Section 2: Using HOME and CDBG for Rental Housing

Approaches to Creating Rental Housing

There are many ways to create affordable rental housing, and jurisdictions can tailor HOME and CDBG funds to address local housing market conditions. For instance:

  • In some communities, there is a surplus of available standard rental housing but it is not affordable to low-income households. In these communities, the right approach might be to acquire these existing units, lower the their cost, and rent them to low-income households.
  • In communities with a sufficient supply of standard housing, it might make sense to provide assistance to the tenants, rather than to the owners. This is known as “tenant-based rental assistance,” or TBRA.
  • In other communities where rental housing exists, but it is in poor condition, an effective rental housing program might focus on rehabilitating these existing structures, or on acquiring and rehabilitating them.
  • In communities that lack a supply of available housing, and those that are characterized by low vacancy rates and high rental prices, new construction might be the best way to create affordable rental housing.

This section describes each of these approaches and their applicability to HOME or CDBG programs.

Acquisition

An acquisition program involves purchasing existing rental units within the community and then lowering their rents to make them affordable to low-income households. Usually, this is accomplished by directly subsidizing the purchase of the units so that the owner’s ongoing financing costs are reasonable and therefore, he or she can afford to offer lower rents.

Example: Rental Acquisition Program

The City of Westwyn found that it had a number of modest rental developments that were in standard condition, but whose rents were generally out of reach for low-income households. It worked with a local nonprofit to purchase the 20-unit Westside Apartments for a total price of $1,000,000. At that purchase price and with a standard market rate loan, the nonprofit would have had debt service that required rents at $700 per month in order to make ends meet. In order to lower the rents to the $600 and $400 high and low HOME rents, the PJ provided the nonprofit with a deferred, forgivable payment loan of $300,000. Since the nonprofit did not need to make debt service payments on this loan and only needed to borrow $700,000, it could afford to offer rents at the HOME rent levels.

The benefit of using an acquisition approach to developing affordable rental housing is that it can be very cost effective since no construction is needed. It can also be used to further mixed-income housing goals. For example, using HOME funds, a PJ could assist a developer who was purchasing a 50-unit building. The HOME funds could be targeted at five of the total units, with financing capped at the maximum per unit subsidy limits. These five units would carry the HOME restrictions related to affordability, income, unit quality, etc. The remaining 45 units could rent to moderate- or upper-income people. Note: assuming that the low and moderate-income housing national objective is being used, acquisition would work with CDBG funds only if low-and moderate-income persons occupy at least 51 percent of the units.

The acquisition approach to rental housing can be successful in communities that have ample rental housing stock in standard condition. In many communities, however, there are not a sufficient number of units that are both standard and reasonably priced for purchase. For this reason, it may not be cost effective to purchase existing units and offer them at an affordable rent.

Both CDBG and HOME funds can be used to acquire existing rental housing. For HOME, the developer needs to keep in mind the requirement that the units meet the applicable local code or national model codes and standards. If the units are not standard, HOME can also assist with rehabilitation costs (see below). Under CDBG, acquisition is an eligible activity, provided it meets a national objective. Acquiring rental units for occupancy by low- and moderate-income tenants would be eligible as a low- and moderate-income housing activity. Rental housing acquisition funded with CDBG would need to be undertaken by the grantee, a public agency, or a nonprofit organization because CDBG prohibits acquisition-only housing activities to be conducted by for-profit entities. In addition, CDBG permits for-profit entities to undertake acquisition with rehabilitation because that is classified as a rehabilitation activity rather than as an acquisition activity.

Tenant-Based Rental Assistance

Another method of making existing rental housing affordable is to offer assistance to tenants to help them afford their rent. The most common tenant-based rental assistance (TBRA) model is the Housing Choice Voucher Program that is run by housing authorities across the country. Under this program, a household chooses a standard unit and the housing authority subsidizes the difference between what the household can afford to pay, and a fixed rent ceiling known as a payment standard. The household then makes up the difference between the actual rent and the housing authority subsidy.

The benefit of this approach is that it is flexible and allows the household to choose where they want to live. Also, TBRA programs can be much more cost effective than rental development programs. For example:

TBRA Cost Effectiveness

Assume that it costs $150,000 per unit to build a new rental unit and the jurisdiction wants to create 50 affordable rental units. That is a total development cost of $7,500,000. Assume the project is funded completely with various forms of public subsidy and that the project has an affordability period of 20 years.

Compare this to a TBRA program in the same community. It has a payment standard of $800 based on the FMR. Thirty (30) percent of the income of a household at 60 percent of median income is $600. So the jurisdiction -- in general—will make up $200 per unit per month in TBRA costs or $2,400 per year.

So, the jurisdiction can subsidize 156 families for 20 years using TBRA for $7,500,000, or, for the same amount, it can develop 50 units of affordable housing for 20 years. Even if the public subsidy is only half of the development cost, the jurisdiction could still fund 28 more families using TBRA.

TBRA may not work in all market conditions, however. First, it is only effective in communities where there exists a supply of standard affordable housing. In many jurisdictions, there are no available units where households could use their TBRA. In addition, TBRA does not permanently increase the supply of affordable housing within the community. If HOME funding is reduced and the jurisdiction has no other funding source, or the funding priorities change, there is no lasting effect on the housing supply.

HOME can be used to create a TBRA program. The program options are highly flexible—from a Housing Choice Voucher model to a security deposit only program. However, it should be noted that the costs to administer a HOME TBRA program cannot be charged as a project cost and must be paid out of the PJ’s administrative budget, and subject to its 10 percent cap.

CDBG cannot be used for TBRA because the CDBG program considers rental assistance as a type of income payment (i.e., payments directly to or on behalf of households) which is expressly prohibited, unless it is conducted as a part of a CBDO eligible activity. However, the CDBG regulations at 24 CFR 570.201(k) and the statute at 105(a)(20) allow CDBG funds to be used to administer HOME TBRA programs (as well as provide other HOME-related housing services). This is important because it is a separately eligible CDBG activity that is not subject to the CDBG administrative cap. So, although CDBG cannot directly fund TBRA, it could support the operation of such a program, and this might be a good opportunity for combining the two funding sources.

