Section 4: Using HOME and CDBG for Homeowner Rehabilitation
Using HOME and CDBG for Homeowner Rehabilitation
This section describes the range of approaches used by jurisdictions to conduct homeowner rehabilitation activities with HOME and CDBG funds. The section discusses key options and rules related to financing and undertaking homeowner rehabilitation programs. It concludes with sample case studies to illustrate how HOME and CDBG can be used strategically for homeowner rehabilitation.
Approaches to Homeowner Rehabilitation
There are a wide variety of rehabilitation approaches that are possible under the HOME and CDBG programs, including:
- Minor rehabilitation, including minor repair programs and single purpose programs, such as emergency repair or handicapped accessibility programs;
- Moderate or substantial rehabilitation, including whole house rehabilitation;
- Historic preservation;
- Lead-based paint abatement;
- Code enforcement; and
- Home-based business rehabilitation.
Under the minor rehabilitation approach, the jurisdiction funds a minor level of repairs only. This might include working on specific work items—such as those items most in need of repair or those in imminent danger of failing.
This approach also includes specialty programs such as those designed specifically to address:
- Handicapped accessibility;
- Energy conservation;
- Utility hook-ups;
- Lead abatement work;
- Paint programs; or
- Emergency repairs.
HOME is not generally used for minor or specialty repair programs unless they are a part of bringing overall units up to applicable codes and standards. The HOME Program requirements stipulate that each unit rehabilitated with HOME funds must meet all applicable state and local housing codes, or other applicable codes. In addition, HOME has a minimum investment threshold of an average of $1,000 per HOME-assisted unit in a project. CDBG funds can be used to assist the full range of specialty and minor repair programs and it has no minimum investment requirement. In addition, CDBG has no requirement that units meet code upon completion of the rehabilitation, although this is sometimes required by grantees.
Example: Special Purpose Program
The City of Glen Allen has a large percentage of elderly persons in its community. Many of these elderly persons have aged in place in their existing homes. Yet, these homes have not been updated to accommodate the seniors’ needs— such as accessible bathrooms, kitchens and entryways.
While the City would like to be able to fully rehabilitate all substandard homes in its community, it does not have the resources. So, the City uses its CDBG funds to develop a handicapped accessibility rehabilitation program. Under this program, any low-income elderly or disabled household can apply for up to $5,000 of assistance to enhance the accessibility of their home.
When a unit requires moderate or substantial rehabilitation, significant repairs are made to the home. This may include simply rehabilitating all items that do not meet code or it may involve what is sometimes called “whole house rehabilitation,” meaning undertaking substantial repairs throughout the home in order to bring it up to code and to improve the overall livability and functionality of the unit.
HOME funds can be used to finance substantial rehabilitation activities. PJs must ensure that the HOME investment in the rehabilitation does not exceed the maximum per unit subsidy limits. As noted in Section 1 of this guide, these limits are set at the 221(d)(3) limits for the community and may be obtained by contacting the HUD Field Office or online on the HOME Program website at https://www.hud.gov/offices/cpd/affordablehousing/programs/home/limits/subsidylimits.cfm. Generally, these limits are fairly generous and it is highly unlikely that most rehabilitation projects will exceed these limits.
PJs must also ensure that the post-rehabilitation value of properties does not exceed the maximum value limit. The after-rehabilitation value may not exceed 95 percent of the median purchase price for the area. There are two methods for determining this cap:
- Using the 203(b) limits as published by HUD, or,
- As determined locally through market analysis.
The maximum purchase price/after-rehabilitation value limits are available online at: https://www.hud.gov/offices/cpd/affordablehousing/programs/home/limits/maxprice.cfm.
To establish HOME project eligibility, after-rehabilitation value must be established prior to any work being performed. Any one or more of the following methods may be used to establish the after-rehabilitation value:
- Estimates of value. The PJ or subrecipient can prepare estimates of value. Project files must contain the estimate of value and document the basis for the value estimates.
