- Ongoing Compliance

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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