In some programs, rental assistance is provided as project-based assistance, where a public entity provides an owner with ongoing assistance to cover his or her operating costs in return for reduced rents. Unlike TBRA, project-based assistance is tied to a unit and does not move with the tenant. Neither HOME nor CDBG can be used for project-based assistance.

Rehabilitation

Rehabilitation of existing housing is another way of creating affordable, standard rental housing. Under this model, a jurisdiction provides low-cost assistance to help an owner bring his or her units up to a quality standard. In return, the owner agrees to rent units at reduced rents to low-income households.

This model can be combined with acquisition so that the developer is acquiring and rehabilitating the property. Rehabilitation can be minimal, or it can sometimes be very extensive, including reconstruction.

The obvious benefit of this approach is that it not only helps to house low-income families but it reduces the number of existing dilapidated housing units in the community.

This approach to developing affordable rental housing can be quite expensive, however. In some communities, and given some project situations, it can be more expensive to renovate units than to undertake new construction. Also, when rehabilitating occupied units, extensive renovations might cause displacement and trigger requirements and related costs under the Uniform Relocation Act and/or Section 104(d) relocation requirements.

Both HOME and CDBG can be used for rehabilitation only and for acquisition with rehabilitation. HOME requires that all assisted units be rehabilitated in accordance with a minimum property standard, but CDBG does not. Under CDBG, the developer can fix the most critical items (such as emergency repairs of major systems) but it would not necessarily be required to bring the entire unit up to housing codes and standards.

In addition, both programs can be used for historic preservation as a part of rehabilitation. In these instances, jurisdictions will want to work with their State’s Historic Preservation Office (SHPO) to determine the appropriate scope of work.

 

Example: Acquisition with Rehabilitation

The town of Eastbrooke has a large number of dilapidated rental structures. The cost to renovate these structures exceeds the likely return to any developer. So, they remain vacant and an eyesore for the community. Meanwhile, the waiting list for the jurisdiction’s rental program is years long.

So, Eastbrooke creates a program where it will provide assistance to CHDOs to buy, renovate, and manage rental properties. The HOME assistance will be used for acquisition and for extensive rehabilitation and is structured as a 0% interest rate loan. CHDOs can borrow HOME funds up to 40 percent of the unit’s total development cost. The remainder of the funds comes from low-income housing tax credits (LIHTC) and private loans.

The reduced rate HOME financing allows the CHDO to cover its development costs and offer units that rent below the HOME (and LIHTC) rent limits.

 

New Construction

Jurisdictions can provide affordable rental housing by building new units. Under this approach, the jurisdiction typically works with a nonprofit or for-profit developer who identifies the site, develops the plans and specifications, and works with a general contractor to build the units.

The benefit of new construction is that it generates new affordable units for the community. In addition to creating housing, new units can help spur development of other units and services in the neighborhood.

New construction can also be very expensive, and delivery of the new units can take a long time.

HOME can be used for new construction of rental units. It can finance all or a portion of the costs, including the acquisition of the site, hard construction costs, soft costs or an 18-month project operating reserve. As with other forms of rental development, the amount of HOME funds invested will dictate how many HOME units must be provided.

CDBG cannot be used to pay for the hard costs or the soft costs of new construction unless the construction is being undertaken by a CBDO as a part of a neighborhood revitalization, energy conservation, or community economic development activity. A common misconception is that CDBG funds can be used for soft costs for new construction (such as architect’s fees, building permits, engineering etc.). These costs are generally not allowed because they are not a separately eligible activity unto themselves—they are necessarily related to the new construction, which is not generally eligible under CDBG.

The Entitlement CDBG program regulations contain limitations on the use of CDBG funds for "soft costs" related to new housing construction. The Housing and Community Development Act (HCDA) only lists activities that are eligible for CDBG funding, and so has no discussion of new housing construction. Under the State CDBG program regulations, states are given the ability to interpret the list of eligible activities in the HCDA, providing their interpretations are not plainly inconsistent with the HCDA. States may use the Entitlement program eligibility regulations as interpretive guidance.

CDBG can be used to support the development of new construction by financing the cost of activities that are separately eligible activities, such as site clearance or demolition. In addition, CDBG can be used for any infrastructure that is owned by a public or nonprofit agency. CDBG can also be used for property acquisition when it is undertaken by the grantee, a public agency, or a nonprofit.

 

Example: New Construction

The town of Glendale needs more rental housing units for its very low-income elderly residents. However, none of the buildings in its community are fully adapted for the special needs of these elderly residents (such as wheelchair accessible bathrooms, adapted kitchens, live-in nursing aide quarters, etc.)

So, the PJ worked with a local faith-based nonprofit to acquire land and build a new 30 unit building for very low-income seniors. The PJ provided the nonprofit with a deferred payment HOME loan due only upon sale of the property. The remainder of the development financing came from state and foundation grants. The nonprofit conducted fundraising among the congregation members and the community at-large in order to raise funds for ongoing property operation and maintenance.

 

A jurisdiction might also rehabilitate an existing building and convert it into affordable units. This is known as "conversion" and it is treated as rehabilitation under HOME.iii

Conversion of existing non-housing structures to new housing is permitted under CDBG. For example, a grantee could use CDBG funds to convert an old, abandoned school into affordable housing. CDBG treats the conversion of a non-residential building to a residential use as rehabilitation.

Example: Conversion

The town of Lakeside has an old hotel that is dilapidated and boarded up. It also has a severe shortage of affordable rental units.

A for-profit developer wants to buy and convert the hotel into apartments. They want to have up-scale loft style apartments on the top floor. However, in return for HOME assistance, they agree to allow for 40% of the total units to be occupied by low-income households.

Lakeside determines how much HOME money they can provide given the costs of the affordable units and provides that assistance as a 2% interest rate loan where payments will not start until the 3rd year of the affordability period. This delayed start time allows the owner to build a market for the units and stabilize the project’s income and operating expenses.

