Navigating Reinvestment and Repositioning: A Guide for Public Housing Providers

Public housing authorities (PHAs) face the continual challenge of maintaining and improving their properties while navigating the complexities of federal regulations and funding. Alongside these challenges, insurance considerations play a crucial role in repositioning efforts, ensuring that properties are adequately protected during and after transitions.

Several U.S. Department of Housing and Urban Development (HUD) tools are available to support the rehabilitation and redevelopment of public housing and address funding challenges. Rental Assistance Demonstration (RAD) and provisions under the amended U.S. Housing Act of 1937, such as Sections 18, 22, 32, and 33, offer valuable opportunities to enhance living conditions, increase financing options, and maintain a resident-first approach.

This guide explores these tools and provides insights into how PHAs can effectively leverage them for successful property reinvestment and repositioning.

Understanding reinvestment options

Jane Hornstein, director of HUD's Special Applications Center, emphasized during Connecticut NAHRO's August 2024 annual conference that HUD's reinvestment and repositioning tools are designed to supplement, not replace, the public housing program. These tools aim to secure additional capital to improve physical conditions and ensure the long-term availability of affordable housing.

"We're trying to find ways to get you more capital for reinvestment," Hornstein told attendees.

Hornstein advised that before starting any rehabilitation or redevelopment project, PHAs should clearly define their goals.

"You need to understand what you're really trying to accomplish," she said.

Hornstein noted that successful reinvestment efforts have helped PHAs modernize aging properties, stabilize property revenues, rehabilitate dilapidated structures, redevelop distressed properties, and relocate housing assistance to neighborhoods with more resources for residents.

Key decision-making questions

Hornstein said that when evaluating how to rehab or redevelop properties, PHAs should consider several key questions:

• Do you want to preserve existing units or provide tenant-based voucher assistance?
• Are there scattered sites you wish to dispose of?
• Is there interest in promoting homeownership within your community?
• Are there plans to build new housing in the future?
• What are the capital needs of your existing properties?
• What role will your agency play in the future—ownership, control, or oversight?
• What are your options for external financing?
• What is the optimal sequence of actions for reinvestment?

Leveraging the public housing program's reinvestment tools

As PHAs explore options for property reinvestment and repositioning, they have several tools to support their efforts. These tools can help secure additional funding, foster partnerships, and facilitate community revitalization. Hornstein outlined essential reinvestment tools that PHAs can leverage within the public housing program:

• Section 30 Mortgages: PHAs can use properties as collateral for loans, using the funds to maintain, improve, or redevelop public housing.
• Mixed-Finance Development: By partnering with private developers, PHAs can finance projects that include a mix of affordable and market-rate units. This approach revitalizes communities while maintaining affordable housing options.
• Choice Neighborhoods: This competitive grant program supports PHAs in transforming distressed housing and surrounding neighborhoods. Funds are used to improve both housing and community amenities.

Elm City Communities (Housing Authority of New Haven) housing units and facilities in New Haven, CT. | Stock photo courtesy of HAI Group

Depending on a PHA's goals, options for repositioning may be limited within the public housing program due to the Faircloth Amendment, passed in 1999, which limits the number of public housing units that can be built using federal funds. Specifically, it prevents HUD from funding the construction of any new public housing units beyond the number of units that existed as of 1999. This means that PHAs can't create more traditional public housing units than they had on their books then, but they are allowed to rebuild up to that limit if they have since demolished or disposed of units.

Removing units from the public housing program

If the available options within the public housing program are insufficient, PHAs have several strategies for recapitalizing by removing units from the program. Hornstein noted these options include:

• Rental Assistance Demonstration (RAD): This program enables PHAs to convert public housing units to long-term, project-based Section 8 contracts, unlocking private investment for rehabilitation and redevelopment.

• Section 18 Demolition/Disposition: This section allows for the demolition or disposal of public housing if the property meets specific justification criteria (e.g., physical obsolescence, health and safety, infeasible operations, efficiency, and effectiveness). PHAs with 50 or fewer units can automatically qualify without proving obsolescence.

