A new update from the Department of Housing and Urban Development has just made it easier for public housing to get much-needed cash injections.

The nation’s public housing stock has a $170B backlog of capital needs, HUD estimates. The agency hopes to tap the private sector to address that funding gap.

In late August, HUD announced it is changing a rule known as Section 18, creating more flexibility for public housing authorities to find and use private sector funding.

“The significance of this really rests with the fact that, especially on the public housing side of things, agencies have just been underfunded for decades with their public housing units,” said Eric Oberdorfer, director of policy and legislative affairs at the National Association of Housing and Redevelopment Officials.

Approximately 1.2 million households are living in public housing across the U.S., with more than 3,300 PHAs managing those units. But PHAs have struggled to maintain properties since the 1960s, when operating costs began to rise far faster than tenant incomes.

Section 18 was introduced as part of the United States Housing Act of 1937, the legislation that created public housing. The rule allows PHAs to transition public housing units to a model where tenants can receive Section 8 and Tenant Protection Vouchers. 

Switching to a voucher model means that instead of relying solely on the federal public housing operating and capital funds to maintain properties, PHAs can tap private market developers and financing to make building upgrades that wouldn’t have been covered by those federal funds. PHAs still receive the same amount of funding to subsidize rent when they use Section 18, Oberdorfer said.

“It's a way that allows units to convert to a different funding stream, which allows private investment to come into the property,” he said.

The August update to Section 18 loosens the criteria for projects that are eligible to make that jump in three ways, said Tanya Dempsey, co-CEO at municipal advisory and consulting firm CSG Advisors. 

First, it expands the definition of obsolete buildings, allowing PHAs to file to demolish or dispose of properties under Section 18 and have them redeveloped, modernized or sold as affordable housing. Landlords would then be eligible to rent out units to tenants with vouchers. 

The main update with that definition is further clarification on what HUD means by “functional obsolescence,” Dempsey said. 

Any public housing unit built before 1950 — of which there are at least 270,000 — may meet the criteria for being defined as functionally obsolete, according to HUD’s new guidance.

“It's like [a unit] on the second floor and there's no elevator,” Dempsey said. “So it is actually not code-compliant anymore, and it has been grandfathered in.”

According to the new guidelines, functional obsolescence now includes building and site design flaws that can only be remedied by rebuilding. Those rebuilds would also need to be so expensive that any updates to bring buildings up to code would account for more than 57% of the reconstruction’s total development cost for buildings without elevators and more than 62% for buildings with elevators.

Secondly, the rule change now allows agencies with 75 or fewer units to reposition properties from public housing models to instead opt for vouchers. Previously, this was only available to PHAs with 50 units or fewer, Dempsey said. 

That change will make it easier for PHAs that have already converted other units to Section 8 housing but still have a small portfolio of public units within their properties, Oberdorfer said.

That matters because public housing isn’t always in the New York City Housing Authority-style towers and is sometimes strewn throughout other developments. PHAs can now include scattered-site public housing to use Section 18, which can make the case that the distance between units makes maintenance and uniformity hard.

“It could be in a small city, but you also see it a lot of times the further west you get,” Oberdorfer said. “A lot of times on the West Coast, there are less public housing units because most of the funding comes in through the voucher programs.”

Finally, the update provides a way for buildings known as “mixed finance” properties — built using a combination of low-income housing tax credits and federal operating subsidy — to use Section 18 once the 15-year LIHTC period expires. 

Scores of public housing properties developed using mixed financing under a previous HUD program are now “in bad shape,” Dempsey said, because PHAs haven’t been able to recapitalize or stabilize them because of prior funding restrictions. The new change allows for those buildings to also be demolished, then rebuilt as affordable housing and leased to voucher-holding tenants. 

“I'm very hopeful on the mixed finance component of this, because that was previously not explicitly allowed,” Dempsey said. 

Overall, the rule change creates increased flexibility that means PHAs aren’t as reliant on congressional appropriations to fund repairs, Oberdorfer said. In turn, that makes it easier for developers and lenders to sign on to public-private partnerships because federal funding is likely to be more stable.

“There were a couple of years where funding remained decently high and relatively stable for housing programs,” he said. “We're in a much different economic climate right now, especially when thinking about federal appropriations. … Because of that, you may see moments where Section 18 is a much more viable option.”

The end result will likely be more interest from large developers in helping to renovate or build new public housing, Dempsey said, adding that probable contenders include some of the names involved with NYCHA repairs.

The rule change could also mean new public housing developments become feasible on empty PHA-owned land and will also likely generate interest from tax credit investors, traditional bank lenders and government-sponsored enterprise lenders like Fannie Mae and Freddie Mac, she said. 

“The expansion of what's allowable introduces additional funding into affordable housing,” Dempsey said. “It’s super cool.”