- Appraisals. A licensed fee appraiser or a staff appraiser of the PJ can prepare an appraisal. Project files must document the appraised value and the appraisal approach used.
- Tax assessments. Tax assessments for a comparable property located in the same neighborhood may be used to establish the after-rehabilitation value if the assessment is current and accurately reflects market value after rehabilitation.
The CDBG Program can also be used to conduct moderate and substantial rehabilitation. CDBG is not
subject to a maximum value or maximum per unit investment cap. However, all costs must be reasonable.
Reconstruction involves demolishing an existing residential unit and rebuilding another on the same site. Often, reconstruction occurs because the cost of rehabilitation is prohibitive or is more than the cost to build a new unit.
A reconstructed HOME unit is essentially demolished and rebuilt. HOME may be used for reconstruction when:
- There is an existing building on the site that will not, as determined by the PJ, be rehabilitated. The existing housing must be standing at the time of project commitment; and
- The number of dwelling units will remain constant. Note that the number of bedrooms per unit may change; and
- The new unit will be located somewhere on the same lot. It is no longer required that the new unit be located on the same foundation footprint as the existing unit.
Reconstruction is a fairly new eligible activity for CDBG and although it is currently permitted by statute, it is not yet incorporated into the CDBG regulations. Grantees may refer to the HOME Program definition of reconstruction as a “safe harbor.”
- Reconstruction means rebuilding a housing unit on the same lot. Under CDBG, it is acceptable if the existing home is not standing at the time of CDBG project commitment but it must have been on the site within a reasonable timeframe from when the project was initiated.
- CDBG does not require that the grantee itself undertake the demolition of the existing unit. The homeowner can undertake this demolition, or it may be the result of accidental means (such as a fire).
- The number of housing units on the lot can not be decreased or increased as part of reconstruction, however, the number of rooms may be decreased or increased.
- Reconstruction includes replacing an existing substandard manufactured housing unit or stick-built home with a new or standard manufactured housing unit.
- Reconstruction does not include demolishing a non-residential structure and constructing residential units. This would be new construction and while the demolition would be eligible, the new construction would not, unless undertaken by a CBDO.
Under the State CDBG program regulations, states are given the ability to interpret the list of eligible activities in the Housing and Community Development Act (HCDA), providing their interpretations are not plainly inconsistent with the HCDA. The HCDA lists reconstruction of buildings as an eligible activity, but does not further define “reconstruction.” States may use the Entitlement program eligibility policy as interpretive guidance.
Note that reconstruction under either CDBG or HOME is treated as rehabilitation for the purposes of program compliance. However, reconstruction is treated as new construction for the purposes of conducting an environmental review.
The State of Lincoln has a number of owner-occupied homes that are significantly decayed. The state is concerned about the health and safety of the occupants.
It uses its HOME funds to set up a program where these low-income households can receive reconstruction assistance. The program is run by a state-wide, faith-based, nonprofit subrecipient. This subrecipient takes the applications and processes the HOME funding.
Households can receive assistance to demolish their existing unit. In order to keep costs low, the subrecipient works with the household to select a new factory-built and locally-installed manufactured home to be placed on the site. This approach is less expensive than new construction and the new units can be occupied more rapidly.
Historic preservation involves rehabilitating structures within the community that are determined to be “historic.” Often, people think of historic preservation as addressing commercial and public facilities. While this type of preservation is indeed eligible under CDBG, the activity can also include historic preservation of residential structures, including single family homes.
Both HOME and CDBG funds can be used to preserve residential buildings of an historic nature in the community, although there are some important differences in how funds from either program can be used.
HOME does not have a specific eligibility category entitled “historic preservation.” Historic preservation as a stand-alone activity does not constitute an eligible use of HOME funds unless the activity in question is for the express purpose of providing one or more units of affordable housing. In other words, since HOME funds must be used solely for the development of affordable housing, the preservation of any historic structure must be incidental to the rehabilitation of an affordable housing unit. These units would still be subject to all of the HOME rules regarding rehabilitation.