• Section 18 De Minimis Demolition allows for PHAs to demolish not more than the lesser of five units or 5% of a PHA's total public housing units in a five-year period. The reasoning for any demolished unit must be to meet the needs of public housing residents (or the unit is beyond repair). While HUD's Special Applications Center must be notified, application and approval are not required.

• RAD/Section 18 Blends: Combining RAD with Section 18 allows PHAs to leverage additional resources and Tenant Protection Vouchers (TPVs) to support repositioning efforts. PHAs using this method apply through the RAD process rather than the Section 18 application.

• Section 22 Voluntary Conversion: This allows PHAs to voluntarily transition public housing units into Section 8 assistance, offering flexibility in managing housing stock and finances. PHAs must show that converting for tenant-based aid is more cost-effective than continuing to operate developments as public housing.

• In 2019, HUD authorized PHAs with 250 or fewer units to undergo the Section 22 Streamlined Voluntary Conversion process, which does not require a conversion assessment or cost test. Hornstein said a recent legal decision may hamper the streamlined conversion process. She suggested considering other repositioning options.   

• Section 32 Homeownership: This program facilitates the sale of public housing properties for homeownership, with proceeds reinvested into affordable housing initiatives. To participate in Section 32, a PHA must submit a Section 32 Homeownership Plan to HUD's Special Applications Center.

• Section 33 Required Conversion: This outlines the process for PHAs to review their public housing inventory annually and identify if any units meet the criteria for required conversion from public housing. Like Section 22 Voluntary Conversion, Section 33 applicants must submit a cost methodology showing conversion away from public housing is more cost-effective, though the method differs.

• Part 200 Retention: This refers to regulations under 2 CFR 200.311(c)(1) that allow PHAs to retain project assets after a sale or refinance, supporting continued investment in affordable housing, so long as the assets are no longer used or were never used for public housing dwelling purposes.

Detailed insights into critical repositioning programs

RAD Program

HUD created the RAD program to give PHAs a tool to preserve and improve public housing properties and address the $115 billion nationwide backlog of deferred maintenance. The program enables PHAs to convert public housing units from their original public housing funding structure to long-term, project-based Section 8 contracts. This conversion unlocks private investment for property rehabilitation and redevelopment, allowing PHAs to improve the physical condition of their properties without relying solely on limited federal funding.

Hornstein stressed that RAD conversion isn't a one-size-fits-all solution. Each PHA should assess its specific goals and needs—addressing aging infrastructure, modernizing facilities, or reducing operational costs—and determine whether RAD can help meet those objectives.

Elm City Communities (Housing Authority of New Haven) housing units and facilities in New Haven, CT. | Stock photo courtesy of HAI Group

Key Features of the RAD Program:

• Tenant Protections: One of the most significant benefits of the RAD program is that tenants retain their rights, which are the strongest among all HUD repositioning tools. Tenants have the right to return to their homes after any redevelopment without undergoing rescreening or requalification.

• No Permanent Displacement: RAD ensures that residents are not permanently displaced. They may need to relocate temporarily during the rehabilitation or redevelopment process, but they are guaranteed the right to return once construction is complete, even if they are over income limits.

• Conversion Flexibility: The program offers flexibility in converting units to project-based rental assistance (PBRA) or project-based vouchers (PBV). This allows PHAs to choose the best financial model for their specific situation.

• Increased Access to Funding: By converting to a project-based Section 8 platform, PHAs can leverage private capital—such as Low-Income Housing Tax Credits (LIHTC), bond financing, and other investment tools—to rehabilitate or redevelop properties.

Section 18 Demolition/Disposition

Section 18 of the Housing Act of 1937 plays a pivotal role in the management and redevelopment of public housing. This provision allows HUD to approve the demolition or disposition of public housing under specific circumstances.

