Part 1: Making Strategic Investments
As demonstrated in the previous sections, there are a wide range of activities that can be undertaken with HOME and CDBG funds. Yet, many jurisdictions are not as strategic as they can be about how they invest these important and limited resources.
Some jurisdictions may use CDBG and HOME to fund all of their housing activities without discriminating based upon the best use of the money. So, for example, a jurisdiction may administer one homeowner rehabilitation program that is co-funded by CDBG and HOME. When an application is received, it may be funded by a combination of both sources or by one or the other depending upon which has the most funds available. While this approach can certainly be eligible, it may not be the most effective use of the resources.
There are two levels to thinking about using HOME and CDBG effectively—by program or by project. In some instances it makes sense to allocate CDBG and HOME resources by program. For example, HOME might solely be used for homebuyer assistance and CDBG might be used for homeowner rehabilitation. In other instances, it makes sense to evaluate project by project and determine how and where to use the funds. For example, a jurisdiction might evaluate a particular rental project and determine that HOME should be used to pay for the construction and CDBG for the land acquisition.
Jurisdictions typically set out their plans and priorities for investing HOME and CDBG dollars in their Consolidated Plans and Annual Action Plans. These plans involve collecting data, making program decisions, writing a document, and then sharing the written plan with the public for comment. Only after this process has been completed and HUD has approved the plans, can jurisdictions draw down HOME or CDBG funds for eligible programs and projects. Further, jurisdictions cannot fund programs or activities that are not outlined in the Consolidated Plan and Action Plan without amending the Action Plan.
So, in order to write an effective and useful Consolidated Plan and Annual Action Plan, and in order to make strategic use of HOME and CDBG funds, jurisdictions need to undertake an in-depth and timely analysis of their community development needs and desired program types.
Exhibit 6-1 highlights the key steps in making strategic HOME and CDBG investments for projects and programs. The text then tracks this chart and lays out a series of topics that are designed to assist jurisdictions to make effective HOME and CDBG funding decisions.
Communities can apply these steps in their decision-making process:
Step 1: Evaluate community needs and preferences
The first step in determining how and when to use CDBG and HOME funds is to evaluate the affordable housing and community development needs of the community. Often this analysis is conducted as a part of developing the five-year Consolidated Plan. It is important to conduct a thorough analysis of housing needs and preferences before making decisions about CDBG and HOME funding because it enables jurisdictions to invest these funds in programs and locations that will address critical community issues.
The types of information to be collected might include, but are not necessarily limited to:
- Housing demand. This enables the jurisdiction to determine the types of programs that residents want and need.
- Housing supply. This information covers the number and type of housing units currently available in the community. Usually jurisdictions break down the description of supply into its subsets, including owner units and types of rental units (multifamily, elderly, special needs, homeless facilities, etc.) In addition, this data often includes information about the vacancy rate for various types of units.
- Housing cost. Information on housing cost describes how much families must pay for housing in the jurisdiction. It is often expressed as both a net number (rents or sale prices) and as a percentage of income.
- Housing quality. This information enables the jurisdiction to determine the number and type of substandard units in its community. Often, the jurisdiction maps this information so that it can visualize where dilapidated housing is a major issue.
- Specific neighborhood issues. The jurisdiction’s needs assessment should also include a consideration of the particular needs and concerns of specific neighborhoods. For example, the jurisdiction might have one particular neighborhood where there is an over concentration of low- and moderate-income households and where it wants to introduce mixed-income projects.
- Income levels. This information enables the community to understand its overall poverty level and the distribution of that income. In some jurisdictions, there are a large number of very low-income people and some very wealthy people with few in the middle. In these jurisdictions, deeper subsidies might be needed to help the very low-income families. In other jurisdictions, most of the population is clustered around the median income. These jurisdictions might decide to offer more shallow subsidies to more families.
- Local economic issues. Jurisdictions often collect data on economic issues such as employment rates, job creation, business start-ups or tax revenues as a way of measuring the economic health of their community. This information may affect decisions about CDBG and HOME because it might help to indicate what portion of these funds should be used toward neighborhood revitalization or job creation activities (CDBG).
Once the community’s needs have been identified, the stakeholders of the neighborhood can engage in a process to begin to articulate a vision and preferences for the neighborhood. Key stakeholders that should be included in this planning process include residents, business leaders and owners, institutions located in the neighborhood, and nonprofit organizations that are based or provide services in the neighborhood. Formal public meetings or hearings, opportunity to comment on plans and proposed projects, and partnerships that
actively involve stakeholders throughout the planning process are all useful methods for generating public input. The ultimate goal is to generate sufficient information and understanding of need and community desires to guide decisions about appropriate development and housing activities.