Financing and Developing Rental Housing

This section provides an overview of how rental properties can be financed and developed using HOME and CDBG funds. It highlights:

  • Development partners that jurisdictions may wish to work with;
  • The methods of financing and assisting projects;
  • Eligible rental projects;
  • Determining assisted units;
  • Eligible costs;
  • Property standards; and
  • Other Federal requirements that apply to the development process.

Partners

In developing rental housing, most jurisdictions work in partnership with other organizations. In many communities, rental housing is created by nonprofit and for-profit developers. While it is eligible for jurisdictions to develop and own rental housing themselves, it is not common practice because of the legal and operational complexities of managing such property.

There are many roles that partners can play in the rental housing development process, including:

  • Developer. This is the entity that puts together the rental deal. It finds the financing, arranges for the property purchase (as applicable), and oversees the construction process. After project completion, the developer may or may not retain ownership of the property.
  • Owner. This is the entity that owns the rental property once it has been built, acquired, or rehabilitated. This entity is responsible for the ongoing compliance of the property (as applicable).
  • Sponsor. This is an organization (typically a nonprofit) that works with another organization to help this other entity to develop the rental housing. The sponsor typically owns the property during the development process and assists with assembling the financing. Upon project completion, the sponsor typically sells its ownership to the second entity that becomes or remains the owner.
  • Property Manager. In some cases, owners will select another organization to assist with the property management once the project is complete. The property manager may or may not be legally related to the ownership entity. The role of the property manager is to oversee the maintenance and marketing of the units. Typically, the property manager is responsible for maintaining documentation to demonstrate compliance with income and affordability requirements.
  • Consultant. There are many consulting roles that partners can play in the development of rental housing. For example, some rental projects require community input. A partner organization can act as a neighborhood liaison, organizing community meetings and providing outreach information. Consultants can also provide services such as market assessments, tax credit expertise, or construction management.

    • Program Manager. In some jurisdictions, a nonprofit or other public entity might manage the rental development program on behalf of the local public agency. In this instance, it is acting as a subrecipient to the jurisdiction and its job is to select and fund projects.
    • Lender. A wide range of lenders can act as partners in a HOME or CDBG-funded rental housing project. Sometimes lenders are for-profit companies—such as banks or credit unions. Other times lenders are nonprofit organizations that may be either lending their own resources to the project or acting as subrecipients and lending HOME or CDBG funds to the project. One special type of lender that may sometimes participate in HOME or CDBG programs are Community Development Financial Institutions (CDFIs). CDFIs are community-based lenders working to address housing and economic development needs. Note that under the CDBG Program, projects undertaken by CDFIs get special regulatory flexibility related to applying the national objective for jobs or housing.

    Under the HOME Program, PJs are required to invest some funds in housing that is owned, developed, or sponsored by CHDOs. The development of rental housing is an eligible CHDO set-aside activity and these expenditures count toward the 15 percent threshold. In order to count as a CHDO set-aside activity, the CHDO must be acting in the role of owner, sponsor or developer. CHDOs can play other roles in the development process but it does not count toward the 15 percent minimum CHDO set-aside.

    Under the CDBG program, grantees are not required to work with any one particular type of partner. Nonprofits and for-profits may play any of the roles outlined above. However, grantees sometimes find it beneficial to work with CBDOs. As noted in Section 1, CBDOs are a special type of organization whose purpose is community development. A CBDO may undertake activities related to neighborhood revitalization, energy conservation, or community economic development. Housing–-including rental housing–-can be a component of these efforts. Note that under the State CDBG Program, these entities are generally known as nonprofit development organizations working under Section 105(a)(15) of the Housing and Community Development Act, and individual states may or may not call these organizations “CBDOs”.

    There are several reasons why grantees may wish to partner with CBDOs or nonprofit development organizations serving the needs of non-entitlement areas (referred to generally as CBDOs below):

    • CBDOs are intended to be organizations with a relationship to the community. They offer the local resident perspective to the development.
    • A CBDO is the only entity that is allowed to construct new housing with CDBG funds (other than units developed as last resort housing for relocation purposes). This new CBDO housing must be in the context of neighborhood revitalization, energy conservation, or community economic development.
    • If the grantee adopts a Neighborhood Revitalization Strategy Area (NRSA), or for recipients of State CDBG funds, a Community Revitalization Strategy Area (CRSA), any services undertaken by the CBDO pursuant to the strategy within that area are not subject to the 15 percent public services cap. This means that the grantee could fund public services via the CBDO using CDBG funds without having to worry about needing to reduce its funding to other public services activities in order to fit all activities within the cap. This could be especially helpful to service-enriched rental projects located within the NRSA or CRSA area, such as elderly projects with meal, medical, or counseling services.

    It is important to note that there are key distinctions between CHDOs and CBDOs. Table 2-1 compares these two types of development organizations.

    As noted in Table 2-1, HOME CHDOs that have a geographic area of operation that does not exceed one neighborhood will automatically qualify as a CBDO, regardless of whether they meet other CBDO criteria. This organization must have received HOME funds or be expected to receive HOME funds. Note that in order to qualify as a CBDO activity, the CDBG-assisted activity must be part of a community economic development, neighborhood revitalization, or energy conservation project.

    In choosing partners, jurisdictions need to ensure that they adhere to the Federal requirements related to conflict of interest. In general, no covered person or entity may obtain a financial benefit due to his or her working relationship to the HOME or CDBG programs. A covered person is a jurisdiction employee, agent, or officer and their immediate families and business partners. So, a jurisdiction employee could not form a development firm and then request HOME or CDBG assistance to build rental units.

    In addition to these requirements, HOME also imposes requirements related to the occupancy of units. In general, no owner, developer, or sponsor of HOME-assisted housing, including their officers, employees, agents, consultants, or elected officials may occupy a HOME-assisted unit. Note that there are exceptions for owner-occupied rehabilitation and rental property managers or maintenance workers.

    Table 2-1: CHDO and CBDO Comparison*

    Topic

    CHDO

    CBDO

    Required set-aside

    15% of the annual grant.

    None.

    Primary mission

    Provision of affordable housing for low- and very low-income persons.

