With the Public Housing Authority (PHA) program facing a ~$27 billion shortfall to finance capital improvements, the U.S. Department of Housing and Urban Development (HUD) found a creative way to bridge the gap: Rental Assistance Demonstration (RAD).
Many PHAs tap RAD to provide capital for construction and financing. However, few are aware that RAD also provides an opportunity to access the benefits associated with implementing green improvements. And the even better news – HUD pays for these green improvements!
The Green Incentive
When designing RAD, the folks at HUD included a ‘green incentive’ to overcome the traditional pitfalls of the split-incentive (i.e. why would an owner spend money to reduce utility costs for tenants?). As PHAs rehabilitate their properties through a RAD conversation, green improvements will make buildings more efficient and reduce utility costs. The RAD Green Incentive provides a mechanism for PHAs to capture the ensuing cost savings, even those realized by tenants, which in turn increases net operating income and creates an opportunity to access additional financing.
Importantly, RAD allows 75% of the value of tenant-paid utility savings achieved as a result of green upgrades to be subtracted from the utility allowance and transferred to the PHA as a rent increase. For example, if green improvements will lower a tenant’s utility bill by $40, HUD allows an increase of $30 to the Contract Rent.
Green improvements being made to a Denver affordable housing property.
Despite the benefits of the RAD Green Incentive, it has been severely underutilized in most RAD conversions. Ironically, all retrofits under RAD, whether designed to be green or not, would benefit from using the Green Incentive. As old, inefficient systems are replaced with currently available models, most property retrofits will naturally result in utility savings. Yet most PHAs are missing out on the opportunity to capture and leverage these savings.
Ultimately, PHAs should have a green consultant on their RAD team to assess the benefits of the Green Incentive. In an era of budget cuts and thinning funding pools, no PHA should miss out on opportunities to garner additional funds.