Financing a RAD conversion, execution by execution
Most RAD conversions are financed with a mix: tax credit equity, a first mortgage sized to the RAD rents at about 1.11 debt service coverage, a seller note from the housing authority, and soft funds. Tax credit equity is the largest source in HUD's data ($16.27 billion of about $52.58 billion), and FHA-insured loans are about 7.4%.
Most RAD conversions are financed with a mix of four things: tax credit equity, a first mortgage sized to the RAD rents, a seller note from the housing authority, and soft funds. In the RAD Resource Desk’s running total of closed public housing deals, tax credit equity is the largest source, about $16.27 billion of roughly $52.58 billion, and FHA-insured loans are about 7.4%.
This guide compares each execution, explains how lenders size debt against RAD rents, and sets out the feasibility test HUD added in Supplemental Notice 4C. The program itself is no longer temporary: section 212 of Public Law 119-101, enacted July 11, 2026, removed the application deadline and raised the cap to 555,000 units (see what the 2026 law changed).
Where RAD money has come from
The RAD Resource Desk publishes cumulative sources for closed public housing conversions. Shares below are each source divided by the roughly $52.58 billion total.
| Source | Amount | Share |
|---|---|---|
| Tax credit equity | $16.27 billion | 30.9% |
| Commercial loans, not FHA-insured | $10.79 billion | 20.5% |
| Seller note or take-back financing | $7.86 billion | 14.9% |
| State and local funds | $5.45 billion | 10.4% |
| FHA-insured loans | $3.88 billion | 7.4% |
| Deferred developer fee | $1.38 billion | 2.6% |
| Public housing Capital Funds (including DDTF) | $1.11 billion | 2.1% |
| PHA non-federal funds | $0.94 billion | 1.8% |
Smaller lines include interim income, sponsor equity, public housing operating reserves, MTW voucher funds, HOME, CDBG, Choice Neighborhoods and FHLB AHP.
The deal-level export tells a similar story. From HUD’s RAD Resource Desk data, as of October 24, 2026: of 1,955 closed conversions, 936 used tax credits (630 with 4% credits, 300 with 9% credits, 6 with both), 237 had FHA-insured debt, and 1,085 reported some hard debt. The financing breakdown shows the same data by year and structure.
The executions compared
| Execution | Best fit | Leverage and coverage | Term and amortization | Main constraint |
|---|---|---|---|---|
| FHA 223(f) | Acquisition or refinance with moderate repairs | 90% of value at 1.11 for 90%+ assisted (ML 2025-03) | Up to 35 years, fully amortizing | Repairs must stay under HUD’s substantial rehab limit ($20,406 per unit base for 2026, adjusted by high cost percentage) |
| FHA 221(d)(4) | Substantial rehab, new construction, blends | 90% of cost at 1.11 for 90%+ assisted (ML 2025-03) | Construction period plus up to 40 years | Davis-Bacon wages, longer HUD processing |
| FHA 223(a)(7) | A property already carrying an FHA-insured loan | Streamlined FHA-to-FHA refinance | Per MAP Guide limits | Only works if FHA debt already exists |
| Freddie Mac Optigo HUD Section 8 | Stabilized assisted property, little rehab | Min 1.20x DCR if 50%+ of units are HUD project-based Section 8; 1.15x with new LIHTC; max 80% LTV, 90% with LIHTC | 5 to 15 year terms, up to 35-year amortization | Needs a new 20-year contract or one at least as long as the loan |
| Fannie Mae affordable | Stabilized assisted property | Confirm on Fannie Mae’s current term sheet | Confirm on term sheet | Terms not verified for this guide |
| Bank loan | Small deals, bridge, construction | Set by the bank | Set by the bank; often shorter than FHA | Refinance risk at maturity |
| Tax-exempt bonds plus 4% LIHTC | Rehab above roughly $100,000 per unit | Equity plus bond-financed debt | Bonds often short-term, taken out by a permanent loan | Volume cap, 25% bond test for buildings placed in service in 2026 or later |
| 9% LIHTC | Deep rehab or new construction that wins the state round | Equity covers most of the cost | No bond debt required | Competitive allocation under the state’s QAP |
| PHA seller note | Bridging the gap between debt and value | Repaid from cash flow | Matches the deal | Must fit the PHA’s own approvals |
| Soft funds | Gap filling | Usually deferred or residual receipts | Long | Each funder’s own rules and timing |
FHA-insured loans
FHA’s multifamily programs are the deepest fixed-rate executions for a property whose units are nearly all assisted. Mortgagee Letter 2025-03 kept the 90% and 1.11 parameters for properties where 90% or more of units carry rental assistance, which is typical of a RAD conversion, and underwrites a 3% vacancy. The mortgage insurance premium is 0.25% for all FHA multifamily programs on applications submitted or amended on or after October 1, 2025 (90 FR 45789). Detail is in the guides to FHA 223(f) for RAD and 221(d)(4) for RAD.