    Community development, including housing and economic development. Focus on meeting the needs of low- and moderate-income persons. Primary purpose is improving the physical, social and economic environment of its service area.

    Geographic focus

    Must have a defined geographic service area, although need not be single neighborhood. May include multiple jurisdictions, but not the whole state.

    Works within a defined geographic area within the jurisdiction—does not cover more than one jurisdiction. This requirement is not applicable to the State CDBG Program.

    Legal status

    Organized under State and local law. Must have 501(c) nonprofit status from IRS. No profits may benefit any individual.

    May be nonprofit or for-profit, as long as profits are incidental to operations.

    Table 2-1: CHDO and CBDO Comparison*

    Topic

    CHDO

    CBDO

    Board

    Must be at least 1/3 low-income representatives. This can include low-income residents or residents of low-income neighborhoods or elected representatives of low-income neighborhood organizations. Must also have other means of input by low-income residents.

    51% of governing body is low- and moderate-income residents of, or officers of institutions of, or representatives of low- or moderate-income neighborhood organizations in their service area. Board must be nominated and approved by membership or permanent governing body. The board requirements are not applicable in the State CDBG Program.

    Public agency participation

    Cannot be an instrumentality of the public agency. No more than 1/3 of the board may be representatives of the public sector.

    Cannot be an instrumentality of the public agency. No more than 1/3 of the board may be representatives of the public sector. The board requirements are not applicable in the State CDBG Program.

    Capacity & experience

    Must demonstrate 1 year of experience in serving the community. Must demonstrate staff capacity.

    No CDBG regulatory requirement. Jurisdictions may develop their own requirements.

    Assets

    No specific requirements.

    At dissolution of the CBDO, its assets cannot revert to the jurisdiction.

    Procurement

    No specific requirements.

    Must be free to contract for goods/services of its own choosing. Not required to be a subrecipient, but if so designated by the grantee, is subject to 24 CFR Part 84.

    Exceptions

    None

    CBDOs not meeting above criteria may qualify if they:

    • Are organized under Section 301(d) of the Small Business Investment Act of 1958;
    • Are an SBA approved Section 501 State Development Company or Section 502 Local Development Company or a Section 503 SBA Certified Company under the Small Business Investment Act;
    • Are a single neighborhood CHDO (see text discussion); or
    • Are approved by HUD as being sufficiently similar in purpose, function and scope.

    Eligible activities

    In order to qualify for the 15% set-aside, must be acting as an owner, sponsor, or developer of rental or homebuyer housing. Can undertake other activities but does not count toward 15 percent set-aside.

    Must be part of neighborhood revitalization, community economic development, or energy conservation activities within their geographic area.

    Subrecipient

    Not a subrecipient unless running a program on behalf of the PJ. In this instance, the HOME funds to the CHDO would not count toward the 15% set-aside. When receiving administrative funds to operate the subrecipient program, it is administrative funds, and not CHDO operating funds.

    Not a subrecipient unless the grantee elects to treat them as such. If so, additional administrative requirements apply.

    Operating support

    Up to 5% of the PJ’s annual HOME allocation may be allocated for CHDO operating expenses. Each CHDO may receive up to the greater of $50,000 or 50 percent of its total operating expenses in a given fiscal year.

    None.

    Program income

    Income earned by CHDOs is project proceeds not program income. Project proceeds may be used for any low-income housing activity.

    None unless the grantee elects to consider the CBDO a subrecipient. Assuming the CBDO is not a subrecipient, project proceeds kept by them may be used for any lawful purpose.

     
               

    * Note that the State CDBG Program has a less stringent definition of which organizations qualify under Section 105(a)(15) of the statute. See U.S. Department of Housing and Urban Development Guide to National Objectives and Eligible Activities for State CDBG Programs, pages 2-70 to 2-80. Available online at https://www.hud.gov/offices/cpd/communitydevelopment/library/stateguide/index.cfm.

    Forms of Assistance

    HOME PJs and CDBG grantees can provide financial assistance for rental housing in a number of different ways. Some types of financing that the jurisdiction may wish to consider, and the risks involved in each, are shown in Table 2-2.

    Table 2-2: Financing Types and Characteristics

    Assistance Type

    Characteristics

    Uses and Eligibility

    Risk

    Predevelopment loans or grants

    • Pay for project planning and pre-construction activities.
    • Predevelopment expenses include staff costs of the developer that are directly associated with the project, option to purchase land or a building, legal fees, architectural and engineering fees, appraisals, and possibly loan application fees.
    • May not be used before completion of environmental review and approval of the request for release of funds and related certification, except as authorized by 24 CFR Part 58.
    • Eligible under CDBG or HOME if related to an eligible project.
    • Highest risk because money is spent before the developer can determine whether the project is feasible.
    • If project is not completed, costs are ineligible except under HOME when predevelopment costs are loaned to CHDOs. In this instance, the predevelopment loan may be forgiven.

    Construction loans

    • A short-term or interim loan to cover the cost of constructing or rehabilitating a project, with one or more long-term, permanent loans taking out (paying off) the construction loan at project completion.
    • Construction loans from traditional private lenders are typically at a higher interest rate than permanent loans due to the high risk involved.
    • Pays for the costs of building the housing.
    • Eligible under HOME.
    • Eligible under CDBG if

    related to rehabilitation and not new construction (unless the grantee is using a CBDO, since a CBDO may undertake new construction).

    • Jurisdiction should verify that permanent financing is available before making such a loan (to make sure it will be repaid).
    • Jurisdiction may inherit a partly finished building if anything happens during construction to create a significant budget shortfall, or if developer abandons building.
    • In such an event, it is unlikely jurisdiction could sell building for what has been invested.

    Permanent mortgage loans

    • Proceeds used to repay the construction, bridge, and predevelopment loans.
    • If the permanent financing replaces other loans, original loans must be used for eligible costs.
    • Jurisdictions may choose to finance part or all of the total development costs.
    • Provides long-term financing; repaid from the operating income from a rental or cooperative housing project
    • HOME or CDBG assistance must have been part of the original financing package.
    • Eligible under CDBG for rehabilitation or acquisition. New construction only eligible under limited circumstances (see above).
    • If there is a high vacancy or unexpected increase in operating costs, or reserves are depleted, jurisdiction may not get repaid.
    • If not combined with private financing, ties up large amounts of HOME or CDBG funds in a few projects and, therefore, risks are concentrated.
     

