HUD CDBG-HOME Guidebook

Foreword

One of the major priorities of the U.S. Department of Housing and Urban Development (HUD) is the creation of affordable housing. The Department administers several Federal programs that assist state and local governments, as well as nonprofits and other partners, to develop affordable homeownership and rental units for low-income households. Two of the most important programs are the HOME Investment Partnerships Program (HOME) and the Community Development Block Grant (CDBG) Program.

Both HOME and CDBG are important resources in the local development of homes and communities. While sharing similar goals related to improving the living conditions of low-income families, each program differs in its eligible activities and requirements. In addition, there is a tremendous need for affordable housing in many communities and these needs often exceed available resources. So, it is important that state and local governments make strategic decisions about how to spend their HOME and CDBG funds.

HUD’s Office of Affordable Housing Programs, in partnership with HUD’s Office of Block Grant Assistance, developed this guidebook as a tool for community development practitioners to assist in making these strategic choices about HOME and CDBG resources for affordable housing. Its purpose is to provide practical guidance on how both HOME and CDBG requirements are interpreted and to provide examples of how the two funding sources might be used in tandem. The Department encourages communities to seek strategic, effective, and innovative ways of using two of its most important affordable housing resources – the HOME and CDBG Programs.

Introduction

Two programs form the cornerstone of the U.S. Department of Housing and Urban Development’s (HUD’s) community development efforts—the HOME Investment Partnerships Program and the Community Development Block Grant (CDBG). Across the country, HOME and CDBG funds are helping communities develop new affordable housing for both renters and homebuyers, rehabilitate existing homes, and turn around troubled neighborhoods.

While HOME and CDBG share the same goals—the growth and improvement of America’s communities— the programs differ in important ways. For example, HOME and CDBG have different eligible activities, different approaches to meeting the needs of low- and moderate-income families, and different rules regarding matching funds.

By using HOME and CDBG funds strategically, communities can optimize their use of both funding sources, while working within the limitations and regulations of both programs.

HOME and CDBG: Working Together to Create Affordable Housing is the community development professional’s guide to using HOME and CDBG funds for affordable housing activities as strategically as possible. This model program guide begins by outlining how HOME and CDBG work and by identifying critical differences between the two programs. Next, the guide provides a detailed consideration of how to use HOME and CDBG to support rental housing, homeownership, rehabilitation, and comprehensive neighborhood revitalization projects, giving special attention to how to coordinate the two funding sources. The guide concludes with some final considerations for making strategic investment decisions using HOME and CDBG.

Throughout the guide, the discussion will focus on the importance of using program resources effectively, and how this can be done to meet local housing and community development needs, and to stay in compliance with Federal program rules.

Making Effective Use of Program Resources

Community development is a broad term that encompasses a wide range of activities, including housing, economic development, health, employment and educational services, infrastructure, and many other activities designed to improve the welfare of neighborhoods and families. In towns, counties, and states across America, community development remains a primary concern for local leaders, the staffs of nonprofit and public agencies, and citizens alike.

Yet, Federal resources for community development are limited and are not sufficient to address all of the needs in most jurisdictions. While HOME and CDBG can play an important part in addressing community development needs, they must be used wisely in order to obtain the maximum benefit from each resource. It is important that jurisdictions use these programs strategically because:

• Some types of activities are better suited to be undertaken under one program than the other;
• When combining these resources within projects, it is important that the rules for each program be followed; and
• Effective leveraging of CDBG and HOME resources can mean a generating a greater “bang for the buck” than when each program is used alone.

Selecting Suitable Activities

When Congress enacted the CDBG and HOME Programs, it had differing objectives in mind. CDBG was created to consolidate a number of previous categorical grant programs that had addressed a range of community needs, including water and sewer, urban renewal, model cities, historic preservation, and neighborhood development. CDBG’s eligible

activities, therefore, are diverse and range from residential rehabilitation to infrastructure to public services. While it has a strong focus on meeting the needs of low-income persons, it is also designed to be flexible in order to address other concerns.