CDBG funds may be used for the rehabilitation, preservation, or restoration of historic properties, whether publicly- or privately-owned with the exception of buildings for the general conduct of government. CDBG can pay for some or all of the repairs related to the historic preservation or other rehabilitation of the unit.
Eligible historic properties for CDBG rehabilitation include:
- Properties listed or eligible to be listed in the National Register of Historic Places;
- Properties listed in a state or local inventory of historic places; or
- Properties designated as a state or local landmark or historic district by law or ordinance.
Jurisdictions that are considering undertaking historic preservation must work closely with their state or local historic preservation office. Often, these offices have rules and requirements related to the type of work that may be undertaken on an historic structure.
Lead-based Paint Hazard Evaluation and Reduction
Programs that are designed specifically to address lead-based paint in homes can be administered as a part of other rehabilitation activities or can stand alone as separate programs.
Both HOME and CDBG funds can be used to cover the costs of evaluating and treating lead-based paint. Removal or treatment of lead paint may be undertaken as a homeowner rehabilitation activity. Under HOME, however, rehabilitation of these units must still follow all of the rehabilitation requirements. Therefore, the unit must be brought up to code and the minimum/maximum subsidy and maximum property value limits must be applied.
Under CDBG, lead paint testing and abatement is a stand-alone rehabilitation activity and it can be undertaken as an activity or as a part of other rehabilitation work.
HUD’s consolidated lead-based paint regulations at 24 CFR Part 35 call for jurisdictions to adhere to specific actions when addressing lead-based paint in association with rehabilitation activities. Lead-based paint activity thresholds are based on the lesser of the per unit rehabilitation hard costs (excluding lead-based paint work) or the total amount of Federal assistance in a project.ix
- When this amount is less than $5,000 per unit, a jurisdiction must “do no harm.” That is, the jurisdiction must conduct mild lead hazard evaluation and lead hazard reduction.
- When this amount is between $5,000 and $25,000 per unit, jurisdictions must “identify and control lead hazards.” That is, the jurisdiction must conduct a moderate level of lead hazard evaluation and lead hazard reduction.
- When this amount is greater than $25,000 per unit, a jurisdiction must “identify and abate lead hazards.” That is, the jurisdiction must undertake the highest level of lead hazard evaluation and lead hazard reduction.
Notification and disclosure requirements apply to each level of lead hazard reduction. Ongoing maintenance of lead-based paint units is required only in the case of HOME-assisted multifamily units.
More information about HUD’s lead-based paint policies and requirements is available online at: https://www.hud.gov/offices/lead/.
Code enforcement programs are designed to inspect and evaluate housing quality within a jurisdiction. Often, communities have code enforcement divisions whose job is to assess and cite dilapidated structures.
Both HOME and CDBG funds can be used to inspect residential properties for property standard compliance. HOME funds cannot be used, however, to fund a stand-alone code enforcement program. HOME property inspections must be related to the provision of affordable housing. However, HOME can be used to rehabilitate homes that have been cited by code inspectors. If HOME is tied to the code enforcement process, the PJ needs to ensure that all rehabilitation meets the HOME requirements, including household income eligibility, rehabilitation standards, minimum/maximum per unit investment, maximum value, and all other applicable requirements.
CDBG can be used to fund a stand-alone code enforcement program. Eligible code enforcement costs under the CDBG Program include:
- Salaries and other expenses related to code enforcement activity; and
- Costs of legal proceedings related to code enforcement activity.
CDBG-funded code enforcement must be undertaken in deteriorated or deteriorating neighborhoods and cannot be undertaken on a city-wide basis unless the entire community qualifies as deteriorated. In addition, there must be public or private investment that is planned or ongoing in the code enforcement area that may be expected to arrest the decline of the neighborhood. CDBG need not be funding the improvements, rehabilitation, or services but they must clearly be occurring within the code enforcement area.