Step 2: Determine program types based upon needs and preferences
After determining the needs of the community, the jurisdiction then needs to decide which types of programs it will fund. In some communities, the types of community development programs are driven by the available funding. In other words, since HOME offers four eligible activities, the jurisdiction does four housing activities. If the jurisdiction wins lead paint abatement money or homeless program funds, it does those types of programs.
While this approach is certainly understandable, it is not generally strategic. Instead, it is recommended that the jurisdiction determine its community development needs and preferences (per the previous steps in the analysis) and then design programs that address the community’s needs. Although both CDBG and HOME have substantial compliance requirements, each also offers significant flexibility in the ways that they can be used.
A wide range of programs can be possible tools in addressing the jurisdiction’s community development needs. Options might include any combination of the following programs:
- Rental housing. These programs are designed to build, acquire, and rehabilitate rental housing units.
- TBRA. These programs assist individual families to pay their rent, security and/or utility deposit.
- Homebuyer. These programs are designed to help individual families to purchase homes.
- Homeowner rehabilitation. These programs assist existing homeowners to renovate their homes.
- Neighborhood revitalization. These programs focus on revitalizing a specific geographic area. They are often multi-faceted including housing, commercial development, and social service programs.
- Economic development. These programs are generally designed to address either employment or commercial revitalization issues.
- Public services. These programs offer services to low- and moderate-income people that are designed to improve health, education, job readiness, safety or other important issues.
- Public facilities. These are infrastructure programs that are designed to address concerns like water lines, sewer lines, streets, or community centers.
Step 3: State intended program outcomes
As a part of determining which types of programs should be offered, jurisdictions need to consider the intended outcomes of those programs. For example, two jurisdictions could each run a rental housing rehabilitation program but each might have very different intended outcomes. Jurisdiction A might be primarily concerned with the cost of standard, affordable housing and thus, its goal is to create long-term affordable rental units. Jurisdiction B might be more concerned with the blighted appearance of multifamily housing in a particular neighborhood and so its goal is to improve housing quality overall.
Both of these are perfectly acceptable outcomes of a rental rehabilitation program but each might be designed very differently. In Jurisdiction A, the community might design a program that focused on creating the maximum number of affordable rental units throughout the community. In Jurisdiction B, the community might design a program that targets rehabilitation funds to particular neighborhoods and addresses the most dilapidated units first.
It is therefore important to consider not only the type of desired program but also the jurisdiction’s intended outcomes for that program. In its Consolidated Plan or program design documents, the jurisdiction should set out what it intends each program to accomplish. In addition to providing citizens with information about program purposes, this will assist the jurisdiction to make strategic investment decisions.
There are numerous outcomes that can come from community development programs, such as:
- Sustained affordability for low-income families;
- Housing development to create a supply of new units;
- Job creation or retention; or
- Sustainability or health of community-based nonprofits.
- Reduction of dilapidated units;
- Serving maximum number of low- and moderate-income people;
- Offering deep subsidies to address the needs of very low-income families;
- Physical improvement of neighborhoods;
Step 4: Evaluate the strengths of HOME and CDBG v. intended outcomes
Once the program types and outcomes are determined, the jurisdiction can then evaluate which funding resources are most appropriate. For jurisdictions that are both CDBG entitlements and HOME PJs, this can be a matter of comparing each of the funding sources to the intended program outcomes determined in the step above.
For states, in many cases, CDBG is managed by a different state agency than HOME. CDBG is generally managed by state departments of community development or commerce. HOME is sometimes managed by state housing finance agencies. In these instances, the two state departments should collaborate and determine how the resources can best be used given needs and priorities across the state.
For the jurisdiction that is a CDBG grantee but not a HOME PJ, or who is member of a HOME consortium but who does not receive CDBG, the jurisdiction needs to evaluate its available resources and determine whether it will apply to the state for funds that it does not currently receive on its own. For example, a small entitlement community might determine that it has needs for both an economic development program and a homebuyer program. It might elect to use its local CDBG funds for economic development and apply to its state for HOME funds for housing assistance.