    Bridge loans

    • A short-term loan, often provided by construction lender, if upon construction completion, project does not yet meet requirements of permanent financing.
    • Used when the project will not be ready for permanent financing when construction is complete, such as with multi-stage projects.
    • May be used when permanent mortgage lender wants project to establish a track record before making loan.
    • Eligible under both CDBG and HOME if the project is eligible as previously discussed.
    • Significant changes in the project’s projected income or expenses could affect the availability of permanent financing, even if a loan commitment is in place.
     

    Credit enhancement

    • Includes loan guarantees and mortgage insurance.
    • Used to enhance the credit-worthiness of a project to attract private lenders who would not otherwise participate.
    • Eligible under both CDBG and HOME if the project is eligible as previously discussed.
    • Default requires cash pay-off of lender.
     

    Refinancing

    • Take out existing debt on the rental property.
    • HOME or CDBG funds may be used to refinance existing debt if the funds are used to rehabilitate the property and the refinancing is necessary to permit or continue affordability. Certain restrictions apply.
    • Refinancing can be an expensive use of program resources.
     
                   

    Eligible Projects

    Both HOME and CDBG offer a wide range of options in the design and selection of rental projects. There is flexibility in:

    • Property and unit types;
    • Unit income mix; and
    • Targeting for special needs populations.

    Property and Unit Types. HOME and CDBG allow for significant flexibility in the types of properties that can be used to develop rental housing. Eligible properties may be:

    • Publicly or privately owned; and
    • Residential or mixed use. However, HOME can only pay for the residential portion of the building. CDBG can be used to pay for both residential and commercial development although additional requirements apply.

    HOME funds may not be used for development, operations, or modernization of public housing projects financed under the Housing Act of 1937. HOME funds can be used in combination with HOPE VI funds. CDBG funds can be used to modernize public housing units but CDBG cannot be used to operate public housing or to construct new public housing.

    For both programs, there are no preferences for project or unit size or style. Often when people think of rental housing they picture large, multifamily buildings. While these types of buildings are certainly allowed under both CDBG and HOME, other building styles and forms of ownership are possible. HOME and CDBG rental projects may be one or more buildings on a single site, or multiple sites that are under common ownership, management, and financing.

    A key distinction in unit types between CDBG and HOME involves units that were previously funded. Properties previously financed with HOME during the affordability period cannot receive additional HOME assistance unless provided during the first year after project completion. CDBG funds, on the other hand, can be used subsequent to the initial CDBG investment and/or during the HOME affordability period as well, for a new eligible activity.

    Mixed-Income Housing. Both HOME and CDBG funds allow jurisdictions to develop mixed-income housing. However, the requirements are handled very differently under each program. HOME funds may be used to assist mixed-income projects but HOME funds may only be used for HOME-eligible costs, and only HOME-eligible tenants may occupy HOME-assisted units. So, this flexibility allows jurisdictions to target resources to particular units within a project.

    The amount of HOME money that may be invested in the mixed-income rental project will depend upon the maximum per unit subsidy cap, the total eligible costs for the project, and whether units are comparable. If units are comparable, the PJ can pay for a proportionate share of the eligible costs, up to the subsidy limit. If the units are not comparable, costs must actually be allocated to the units that will be HOME-assisted and costs must be capped at the subsidy limit.

    CDBG may also be used to assist mixed-income projects so long as the national objective is met. That means that 51 percent of the units must be occupied by low- and moderate-income households, or the project must meet one of the slum/blight national objectives. This is very different than the approach taken by the HOME Program. Regardless of the amount of CDBG funding—be it $100 or $10,000,000—if the low- and moderate-income housing national objective will be used, 51percent of the units must be occupied by low-and moderate-income households.

    There is one exception to this rule when a grantee is helping to write down the costs of new construction of multifamily, non-elderly housing. However, do not forget that unless a CBDO is involved, the grantee cannot actually pay for the construction itself but rather might help through eligible activities such as acquisition or site clearance. In this instance, CDBG can pay for a proportionate share of units and the costs (less than 51 percent) so long as at least 20 percent of the units are occupied by low-and moderate-income households.

    Mixed-Income Housing Options

    Newtown wants to develop mixed-income rental housing. It has available $200,000 in HOME funds and $50,000 in CDBG funds. A developer has a 10-unit rental acquisition

    and rehabilitation project that it would like to undertake with a total development cost of $1,000,000. The City’s per unit HOME maximum subsidy limit is $150,000.

    Q: If Newtown invested all $200,000 of HOME funds, how many units would need to be HOME-assisted?

    A: Two units. Since 20 percent of the costs are paid by HOME, 20 percent of the units must be considered HOME-assisted (assuming units are comparable).

    Q: If Newtown instead invested $50,000 of CDBG in the project, how many units would need to be occupied by low-income persons?

    A: Assuming that this is not a blighted area or site, six of the units would need to be occupied by low- or moderate-income households. This project would need to be qualified under the housing national objective and that requires 51 percent occupancy by low- or moderate-income persons.

    Special Needs Housing. There is also a significant difference between the HOME and CDBG programs when it comes to special needs facilities. Transitional and permanent housing for persons with special needs, including group homes and single room occupancy (SRO) units, are eligible under HOME and CDBG.

    Properties that are “facilities” are not eligible under HOME, but are eligible under CDBG. This includes shelters that include a residential component, such as homeless shelters or orphanages. These buildings are not considered housing under CDBG but rather “public facilities”. This is important for three reasons:

    • First, public facilities are not subject to the CDBG ban on new construction of housing, so grantees can build new facilities for persons with special needs.
    • Since these units are not housing, they qualify under the limited clientele national objective rather than under the housing national objective. If the facility exclusively serves a clientele that is presumed to be low- and moderate-income (see Section 1 for this list), the grantee is not required to document household income.
    • Public facilities must be owned by the grantee, a nonprofit, or another public agency. Therefore,

    for-profit firms cannot develop and own a facility for persons with special needs under CDBG.