The HOME Program was created nearly two decades later, to address the growing affordable housing crisis in America. Its purpose is to increase the supply of affordable housing for low-and very low-income households. There are four eligible activities under HOME and all relate directly to affordable housing. In addition, HOME has a secondary purpose of supporting the development and sustainability of nonprofit housing providers. To achieve this, it mandates that a percentage of each annual allocation be used by community housing development organizations (CHDOs) to own, develop, or sponsor housing.

Given these differing legislative histories and program purposes, it is no wonder that each program has its relative strengths and limitations. For example, CDBG cannot generally be used to construct new housing. However, it can be used to develop the infrastructure in a low-income neighborhood that might support a new affordable housing development. HOME, on the other hand, can be a very good resource for building new units but cannot be used to create off-site infrastructure. So, making strategic choices about how the HOME and CDBG programs are used can help a jurisdiction address a wide range of needs within its available resources.

In addition to these programmatic constraints, there are also strategic elements in deciding which program to use for which purpose.

Assume, for example, that the goal of a jurisdiction’s program is to improve and preserve its supply of affordable homebuyer units. Both CDBG and HOME can be used to assist with homeownership. However, only HOME mandates that units remain affordable for a specific period of time. HOME might be the preferred resource to use in this situation.

Now assume a different a jurisdiction wishes to spur neighborhood revitalization by rehabilitating rental units. Its objective is not necessarily to create long-term affordability, but rather to address the blight in the area so that other businesses and homeowners will locate in the neighborhood. In this instance, both HOME and CDBG can be used for rental rehabilitation. However, CDBG might be the preferred resource because it does not mandate long-term affordability restrictions and allows for undertaking projects where the focus is not necessarily on addressing the needs of low- and moderate-income households but rather on cleaning up a blighted neighborhood.

Jurisdictions that are familiar with the rules and flexibilities of both HOME and CDBG will be able to make strategic choices about investing their program resources.

Complying with the Rule

In addition to thinking strategically about how and when to use HOME and CDBG, jurisdictions need to ensure that both sets of program rules are met. When the programs are operated separately and are not combined in projects, jurisdictions must make sure that they carefully document compliance for each program according to the rules established by the CDBG and HOME regulations.

However, CDBG and HOME are sometimes combined in a single project. When this is done, the jurisdiction must ensure that both sets of rules are met simultaneously. Since both HOME and CDBG are Federal programs with implementing statutes and regulations, neither program overrules the other. In other words, the most stringent applicable requirement from each program must always be met.

For example, when a PJ invests HOME funds in a multifamily rental project, it can elect to invest its resources in selected HOME units. That is, if the jurisdiction wishes to partially rehabilitate a 10-unit rental building, it can fund two HOME units and leverage other funds to rehabilitate the remaining eight units. However, if CDBG is also invested in that same 10-unit project, the entire structure is considered to be assisted. Therefore, if the housing national objective is used it would mandate that at least 51 percent of the units be occupied by low- and moderate-income households, regardless of the amount of CDBG assistance in the project. Under HOME rules, only the two assisted units would need to be occupied by income-eligible families, but CDBG mandates that low- or moderate-income families occupy at least six units.

So, it is important for the jurisdiction to understand the rules of both programs in order to be sure that all activities are compliant.

Leveraging CDBG and HOME

Jurisdictions need to be familiar with how CDBG and HOME work together so that they can get the greatest impact for their investments. As noted above, there are differing instances when either CDBG or HOME is the most appropriate tool for a particular task at hand. However, sometimes when those tools are used together, the impact is greater than either could achieve alone.

For example, assume that HOME funds are used to support homeownership in a given neighborhood. HOME or CDBG can provide downpayment assistance to help low-income families to finance the purchase of new homes in a targeted neighborhood. However, if the families move into the neighborhood and find that the community lacks community facilities and local retail shops to meet their needs, it might make sense for the jurisdiction to invest its CDBG funds in the non-housing needs of the neighborhood, and its HOME funds in the homeownership program. This way, it can stretch its resources to undertake a broader range of activities to meet the diverse needs of the neighborhood residents. This results in a more vibrant, successful community.