Agency loans
Freddie Mac’s Optigo HUD Section 8 financing covers project-based assistance including PBVs. The sheet requires a new 20-year contract or a remaining term at least equal to the loan term, which a fresh RAD HAP contract satisfies. Its coverage floors are higher than FHA’s, so the same income supports less debt, but it does not run through HUD’s MAP processing.
Tax credits and bonds
Credits finance the heavier scopes. In HUD’s data, median reported hard cost per unit was about $135,723 for 4% deals and $177,055 for 9% deals, against about $2,748 for deals with no credits. Public Law 119-21 lowered the bond financing test for 4% credits to 25% in many cases and raised 9% allocations by 12% from 2026. The 4% credits and bonds guide works through the test and a sources and uses example.
Seller notes and soft funds
The housing authority sells or leases the property to the ownership entity, and part of the price is often paid with a note the PHA holds. Combined with state and local funds and the PHA’s own capital and reserves, these close the gap between what the rents can carry and what the work costs. The sources and uses builder lays them out.
How lenders size RAD rents
The rents come first and they are fixed. A RAD conversion receives no incremental subsidy: HUD sets contract rents from the project’s current public housing funding (Operating Fund, Capital Fund and tenant rent) for its RAD rent base year. HUD’s RAD Contract Rents Look-Up Tool, updated May 27, 2026, gives the figure for every unconverted project. Its baseline comes from 2024 funding levels adjusted by the 2025 and 2026 OCAFs. The median 2026 RAD rent in that tool is $934 per unit per month across 6,191 projects. The rent check shows any project’s rent.
Lenders then underwrite those rents, not market rents. On a RAD 221(d)(4) substantial rehab, the MAP Guide tells the appraiser to use the CHAP rents (section 7.13.6). The rent ceiling also depends on the contract type: PBV rents start at no more than 110% of fair market rent less utilities, and PBRA at 120%, up to the lower of market or 150% with a rent comparability study (PBV vs PBRA, and the PBV vs PBRA chooser).
Worked example (illustrative)
A 100-unit project at the median $934 RAD rent:
| Line | Amount |
|---|---|
| Gross potential rent, 100 × $934 × 12 | $1,120,800 |
| Less 3% vacancy | $1,087,176 |
| Less operating costs and reserves, assumed $6,600 per unit | $660,000 |
| Net operating income | $427,176 |
| Maximum debt service at 1.11 | $384,843 |
| Supportable loan at an assumed 5.5% rate, 0.25% MIP, 35-year amortization | about $5.75 million |
That is about $57,500 per unit. The same income at Freddie Mac’s 1.20x floor and the same rate (no MIP) supports about $5.52 million. These figures use assumed rates and costs, not a quote; the RAD debt sizer runs your own numbers.
The 4C feasibility test
Supplemental 4C (H-2025-01 / PIH-2025-03) rewrote the benchmarks every Financing Plan must meet:
- Leveraged deals: debt service coverage of at least 1.11 over ten years, using 2% annual revenue growth and 3% annual expense growth.
- Non-leveraged deals: an operating expense ratio, including reserve deposits, of no more than 80% of gross potential income in each of the first five stabilized years.