    Assisted Units

    There is also an important difference in the way that HOME and CDBG approach assisted units. Under CDBG, the housing national objective is met at the time that the project is completed and the units are first occupied. At initial occupancy, 51 percent of the units need to be occupied by households who are low- or moderate-income, if the activity is based on the low-and moderate- income national objective. However, if those households move out and others move in, there is no requirement that the grantee evaluate or constrain the income of subsequent tenants. So, the program does not include the concept of a “CDBG-assisted unit” over the long-term, although a grantee can impose such a requirement.

    HOME, on the other hand, establishes long-term affordability periods for HOME compliance based upon the activity type and amount of investment (See “Ongoing Compliance” in this section for more detailed information on this topic.) During this affordability period, certain units that are deemed as “HOME-assisted” must remain affordable and occupied by low-income households. There are two methods of determining HOME-assisted units:

    • Fixed. When HOME-assisted units are “fixed,” the specific units that are HOME-assisted (and, therefore, subject to HOME rent and occupancy requirements) are designated and do not change during the affordability period.
    • Floating. When HOME-assisted units are “floating,” the units that are designated HOME-assisted may change over time as long as the total number of HOME-assisted units in the project remains constant.
      • The floating designation gives the owner some flexibility in assigning units and can help avoid stigmatizing the HOME-assisted units.
      • If the floating designation is used, the owner must ensure that the HOME-assisted units remain comparable to the non-assisted units over the affordability period in terms of size, features, and number of bedrooms.

    Eligible Costs

    A wide variety of rental development costs can be paid for with HOME or CDBG funds provided that these costs are incurred in the context of an eligible project. This section highlights eligible direct rental project costs and discusses approaches to addressing activity delivery costs.

    Direct Project Costs. Eligible rental project expenditures under HOME or CDBG may include:

    • Site acquisition;
    • Labor, materials, and other construction costs;
    • Energy efficiency improvements;
    • Utility connections;
    • Inspection, testing, and abatement of lead-based paint;
    • Reserves remaining at the end of 18 months may be retained for reserves at the PJ’s discretion.
    • Relocation costs for assisted properties;
    • Soft costs such as: financing fees; credit reports; title binders and insurance; surety fees; recordation fees; transaction taxes; legal and accounting fees, including cost certification; appraisals; architectural and engineering fees, including specifications and job progress inspections; environmental reviews; builders’ or developers’ fees; affirmative marketing; and
    • Handicap accessibility improvements.

    Remember that CDBG cannot pay for new construction of rental housing unless it is undertaken by a CBDO as part of a neighborhood revitalization, community economic development, or energy conservation project. However, grantees may provide support for the development of new rental housing as an eligible activity. “Support” refers to:

    • Acquisition (if purchased by the grantee, or another public or nonprofit entity);
    • Site clearance; and
    • Site improvements (if in public ownership).

    Note that HOME requires that all units be brought up to code and it has a minimum investment requirement of an average of $1,000 per HOME-assisted unit for the project. So, while handicapped accessibility and energy efficiency improvements are eligible as a part of construction, they are not typically able to be stand-alone activities because these work items alone typically do not bring a property up to code. CDBG does not have a minimum investment or code requirement, so single purpose rental rehabilitation programs are eligible.

    HOME funds can also be used to cover the cost of funding an initial operating deficit reserve for new construction and rehabilitation projects. This is not an eligible cost under CDBG.

    • This reserve is meant to meet any shortfall in project income during the project rent-up period.
    • The reserve cannot exceed 18 months.
    • The reserve can be used only for project operating expenses, scheduled payments to replacement reserves, and debt service.
    • The disposition of any remaining funds at the end of the 18-month period should be determined in the agreement between the developer/owner and the PJ.

    Activity Delivery Costs. HOME and CDBG treat the jurisdiction’s housing program or activity delivery costs differently. Activity delivery costs include specifications, inspections, underwriting, loan processing, and other staff and contracted costs needed to deliver and oversee the eligible project. Under CDBG, these types of costs are eligible when needed to deliver a rehabilitation program or project or if new construction is being undertaken by a CBDO. They are considered activity delivery costs and are not counted toward the administrative cap. Under HOME, these costs can be charged to a specific project (and therefore not against the administrative cap), if the PJ tracks costs unit-by-unit so that they can be included within the per unit maximum subsidy limit. Otherwise, the costs have to be charged as administrative costs, and are subject to the 10 percent program administration cap.

    It is important to note that CDBG contains an eligibility category that is designed to enable grantees to use CDBG for housing services under the HOME program. Under 24 CFR 570.201(k) of the CDBG regulations and 105(a)(20) of the statute, grantees may elect to pay for costs related to housing services under HOME. As noted above, services may be provided to owners, tenants, contractors, or other entities participating or seeking to participate in HOME-funded activities. Grantees may pay for the following types of HOME costs with CDBG funds:

    • Housing counseling;
    • Energy auditing;
    • Preparation of work specifications;
    • Loan processing;
    • Inspections;
    • Tenant selection; and
    • TBRA management.

    This is an important addition to the CDBG program because these costs are a separately eligible activity under CDBG and are not counted toward the grantee’s administrative cap. This new flexibility provides a good option for combining CDBG and HOME.

    Property and Neighborhood Standards

    There is a significant distinction between HOME and CDBG when it comes to property standards. Under CDBG, there are no established rules regarding property quality. Obviously the grantee should be prudent and use its funds wisely. CDBG grantees are free to design rental rehabilitation programs that focus on particular trouble areas—such as handicapped access or emergency repairs—without bringing the entire building up to standard.

    However, as with all HOME-assisted properties, HOME rental properties must meet certain written standards.