It is important for jurisdictions to consider how CDBG and HOME can work together so that they are able to get the greatest return for their programs.

Planning for CDBG and HOME

There are numerous ways that CDBG and HOME can be combined. Jurisdictions need to evaluate these options and then make decisions about how to effectively use these programs given the needs of their community. The section below provides a brief summary of how jurisdictions can consider these options as a part of their planning processes. For more detail on the key steps in making strategic decisions regarding CDBG and HOME funding, see Section 6 of this guidebook.

To tackle these complex program decisions, jurisdictions may wish to consider developing:

• An assessment of community needs;
• A community-wide plan for addressing needs through an array of different community development projects; and
• A clearly-defined approach to each individual community development project.

Assessment of Community Needs

Although many American communities share similar challenges, such as a lack of affordable housing, no two communities are exactly alike. A needs assessment helps each community identify and define its individual needs as well as its strengths and assets.

The needs assessment should be conducted by the local or state government and should be the first step in determining how to effectively use HOME and CDBG resources. Often this assessment is done as a part of the Consolidated Planning process and includes:

• A description of the assets and resources present in the community (such as a community college or existing infrastructure);
• Current data and projections concerning demographics (e.g., households, income levels, etc.) as well as housing supply and demand;
• Data on rents and housing prices in specific neighborhoods within the jurisdiction;
• An analysis of the health of the local economy;
• An assessment of the state of the jurisdiction’s infrastructure;
• An analysis of which neighborhoods have the most acute community development needs; and
• A general review of the feasibility and need for certain types of community development projects (such as infill housing versus multifamily rental housing) in specific neighborhoods.

Community-Wide Plan

After conducting a community needs assessment, community development staff should develop a plan for tackling the challenges faced by the community. Typically, the plan will involve a number of different community development activities in different neighborhoods within the jurisdiction. The plan strives to coordinate different types of housing, economic development, infrastructure, and related activities to maximize the impact of public funds.

States and localities can use the Consolidated Planning process—a requirement for direct grantees receiving HOME or CDBG funds—as an opportunity to undertake community-wide planning. Note that subrecipients and units of general local government who receive funds from a direct HUD grantee do not need to do their own consolidated plan. They are covered by the grantee’s plan. This planning process ensures that there is input from nonprofit partners, local businesses, and most importantly, residents that will be affected by community development projects. Wide community participation in the planning process is invaluable because it ensures that community development projects truly reflect what the community wants and needs.

When preparing the Consolidated Plan and Annual Action Plan, jurisdictions determine the appropriate level and nature of a variety of housing activities, such as the development of local rental, homebuyer, rehabilitation, special needs, or other types of affordable housing programs to address community needs. The process should also address how HOME and CDBG can be used strategically to address the needs identified for the community.

Individual Project Approach

With a consolidated plan in hand, jurisdictions are ready to evaluate the feasibility, implementation and benefits of program resources for each individual project.

Feasibility Research. Often, communities will need additional research to establish the feasibility of a given project. For housing projects, a market study is a focused assessment of whether a specific housing product, on a specific site, will be able to attract residents with the ability to pay—and how quickly. This type of study will explicitly conclude whether the proposed rents or housing prices for the specific project are achievable. For neighborhood revitalization projects, a broader market study that examines both housing and economic data may be necessary to assess the feasibility of a larger, multi-faceted initiative.

Implementation Planning. As early as possible, community development staff should identify the potential costs and existing concerns related to the implementation of the project. Even an apparently straightforward housing development project can involve a diverse array of costs: administrative expenses, infrastructure modifications, services for residents, basic construction costs, and more. As this model will explain in detail, the availability of HOME and CDBG funds (as well as other sources of financial

support) depends on whether the specific use of funds qualifies as an eligible activity under their respective program rules. Strategic use of program funds can maximize the impact of subsidies while meeting the eligibility requirements of all relevant programs.

