
The OBBBA, passed in 2025, impacted the LIHTC program in several ways:
While these are positive changes to LIHTC policy, equity pricing and interest rates are subject to market forces. PHAs should be aware of how similar deals are being underwritten in their area and what loan terms are available.
Construction costs have stabilized compared to the volatility of recent years, but they remain elevated and continue to be influenced by federal wage rules, tariffs, and broader economic policy. PHAs should continue to use conservative assumptions when budgeting for RAD/LIHTC projects.
HUD’s Alternative Operating Cost Adjustment Factor (OCAF) allows owners to seek higher rent increases if their operating costs (insurance, utilities) have skyrocketed beyond standard inflation.
Consolidated RAD/Section 18 contracts (PIH 2024-40): HUD now allows for a single HAP contract for blended deals. This simplifies administration, but also means that all units are now subject to OCAF increases rather than fair market rent (FMR) adjustments. PHAs should underwrite more conservatively to ensure long-term sustainability as costs rise.
PHAs benefit from evaluating their portfolios 18 to 24 months before they plan to close on project financing. Many agencies are now developing multiyear repositioning plans that assess the needs of each property and sequence transactions accordingly. This approach allows PHAs to target 9% LIHTCs to their most distressed sites while using 4% credits for properties with more modest capital needs, creating an orderly and strategic pipeline of RAD/LIHTC conversions.
PHAs should underwrite for resilience. Evaluating all repositioning options, particularly the RAD/Section 18 Blend, can help secure the highest possible starting rents and support stable operations, adequate reserves, and positive resident outcomes during the compliance period.
This work is far more effective when PHAs partner with developers and consultants who have deep LIHTC and RAD deals and a strong understanding of current market conditions. Given how quickly external factors can shift, project teams also need to remain flexible and ready to adjust their strategy to maintain feasibility.
Pairing RAD with LIHTC remains one of the most powerful tools available to PHAs, but success depends on matching the right credit type to the right project and planning early. Noncompetitive 4% credits offer predictability and scale for moderate rehab and large portfolios, while competitive 9% credits deliver deeper equity for properties with significant capital needs. Across both structures, strong coordination among PHAs, developers, investors, lenders, and HUD is critical to balancing RAD subsidy, LIHTC equity, and layered soft funding without overleveraging projects.
With recent policy shifts expanding access to credits and market conditions continuing to evolve, PHAs that underwrite conservatively, engage partners early, and align financing strategies with long-term asset needs will be best positioned to preserve affordability and ensure sustainable operations well into the future.
This article is for general information only. HAI Group® makes no representation or warranty about the accuracy or applicability of this information for any particular use or circumstance. Your use of this information is at your own discretion and risk. HAI Group® and any author or contributor identified herein assume no responsibility for your use of this information. You should consult with your attorney or subject matter advisor before adopting any risk management strategy or policy.
HAI Group® is a marketing name used to refer to insurers, a producer, and related service providers affiliated through a common mission, management, and governance. Property-casualty insurance and related services are written or provided by Housing Authority Property Insurance, A Mutual Company; Housing Enterprise Insurance Company, Inc.; Housing Specialty Insurance Company, Inc.; Housing Investment Group, Inc.; and Housing Insurance Services (DBA Housing Insurance Agency Services in NY and MI).