- No tax credits and no commercial debt: a six-month operating reserve.
- Scope: every capital needs item rated critical, immediate or required within two years must be addressed, and 20-year needs funded.
Because expenses are modeled to grow faster than revenue, a deal with a thin expense margin can pass in year one and fail later. Check year ten, not just year one. The test applies to transactions that had not submitted a complete Financing Plan by the 90th day after 4C’s effective date.
Choosing an execution
- Light scope, stable rents, little rehab: a 223(f) or agency loan, or no debt at all.
- Rehab above the substantial rehab limit but below about $100,000 per unit: 221(d)(4), or bonds and 4% credits if the PHA can secure volume cap.
- Heavy rehab or new construction: 4% credits and bonds with soft funds, or 9% credits where the state round is winnable.
- Section 18 blend: a blend raises rents on part of the units; the blend calculator shows the effect on debt.
- Already converted: see refinancing a RAD property and the post-conversion refinance tool.
- Section 202 PRAC: see RAD for PRAC financing.
Whatever the mix, it has to be documented in the Financing Plan; the Financing Plan checklist lists each item and who produces it. The conversion steps guide covers the HUD clocks.
Getting terms
If the debt is the open question, send the project, its CHAP rents and the scope to the commercial mortgage team at Janover Capital LLC, a commercial mortgage advisor, not a lender. Get a financing quote and the team will compare executions against the same rents.
HUD’s notices and the statute control; nothing here is legal advice.
Sources
- Public Law 119-101, section 212, July 11, 2026: govinfo.
- HUD, RAD Notice Revision 4 as amended by Supplementals 4B and 4C; Supplemental Notice 4C, H-2025-01 / PIH-2025-03, section X.
- RAD Resource Desk, leverage and sources page, read October 30, 2026; Component 1 data export, October 24, 2026.
- HUD, Mortgagee Letter 2025-03, January 8, 2025.
- 90 FR 45789, September 23, 2025: FHA multifamily MIP.
- HUD, Mortgagee Letter 2026-05, May 20, 2026: 2026 substantial rehab threshold.
- HUD, MAP Guide, 2020 edition revised March 19, 2021, section 7.13.6.
- Freddie Mac, Optigo HUD Section 8 Financing term sheet.
- HUD, RAD Contract Rents Look-Up Tool, May 27, 2026.
- Public Law 119-21, section 70422, July 4, 2025: govinfo.
Short answers
What is the cheapest debt for a RAD conversion?
There is no single answer, because the cheapest debt is the one that sizes highest at an acceptable cost for the rehab the deal needs. FHA 223(f) and 221(d)(4) carry a 0.25% annual mortgage insurance premium and allow 90% of value or cost at 1.11 coverage for properties with 90% or more of units assisted. Agency and bank loans close faster but generally size at higher coverage.
How do lenders size a RAD loan?
Lenders start from the RAD contract rents in the CHAP, not market rents, then subtract vacancy, operating costs and replacement reserves to reach net operating income. The loan is the smaller of what that income supports at the lender's coverage ratio and the loan-to-value or loan-to-cost limit. HUD's own feasibility test asks for 1.11 coverage across ten years at 2% revenue and 3% expense growth.
Do RAD conversions have to use tax credits?
No. In HUD's RAD Resource Desk data, as of October 24, 2026, 1,019 of 1,955 closed conversions used no tax credits. Those deals tend to have light scopes: their median reported hard cost was about $2,748 per unit, against about $135,723 for 4% credit deals.
Can a housing authority lend to its own RAD deal?
Yes. Seller notes or take-back financing from the PHA are the third-largest source in HUD's data, about $7.86 billion across closed conversions. The note usually covers part of the acquisition price and is repaid from cash flow, which lets the PHA keep value in the deal without adding hard debt service.
Is RAD still a demonstration with a deadline?
No. Section 212 of Public Law 119-101, enacted July 11, 2026, made public housing conversions permanent and raised the cap to 555,000 units. HUD's RAD notice still shows the earlier 2029 application date because it has not been reissued.