    • Acquisition. If no rehabilitation or construction is planned, the housing acquired must meet state and local housing quality standards and code requirements. If no such standards or codes exist, the property must meet Housing Choice Voucher Housing Quality Standards (HQS).
    • Construction and rehabilitation. Housing that is constructed or rehabilitated with HOME funds must meet all applicable state and local codes, rehabilitation standards and ordinances. If no state and local codes apply, the property must meet one of the national standards.iv If new construction, the property must also meet the Model Energy code.
    • New construction of rental housing. The site and neighborhood standards of 24 CFR 983.6(b) apply to new construction of rental housing. PJs are required to perform the review and maintain records that document the results.

    Other Federal Requirements

    In general, rental housing developed under CDBG and HOME is subject to similar other Federal requirements. Jurisdictions should carefully review all applicable regulations and HUD guidance on other Federal requirements.

    Ongoing Compliance

    Ongoing compliance for rental housing is an area where CDBG and HOME differ significantly. Under the CDBG program, once compliance with a national objective is documented, there are not significant ongoing responsibilities. However, CDBG does contain requirements related to the change of use of any real property within the grantee or a subrecipient’s control that was acquired or improved using CDBG funds in excess of $25,000. The recipient/subrecipient cannot change the use of the CDBG-funded property unless it consults with citizens and the property still meets a national objective or the CDBG program is reimbursed for the current fair market value less any value attributable to non-CDBG expenditures. For the Entitlement Program, these requirements apply until five years after close-out of the grantee’s participation in the CDBG program or, for subrecpients, for five years after the expiration of their subrecipient agreement. For the State CDBG Program, properties under the control of the unit of general local government or a subrecipient are covered for five years after the close-out of the unit of general local government’s grant. See sections 570.489(j) and 570.505 of the CDBG regulations for more details on these requirements.

    Under HOME, a rental housing project must meet certain requirements during the affordability period. This section highlights requirements and responsibilities after project development.

    Affordability Period

    HOME-assisted rental units carry rent and occupancy restrictions for varying lengths of time, depending upon the average amount of HOME funds invested per unit:

    Activity

    Average Per-Unit HOME $

    Minimum Affordability Period

    Rehabilitation or Acquisition of Existing Housing

    <$15,000/unit $15,000–$40,000/unit >$40,000

    5 years 10 years 15 years

    Refinance of Rehabilitation Project

    Any $ amount

    15 years

    New Construction or Acquisition of New Housing

    Any $ amount

    20 years


    HOME affordability periods are minimum requirements. PJs may establish longer terms of affordability for their programs.

    If a shorter affordability period is desirable, the PJ or developer can take steps to minimize the HOME per-unit subsidy.

    • The HOME subsidy can be reduced and replaced with other funds that do not have long-term requirements, such as CDBG or state funds; or
    • The developer may choose to designate a higher number of HOME-assisted units than required in order to reduce the HOME investment per unit.
    • Example: Consider Sable Park Housing’s 20-unit, $400,000 rehabilitation project. Merion City provided $100,000 in HOME rehabilitation funds and required that five of the 20 units be designated HOME-assisted. Under this arrangement, Sable Park would be obligated to keep the development affordable for 10 years ($100,000 ÷ 5 = $20,000 HOME funds per unit, requiring a 10-year affordability period). If Sable Park Housing designates 10 of the units as HOME-assisted, the per-unit HOME investment will be reduced to $10,000 per-unit, requiring only a five-year affordability period.

    Affordability restrictions remain in force regardless of transfer of ownership. At the PJ’s discretion, they may be terminated only upon foreclosure or transfer in lieu of foreclosure. It is important to note that if the HOME rental units do not remain affordable for the full affordability period, the PJ may be required to repay the HOME investment to HUD.

    CDBG has no required affordability period for rental units. If the low- and moderate-income housing national objective is used, at least 51 percent of the initial occupants must be low- or moderate-income. Once the building is leased and this threshold is reached, the owner has no ongoing liabilities related to affordability or unit quality. However, grantees may elect to impose these types of requirements as a part of their funding agreements. Also note that as previously described in this section, CDBG-funded properties that are under the control of the grantee, a unit of general local government or a subrecipient are subject to requirements related to the change of use.

    Rent Requirements

    Every HOME-assisted unit is subject to rent limits designed to help make rents affordable to low-income households throughout the applicable period of affordability. These maximum rents are referred to as “HOME Rents.”

    There are two types of HOME rents—High HOME Fents and Low HOME Rents:

    • High HOME Rents: Maximum HOME rents are the lesser of:
      • The Fair Market Rents (FMRs) for existing housing; or
      • Thirty (30) percent of the adjusted income of a household whose annual income equals 65 percent of median income.
    • Low HOME Rents: For properties with five or more HOME-assisted units, at least 20 percent of HOME-assisted units must have rents which are no greater than:
      • Thirty (30) percent of the tenant’s monthly adjusted income, or
      • Thirty (30) percent of the annual income of a household whose income equals 50 percent of median income, or
      • If a project has a Federal or state project-based rental subsidy and the tenant pays no more than 30 percent of his or her adjusted income toward rent, the maximum rent may be the rent allowable under the project-based rental subsidy program.

    Some communities receive “rent exceptions” from the published FMRs for purposes of the Housing Choice Voucher program. These rent exceptions do not apply to the HOME Program. All PJs are required to use the HOME Program rent limits established by HUD for rental projects.

    HOME rents include utility costs. This means, if tenants must pay for some or all utilities, the HOME rent must be reduced by a utility allowance determined by the PJ. Annually, the PJ must establish maximum monthly rents and allowances for utilities for HOME-assisted rental projects. However, project owners may submit proposed utility allowances to the PJ for review and approval.

    • Utility allowances provide a mechanism to reduce the maximum allowable HOME rents when the tenant pays some or all utilities.
    • Examle

      $728     High HOME                 $577     Low HOME Rent Rent
      -$ 50     Utility allowance          -$ 50     Utility Allowance
      $678      Maximum HOME        $678     Maximum HOME
                    rent for 80% of                          rent for 20% of units
                    units

    • The utility allowances prepared by the local public housing authority (PHA) may be used when adjusting rents. Utility allowances prepared by the PJ may also be used when adjusting rents.
    • Utility adjustments proposed by owners/developers for specific projects that differ from the PHA utility allowance must be approved by the PJ, and must be supported by documentation.