In evaluating whether to use HOME or CDBG to fund chosen programs, jurisdictions should evaluate the intended outcomes of those programs and determine whether this is a strength of CDBG or HOME or both. Some general strengths of CDBG and HOME include:
- HOME can provide deep subsidies for very low-income families. Because HOME rental assistance is particularly targeted at people who are at 60 percent of median and below, it can be a good resource for addressing their needs. The maximum HOME funding limits (set by the 221(d)(3) program) are generally high for most jurisdictions and usually allow for deep subsidies if that is what is required in order to house very low-income persons. CDBG can also be used to provide deep subsidies to help very low-income people but often has so many competing demands on the dollars that it is not usually used in this fashion.
- HOME creates long-term affordability. HOME requires long-term affordability restrictions that can help to keep housing available to low-income persons for an extended period of time. In communities where the housing market is tight and where the supply of affordable housing is limited, this can be a real benefit. Jurisdictions can elect to place long-term affordability restrictions on their CDBG dollars but this is not usually done.
- HOME can be used to address the needs of individual renter families. HOME can be used to create a very flexible TBRA program. A TBRA program can be tailored to meet the individual needs of families and can address particular issues such as utility deposits, security deposits, or special needs populations.
- HOME fosters the health of nonprofit housing providers. Because of its CHDO set-aside requirement, HOME has become a major resource in strengthening nonprofit organizations. CHDOs and other nonprofit developers can earn a developer fee as a part of their projects. In addition, HOME provides resources such as technical assistance and CHDO operating subsidies that further assist these organizations. Lastly, CHDO proceeds can be a major resource in funding the sustainability of nonprofits. CDBG also allows jurisdictions to fund nonprofits but it does not have a regulatory requirement to do so and it does not have some of the HOME tools to advance nonprofit capacity, such as CHDO technical assistance.
- CDBG can be effective in addressing blight. Because CDBG allows a limited portion of its funds to be used to address dilapidated areas or structures without regard to family income, CDBG can be a strong tool in urban renewal-style activities. While HOME can certainly be used to address the needs of substandard properties, this assistance must be tied to housing for low-income people. Thus, CDBG is a good tool for rehabilitating or clearing dilapidated properties.
- CDBG can provide shallow subsidies for many people. Unlike HOME, CDBG does not have a requirement for a minimum level of investment or a particular property standard. Thus, it can be a very good tool for specialized rehabilitation programs or programs where only minor rehabilitation is needed. In addition, because CDBG does not have these standards, it can be spread more broadly than HOME often can—by spending less and helping more people.
- CDBG can help create jobs. CDBG contains several eligible activities that are explicitly designed to help communities create jobs and economic opportunities for low- and moderate-income persons. These activities include assistance to for-profit businesses and assistance to microenterprises. It can also be used for job training and business counseling. HOME cannot be used for economic development activities.
- CDBG can be used for a wide range of social services and community facilities. Unlike HOME, CDBG has eligibility categories related to providing social services, such as health care, day care, substance abuse services, education, or safety services. CDBG can be used to assist the rehabilitation and development of these facilities, as well as the services themselves. These services can be combined with housing programs to offer a more complete package of assistance to low-income persons and communities. HOME can be used for some housing-related services if these services are tied to the provision of an affordable housing unit.
- CDBG can address comprehensive neighborhood needs. Under the CDBG Program, grantees can adopt a comprehensive revitalization strategy area (state programs) or a neighborhood revitalization strategy area (entitlements). Under these initiatives, the grantee gets regulatory flexibility by agreeing to invest in specific low- and moderate-income neighborhoods. This can help to foster the redevelopment of these neighborhoods.
Step 5: Assess CDBG and HOME constraints
After evaluating the CDBG and HOME program strengths, it is important to look at their regulatory and statutory constraints. In some instances, the type of activity that a jurisdiction wishes to undertake may be ineligible under one or the other program. In other instances, the activity is eligible but it has certain requirements that make it infeasible or not cost effective for the jurisdiction to operate.
Some of the regulatory constraints to consider when evaluating the use of HOME and CDBG funds include:
- Number and types of available partners. HOME requires that 15 percent of its funds be used to support development activities undertaken by CHDOs. In some communities, there is a lack of qualified, experienced CHDOs or there are only CHDOs with specific types of expertise. So, in deciding how to fund programs, the jurisdiction may elect to fund programs where there are available CHDOs with HOME funds and then use CDBG funds for other activities. For example, assume that Jurisdiction XYZ has only two strong CHDOs and both are experts in homeownership. The jurisdiction might elect to use its HOME funds for homeownership because it needs to spend 15 percent of its money through these CHDOs. The jurisdiction might then elect to use the balance of its HOME funds and some of its CDBG funds for rental or homeowner rehabilitation programs.