Costs and Benefits of Funding Sources. Subsidies from HOME and CDBG programs enable communities to undertake projects that may not otherwise be feasible. However, it is important to consider the additional responsibilities and restrictions that come with using these funds for particular projects. Some possible responsibilities and restrictions include, depending on the funding source:

• Rent limits for subsidized units;
• Restrictions on the purchase and resale of subsidized homes;
• Reporting and monitoring responsibilities to ensure ongoing compliance with program rules and regulations; and
• Rules regarding the targeting of subsidies toward a program’s intended beneficiaries.

Communities should consider carefully how the requirements of different funding sources will impact a given project.

How to Use this Model

This model program guide is intended for PJ staff to help communities use their HOME and CDBG funds strategically. The guide is designed to be a useful “crash course” in the programs and it highlights the differences that help practitioners invest these resources wisely. Each section describes the applicable program rules for each specific type of housing development—rental housing, homeownership, and rehabilitation—and includes a side-by-side comparison of the key requirements of the HOME and CDBG programs. This format should assist the community development practitioner in need of specific programmatic information for quick-reference.

This guide is organized in the following six sections:

Section 1: HOME and CDBG Basics introduces each program and provides general information on the eligible activities, program restrictions, and administrative requirements for each program. The section includes a chart that summarizes the key program requirements to facilitate comparison.

 Section 2: Using HOME and CDBG for Rental Housing describes rental housing requirements and illustrates how HOME and CDBG can be combined to support the development of affordable rental housing.

Section 3: Using HOME and CDBG for Homeownership Programs explores ways to assist homebuyers and considers the most effective ways that communities combine the two programs to develop housing units for purchase.

Section 4: Using HOME and CDBG for Homeowner Rehabilitation provides an analysis of using HOME and CDBG for homeowner rehabilitation.

Section 5: Using HOME and CDBG for Comprehensive Neighborhood Revitalization considers the use of HOME and CDBG funds for targeted community development within a specific neighborhood. Strategic use of HOME and CDBG along with other resources can allow communities a chance to breathe new life into a deteriorating neighborhood.

Section 6: Making Strategic Investment Decisions focuses on how communities can make the most of every subsidy dollar. Careful allocation of program funds, effective program design, and program performance review are all part of an effective use of HOME and CDBG.

Under the HOME Program, the recipient of HUD funds is known as a “participating jurisdiction” or “PJ.” Under the CDBG program, the recipient is known as a “grantee.” Throughout this guidebook, the general term “jurisdiction” will be used to mean the local or state government that receives HOME or CDBG funds. When specifically referring solely to the recipient of HOME funds, “PJ” will be used and when specifically referring solely to the recipient of CDBG funds, “grantee” will be used. Under the State CDBG Program, units of general local government that receive CDBG money from a state are sometimes known as “state grant recipients”. Under this guide they will be called units of general local government.

In addition, the guide uses the expression “low- and moderate-income” or “LMI” to refer to income-eligible persons or households under both HOME and CDBG. This is because persons or households who are at or below 80 percent of area median income, as determined and adjusted by HUD on an annual basis, are called “LMI” under the CDBG program, and “low-income” under the HOME Program. When the guide discusses the CDBG or HOME requirements of one of the programs specifically, it uses the terminology of that particular program.

About the Model Program Guides

HOME and CDBG: Working Together to Create Affordable Housing is one of a series of model program guides published by the Office of Affordable Housing Programs of the U.S. Department of Housing and Urban Development. The model program guide series provides technical assistance and guidance on HOME Program implementation to participating jurisdictions. Model program guides are available to the public at no cost. For more information about the model program guides, see the Office of Affordable Housing Programs’ online library at https://www.hud.gov/offices/cpd/affordablehousing/library/modelguides/index.cfm.