    Based on changes in area income levels or market conditions, HOME rents, as calculated by HUD annually, may increase or decrease.

    • Tenants must be given at least 30 days written notice before increases are implemented. Increases can only be made in accordance with the lease provisions. For example, rents may not increase until the tenant’s lease expires.
    • HOME rents may decrease. While project rent levels are not required to decrease below the HOME rent limits in effect at the time of project commitment, decreasing HOME rents may reflect a change in market conditions that may force owners to reduce rents in order to maintain tenants.
    • HUD may permit adjustments to the rent structure if the financial feasibility of the project is threatened. This is important to lenders providing financing to HOME-assisted projects.

    New rents are effective upon receipt of the new HUD-published numbers. However, tenants’ rents should not be adjusted until their leases are renewed.

    HOME program administrators must enforce rent and occupancy agreements through:

    • Covenants running with the property;
    • Deed restrictions; or
    • Other mechanisms approved by HUD.

    Covenants and deed restrictions may be suspended upon transfer by foreclosure or deed-in-lieu of foreclosure. However, while the restrictions may be suspended for purposes of clearing title, the PJ is still responsible for ensuring that the low-income occupancy obligation is fulfilled.v

    Under the housing national objective, CDBG units must initially be rented at an “affordable rent.” However, CDBG does not define what affordable means. Rather, jurisdictions must adopt standards for what will be deemed “affordable” under their CDBG programs and must make these standards public.

    Many jurisdictions have adopted the HOME rents as the standard for “affordability” under CDBG. CDBG only requires that the initial rents be affordable. As described above, jurisdictions can adopt more stringent standards for CDBG rent affordability, especially if they are investing significant resources to acquire or rehabilitate the units. There are no requirements regarding rent increases over time or regarding rents charged to tenants who move into units that are vacated after initial occupancy. Note, however, that for both HOME and CDBG funded projects, if the tenant is in occupancy prior to the project and if the Uniform Relocation Act or Section 104(d) is triggered, there may be requirements related to the initial rent that can be charged to that tenant or related to the percentage rent increase over time for that tenant. See HUD’s relocation website at for more information on these requirements for HOME and CDBG projects at www.hud.gov/offices/cpd/library/relocation/index.cfm.

    Income Eligibility

    Both CDBG and HOME dictate income eligibility requirements for tenants in assisted rental projects. HOME rental housing has two constraints on occupancy:

    • Program targeting rule: The program targeting rule applies to both rental units and TBRA assistance. It specifies that 90 percent of the total families assisted through the rental or TBRA program (counted together) have incomes that do not exceed 60 percent of the area median income. The balance of rental units and TBRA assistance must assisttenants with incomes that do not exceed 80 percent of the area median income. This rule applies to all funds expended from each fiscal year allocation; it is not project specific.

    In theory, the balance of the units may be occupied by tenants with incomes up to 80 percent of median. However, in practice, virtually all remaining HOME-assisted rental units will be initially occupied by tenants with annual incomes at 60 percent of median or less, in order to meet the program targeting rule.

    This rule applies to all funds expended from each fiscal year allocation; it is not project specific.

    • Project rule: The “project” rule specifies the occupancy of units in each rental project.
      • In projects with five or more HOME-assisted units, at least 20 percent of the HOME-assisted rental units must be occupied by families who have annual incomes that are 50 percent or less of median income. These very-low-income tenants must occupy units with rents at or below the Low HOME Rent level.
      • Projects with fewer than five HOME-assisted units do not have to restrict any units to the Low HOME Rents or limit occupancy to tenants at 50 percent or below of the area median income.

    Under CDBG, if the housing national objective is being used, the program also requires income eligibility targeting. Under this national objective 51 percent of the project’s occupants must be low- or moderate-income. Note that if the rental housing is a single unit structure, its tenant must be low- or moderate-income. If the property is a duplex, one of the two occupant households must be low- or moderate-income.

    CDBG has no ongoing requirements related to income eligibility. Therefore, if the household at initial occupancy moves out, the jurisdiction and the owner are under no obligation to ensure that the new household moving into the unit be low- or moderate-income. In addition, if a low- or moderate-income household at initial occupancy becomes over income during tenancy, there is no obligation to change its rent or ask that it leave an assisted unit. Jurisdictions may wish to impose more stringent standards as a part of their contract with the developer or owner of the rental housing. Note that properties acquired or rehabilitated with CDBG assistance in excess of $25,000 and under the control of the grantee, a unit of general local government or a subrecipient are subject to the change of use requirements noted previously in this section.

    Both CDBG entitlement grantees and HOME PJs now use the same definitions of income. Jurisdictions may choose between one of three income definitions:

    • Annual gross income under Part 5;
    • Adjusted gross income on the IRS 1040; or
    • Annual income as reported on the U.S. Census long form.

    States CDBG grantees may choose to use one of these three definitions or they can choose their own income definition. HUD will give maximum feasible deference to the State’s choice of an income definition.

    Note that under CDBG, it is sometimes possible to develop rental housing under the slum/blight national objective. In this case, no low- and moderate-income targeting is required but the property or the neighborhood must be deemed as blighted and the activity must address the blight.

    Ongoing Property Quality

    HOME and CDBG differ in terms of the jurisdiction’s obligation to monitor property quality after project completion. Under HOME, properties must remain in standard condition throughout the affordability period. In order to verify compliance with property standards and the information submitted by owners on tenants’ incomes, rents, and other HOME rental requirements during a project’s period of affordability, HOME rules require on-site inspections of HOME properties according to the total number of units in a project as follows:

    Number of Units

    Inspection Required

    1-4 5-25

    26 or more

    Every 3 years Every 2 years Annually


    Under CDBG, there are no initial or ongoing property standard requirements. Grantees are not required to periodically inspect rental units developed with CDBG, although they may choose to do so. If the grantee wants to impose this type of requirement, it should include this in the funding agreement with the developer or owner.



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