- Eligible activities. As discussed in the activity sections, both HOME and CDBG have constraints about the types of programs that can be funded. HOME can only be used for affordable housing. CDBG can be used for housing but it can also be used for other activities such as economic development, public services, or infrastructure. So, if a community determines that it needs both a business assistance program and a rental housing development program, it might elect to fund the business program through CDBG and the rental housing program through HOME.
- Approaches to development. It is also important to consider the ways that CDBG and HOME can be used to develop housing. As noted in previous sections, HOME can be used for new construction, rehabilitation, and acquisition of housing for low-
- Low-income targeting. HOME requires that all households occupying HOME units be low-income. However, it allows for targeting of units within multifamily rental projects so that only a small portion of the units may be HOME-funded. CDBG allows for a different type of flexibility in low-income targeting. Some projects might qualify under the slum/blight national objective and thus there is no low-income targeting. However, if the jurisdiction wishes to use the low- and moderate-income benefit national objective, then every household in a single structure and one of the two households in a duplex must be low- or moderate-income. In all other structures (three or more units) at least 51 percent of the units must be occupied by low- or moderate-income households, with one exception for projects that assist new construction of non-elderly rental units. CDBG does not allow for unit-by-unit targeting of multifamily properties. When CDBG is invested and the low- and moderate-income national objective is used, 51 percent of the households must be low- or moderate-income. So, if a jurisdiction is doing multifamily housing and it wants to focus on mixed-income developments where only a small portion of units are assisted, HOME may be the better resource. CDBG funds could then be used for other activities.
- Ongoing compliance. Both HOME and CDBG require that jurisdictions keep records documenting eligible activities. However, as noted above for HOME, the jurisdiction must continue to document eligibility during the affordability period. For rental properties, this means documenting tenant incomes, rents, and unit quality over time. CDBG does not have any ongoing requirement for documenting compliance. So, jurisdictions need to evaluate their staffing resources and capacity to ensure ongoing compliance. If the jurisdiction does not have sufficient resources to oversee these long-term tasks, it may wish to use CDBG to develop rental properties and use HOME for activities such as homeowner rehabilitation (which has no affordability period) or homebuyer assistance (which typically has shorter affordability periods and no ongoing inspections).
- Administrative burden. As noted in previous sections, HOME and CDBG generally handle project-related delivery costs differently. Under CDBG, grantees may charge the agency’s direct costs of delivering an eligible activity to that activity itself. Under HOME, the agency’s direct delivery costs can only be charged to projects when those costs can be applied to specific projects and activities, and the jurisdiction maintains documentation to demonstrate that they are direct costs. Further, HOME general administration is limited to 10 percent whereas CDBG allows 20 percent. So, if a jurisdiction does not have systems that readily allow it to track staff time and expenses to specific projects, it may want to consider doing more time-intensive projects with CDBG funds. For example, for many programs, homeowner rehabilitation requires a significant amount of staff time. Agency staff market the program, analyze homeowner applications, review work item specifications, and may be involved in inspections. If the homeowner program is of a large volume, this can require extensive staff time. If the jurisdiction’s cost and time tracking systems do not track to each of these properties, it may wish to use CDBG funds to pay for the homeowner rehabilitation. CDBG could pay for the program delivery costs directly (not under its administrative cap). HOME could then be used for other types of housing programs where the direct project costs are less. Alternatively, the direct costs of the rehabilitation program could be funded with HOME funds, and certain project delivery costs could be paid with CDBG as a HOME-related housing service.
- Match. The HOME Program requires that PJs provide match in an amount equal to no less than 25 percent of the total HOME funds drawn down for project costs. Match is a permanent contribution to affordable housing. CDBG has no such match requirement. When jurisdictions are evaluating their funding options, they need to consider the match obligations that they will be incurring and determine whether projects in this type of program are likely to generate match. For example, homeowner rehabilitation programs do not usually generate a great deal of match unless the owner has invested funds in the rehabilitation. So, jurisdictions need to carefully consider how they invest their HOME funds in order to ensure that sufficient match credits are earned.
