To make full use of RLRA during its rollout phase, we need to untangle project underwriting issues.
If you know what Housing Choice and Section 8 vouchers are, you know what an RLRA subsidy is—sort of.
All three terms describe publicly funded rent payments that close the gap between what a landlord needs to charge for a housing unit to cover costs and what a very-low-income resident can afford to pay. RLRA subsidies are used, specifically, to subsidize rent for supportive housing residents in the Metro region. (If you’re not sure what supportive housing is, check the sidebar below.) Available in project-based and tenant-based varieties, RLRA subsidy contracts have been gradually rolling out to qualifying landlords and tenants in Multnomah, Clackamas, and Washington counties since Metro voters approved funding for the RLRA program in 2020.
For owners and developers seeking to integrate supportive housing into new developments, project-based RLRA subsidies are a tremendously valuable resource. Especially when other tools and strategies aren’t available to bring a project’s operating budget in line with its programmatic goals, these subsidies can make the difference between whether a project can meet its supportive housing targets—and even get built—or not.
The underwriting challenge
But project-based RLRA subsidies have a drawback, compared to other subsidy sources. That is, RLRA contracts are short and, technically, not renewable, because the RLRA program is scheduled to sunset in 2030 if it doesn’t receive voter reapproval. From a project underwriting perspective, the uncertainty surrounding RLRA contract renewability creates risks that lenders want to mitigate. Owners, developers, and anyone with a stake in implementing this funding tool need to understand the implications.
To back up: Project-based rent subsidies kick in during a project’s operating phase; their primary value is to supplement income from rents to help cover a project’s ongoing operating costs and must-pay hard debt. But subsidy contracts come into play during a project’s development phase, too. To build a project finance strategy and to underwrite debt obligations, the development team and its funding partners must look carefully at long-term rent assumptions.
HUD vouchers typically come with a 20-year renewable contract, which lines up with the term of a permanent mortgage. But project-based RLRA subsidy contracts being awarded today are good for less than 10 years—and the horizon shortens for contracts awarded later than today.
The implications
Different financing partners may be expected to interpret and respond to this uncertainty differently. Some may assume, optimistically, that subsidies will be renewed for the permanent mortgage period (knowing that programs like RLRA, once funded, tend to persist). Others may effectively omit rent assistance from underwriting consideration, requiring developers to build a balanced operating budget through other means, such as reducing the size of the permanent loan.
For projects that confront the latter perspective, an inability to provide assurances that rental assistance is available for the term of the permanent loan can lead to delay or derailment. Projects that set ambitious supportive housing targets, the very ones RLRA policies are intended to encourage, are among those most at risk of this outcome.
The Douglas Fir Apartments, a project HDC is assisting, was briefly derailed in this manner. Sponsored by Tigard-based mental health services provider New Narrative, this 15-unit project is composed entirely of deeply affordable supportive housing units. Douglas Fir had endured a strenuous march to full funding—assembling commitments from nine sources, including banks, public funding agencies, and a private foundation—when its permanent lender balked at underwriting the project beyond its RLRA contract term. Budgeting for high operating expenses and deep affordability, the Douglas Fir needed continuing subsidies to operate and to cover its long-term debt.
Fortunately, Multnomah County, the jurisdiction that administers the Douglas Fir’s RLRA contract, recognized the need to intervene, and the project’s permanent lender was open to working collaboratively to find a solution. The county offered a guarantee to replace the rent subsidies with its own funds, through the end of the permanent loan period, should the RLRA program terminate in 2030 and the subsidy contract not be renewed. (RLRA policies stipulate that counties may make these types of funding commitments on a case-by-case basis.) The permanent lender accepted, and the Douglas Fir Apartments are now under construction.
Solutions
The Douglas Fir story had a happy ending, but for many other projects in development, the uncertainty around the future of RLRA remains problematic. What approaches are other counties, and other lenders, taking to address this issue? How can we learn from each other’s creative ideas, successes, and mistakes? To move toward answers to these questions, some of our region’s most experienced RLRA users, administrators, and project underwriters will be joining me for a panel discussion at the Housing Oregon Conference on September 28. I look forward to reporting back and continuing this conversation as RLRA implementation moves forward.
New funding programs take time to adopt; these wrinkles are part of the process of achieving long-term funding for RLRA. Meantime, county contract administrators, lenders, and others must, and will, continue working together to find creative solutions to the underwriting challenge. This work will bring us closer to a future where RLRA subsidies get used to their highest purpose: that is, to subsidize supportive housing units that can’t realistically operate—or get built—without them.
Andrea K. Sanchez is HDC’s deputy director. You can find her full bio and contact info here.
What is supportive housing, and who is it for?
From a housing policy and funding perspective, supportive housing is housing provided through systems shaped by county and federal housing policies aimed at a specific purpose: to reduce homelessness. Practically speaking, it is housing where a resident can live with access to comprehensive services, such as mental and physical health care, and other supports such as rent assistance. Supportive housing placements are primarily reserved for individuals who are currently homeless and judged to be in urgent need of supportive housing—a group generally defined as people who have experienced prolonged homelessness and face complex, co-occurring medical, mental health, and/or substance use issues.
In most counties in the U.S., supportive housing is linked with a regional “coordinated entry system.” The coordinated entry system maintains a master waiting list of people in the region who are experiencing homelessness. It is the system primarily responsible for making supportive housing referrals, based on the screening priorities described above.
The coordinated entry system embraces a principle known as Housing First. The idea behind Housing First is that people who need supportive services cannot be expected to consistently access and benefit from those services if they do not have a place to live. Conversely, the experience of being unhoused worsens conditions such as physical and mental illness that services provided by the system (such as health care) exist to address. Therefore, from both cost-efficiency and human-welfare perspectives, the coordinated entry system places high priority on keeping the people it serves stably housed. In short, it puts housing at its center.
This sidebar was updated on September 29, 2022.