Criteria for Section 18 Demolition or Disposition:

1. Health and Safety Risks: PHAs must demonstrate that a property is no longer safe due to issues like fire hazards or natural disasters. For instance, a property in a flood zone or near a hazardous site may be eligible for demolition or sale.

2. Physical Obsolescence: PHAs must prepare a Physical Needs Assessment (PNA) to show that bringing the property up to a reasonable standard would exceed:

• 57.14% of local Total Development Costs (TDC) for non-elevator buildings.

• 62.5% of TDC for elevator buildings.

1. Efficient or Effective Units: If the property does not meet the obsolescence test, PHAs can argue for disposition under efficient or effective unit criteria. Only 25% of occupied units will receive Tenant Protection Vouchers (TPVs) in this scenario.

2. Infeasible Operation: PHAs can argue for disposition if they demonstrate a lack of demand for units (e.g., long-term vacancy issues).

3. Scattered Sites: PHAs managing scattered-site properties can face challenges in maintaining occupancy. Hornstein noted that HUD will generally approve using Section 18 regarding scattered sites. She touched on an example where a PHA had 38 scattered sites it couldn't fill, leading to HUD's recent approval of Section 18 disposition.

To proceed with a Section 18 application, PHAs must include a disposition plan in their annual plan and conduct a Part 58 environmental review. Local municipalities often assist with this review.

Hornstein said PHAs can consult their local HUD field office for guidance on Section 18 dispositions, particularly for scattered sites. She emphasized the importance of PHAs working with HUD to ensure compliance with all requirements and effectively handling their disposition plans.

RAD/Section 18 Blend

RAD can be combined with Section 18 Demolition/Disposition to form an RAD/Section 18 Blend. This hybrid approach, which Hornstein said is HUD's preferred reinvestment option for PHAs, allows PHAs to leverage additional resources, including Tenant Protection Vouchers (TPVs), to support repositioning efforts.

 "We're trying to get [PHAs looking to reposition their housing] to do so in a blended method," Hornstein said.

A RAD/Section 18 blend offers flexibility by combining the strengths of both programs. This allows PHAs to leverage more Tenant Protection Vouchers while maintaining RAD's financial stability.

There are two kinds of RAD/Section 18 blends:

• Construction Blend 
• Small PHA Blend

Section 32: Homeownership

HUD prefers Section 32 for PHAs looking to sell properties for homeownership. This program ensures new homeowners have access to financial counseling and assistance, with proceeds from sales reinvested into other affordable housing initiatives.

Hornstein highlighted that Section 32 helps ensure the PHA receives the sale proceeds when working with organizations like Habitat for Humanity to fix a property.

Part 200 Retention

PHAs can explore Part 200 Retention, which allows them to retain certain project assets after selling or refinancing. When a HUD-assisted property is sold or refinanced, the Declaration of Trust (DOT) attached to the property must be addressed. The DOT represents HUD's interest in the property. PHAs that want to keep buildings as they are but remove the DOT can do so through Part 200 Retention.

Hornstein shared an example of a PHA that owned the land where a school was built. The school maintained the building and eventually offered to take the land in return for PHA land elsewhere. In this scenario, HUD was able to remove DOT under Part 200 to allow the transfer to the school.

Hornstein said the caveat in these situations is that the PHA either must repay HUD the difference in public housing funds provided to the property or seek an exception, which can be granted if the property continues to provide value to public housing residents.

Insurance considerations for housing repositioning projects

Repositioning public housing properties involves various financial and logistical considerations, and insurance is a crucial aspect to address early in the process.

Property usage, ownership structure, or physical condition changes can significantly impact your insurance coverage.

Before moving forward with any rehabilitation or redevelopment project, it's essential to consult with your insurance professional. If you're an HAI Group policyholder, your account executive can help you understand how repositioning might affect your coverage, identify potential risks, and ensure adequate protection. This proactive approach will help avoid unexpected gaps in coverage and ensure your project proceeds smoothly.