- Timeliness. Both CDBG and HOME have requirements related to timeliness. Under HOME, the PJ must commit funds within two years and spend funds within five years. Under the entitlement CDBG program, the grantee must have no more than 1.5 times its annual allocation in its line of credit 60 days before the end of its program year. Jurisdictions should consider how to use CDBG and HOME so that these timeliness criteria are met. Over time, jurisdictions should periodically check their status on timeliness and change program design in order to address these issues, as needed. For example, assume that a jurisdiction is successfully committing its HOME funds within two years but it is nearing the end of its program year and it has 1.9 times its grant sitting in its CDBG line of credit. The jurisdiction might then decide to fund the next several rental activities with CDBG, assuming that the Consolidated Plan and Annual Action Plan allowed for these types of investments.
income families. CDBG cannot be used for new construction, except in very limited circumstances. So, if a jurisdiction determines that it needs new homebuyer units but that it only needs to rehabilitate its existing rental units, it might elect to spend HOME for new homeownership programs and CDBG for rental rehabilitation.
Sometimes the funding source constraints are not regulatory but rather are financial. Some jurisdictions are CDBG entitlements but not HOME PJs. In this instance, the grantee will need to decide whether or not it is cost effective for them to spend resources to apply to the state for HOME funding, especially if HOME funds are in high demand. Other jurisdictions may be both HOME and CDBG recipients but the amount that they receive under one program or other will help to dictate how those funds are most effectively spent.
Step 6: Determine whether program should be co-funded with HOME and CDBG
Once the jurisdiction has evaluated its needs and goals and the relative strengths and constraints of HOME and CDBG, it is time to determine which community development program should be funded with which funding source. In some cases, the jurisdiction will determine that an entire program should be funded by just one source. For example, the jurisdiction might fund all homeowner rehabilitation with CDBG.
In other cases, the jurisdiction will determine that both funding sources can play an effective role in addressing various elements of a particular program type. For example, a jurisdiction might decide that both CDBG and HOME have a role to play in developing rental housing or providing homeownership assistance.
In determining whether programs should be co-funded by CDBG and HOME, the jurisdiction should evaluate whether each funding source—given its constraints— has an important role to play in that type of program. If HOME or CDBG have a clear advantage in funding a particular type of program, then that should help to dictate the source of program funds. If neither funding source has a clear advantage, the jurisdiction might elect to co-fund the program with both CDBG and HOME and then make specific funding decisions based on individual project circumstances.
Step 7: If co-funded program, evaluate each project to determine appropriate uses of funds
If the jurisdiction has elected to fund some or all of its community development programs with both CDBG and HOME, it will need to make project-by-project decisions on investments. As each project is proposed, the jurisdiction should analyze that project using the following questions:
- What is eligible under each program? This question will help the jurisdiction to determine which components of the project to cover with HOME and which to cover with CDBG.
- What total and type of resources are available? This will assist the jurisdiction to determine the relative amounts that can be invested from each funding source.
- What are the opportunity costs of funding with each resource? “Opportunity cost” is a term borrowed from economics that means the other opportunities that cannot be undertaken because finite resources will be invested in this particular effort. Jurisdictions should ask themselves this question in order to make sure that today’s project will not interfere with tomorrow’s initiative. For example, if a jurisdiction invests all of its CDBG funds in a rental housing project, it will not have funds for the economic development project it also wishes to undertake.
- Are there regulatory benefits of combining programs in this project? This question will assist the grantee to determine whether there is any benefit to combining the funding sources in this project. For example, HOME cannot be used for off-site infrastructure and CDBG cannot generally be used for new construction. But they can be used together to develop a new housing subdivision.
- What are the regulatory detriments of combining programs in this project? This question helps the jurisdiction to determine whether there are any negative impacts on the project because HOME and CDBG are combined. For example, if a jurisdiction wants to do mixed-income, rental rehabilitation, it needs to consider that unless it can qualify the property under the slum/blight national objective, using CDBG for the financing means that 51 percent of the occupants must be low- or moderate-income.
- What is the impact on project feasibility? Sometimes projects need different types of financing in order to be viable. However, because some financing comes with certain strings attached, it can have an effect on project feasibility. For example, if HOME is invested in all units in a project, those units would need to rent for the HOME rents. These lower rents might mean less income to the project and, in turn, this might mean that the project is not financially feasible.
- What is the impact on project administration? As noted above, HOME requires long-term affordability restrictions. This means that the jurisdiction must monitor the project over this period. So, jurisdictions should evaluate whether they are prepared and able to monitor the project given its size and complexity. For example, the PJ may not have the resources to monitor a 300-unit affordable housing project.
- Does the project meet the tests for subsidy layering? Lastly, the jurisdiction needs to determine whether the investment of HOME is needed given project finances. Although CDBG does not have a subsidy layering requirement, it is prudent to undertake a similar analysis.
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