Example: Code Enforcement:
The Town of Devon has two neighborhoods that are significantly deteriorated. The Town has tried a range of voluntary programs, but as yet has been unable to see a substantial improvement. Both neighborhoods consist primarily of low-income owner-occupiedhomes. So, the Town undertakes a two -pronged initiative in the areas. First, the Town uses its CDBG funds to pay for code enforcement inspectors to evaluate and cite units within these neighborhoods. Then, the Town offers HOME rehabilitation funds to any low-income homeowner to assist them to bring their unit up to code. The result is a significant increase in the number of decent, safe, and sanitary units in these neighborhoods.
The CDBG rule prohibits the use of CDBG funds to correct property code violations as a code enforcement activity. However, these corrections can be done as a rehabilitation activity, including homeowner rehabilitation.
Home-based Business Rehabilitation
In many low-income neighborhoods, home-based businesses are common. Examples might include hair salons, tax or accounting services, or day care. In many of these businesses, the business is run out of the same rooms of the home that are used by the family. For example, the basement may serve as the day care center’s indoor play room during the day and the family’s TV area at night.
Under the CDBG rule, program funds can be used to make improvements to single family residential properties that also serve as places of business. Even if the rehabilitation work is necessary in order to operate the business, the activity need not be considered to be rehabilitation of a commercial or industrial building if the improvements also provide general benefit to the residential occupants of the building.
The standard under the HOME rule is different, however. Homeowner rehabilitation assistance can be provided to an income-eligible homeowner whose business is also located in the housing unit if the primary purpose of the activity is to rehabilitate the residence and bring it up to code. Improvements that accrue to the business located in the home are allowable under HOME only so long as the improvements are incidental to the rehabilitation of the residence. Home-based business rehabilitation is not an eligible stand-alone activity under the HOME Program.
Financing and Undertaking Homeowner Rehabilitation
This section highlights the rules related to financing and managing homeowner rehabilitation programs. It describes the partners who are typically involved in such programs, the various financing tools, eligible costs, property standards, homeowner incomes, and other Federal requirements.
There is a wide range of roles that can be played by partners in a homeowner rehabilitation program, including:
- A nonprofit or other public agency may act as a jurisdiction’s subrecipient and manage a homeowner rehabilitation program on behalf of the community.
- A partner may take on a limited administrative role for the jurisdiction, such as marketing the program in the neighborhood, or helping the jurisdiction translate materials into the language spoken by neighborhood residents.
- A partner may act as a community advocate or advisory group.
- A partner may provide counseling to owners on behalf of the jurisdiction on topics such as home repairs and maintenance.
It is important to note that homeowner rehabilitation is not an eligible CHDO set-aside activity because it does not involve the development, ownership or sponsorship of units (since these units are already owned by the homeowner).
Forms of Financial Assistance
This section highlights the various forms of financing that are common in homeowner rehabilitation projects. It also notes special provisions in CDBG for escrow accounts and lump sum draw downs.
Financial Tools. There is a wide range of options for structuring owner-occupied rehabilitation assistance. Homeowner rehabilitation programs and jurisdictions may choose to finance all of the rehabilitation cost or only a portion of the cost. Some common financial tools include:
- Grants. A grant is often necessary to provide the deep subsidy required by very low-income participants of rehabilitation programs. Grant assistance can be used to directly subsidize the cost of rehabilitation, or to write down the principal amount of a private loan, thus making the monthly loan affordable to the homeowner. The latter technique is often referred to as principal reduction.
- Deferred payment loans. Like grants, deferred payment loans are often used to provide deep subsidies to very low-income households. These are non-amortizing loans that are not repaid until some future point in time. Many jurisdictions structure these loans to be repaid upon sale of the property.
- Forgivable loans. Forgivable loans are non-amortizing loans that are typically structured so that a portion of the loan is forgiven over time. Generally, jurisdictions forgive a pro-rated share of the loan based on how long the owner has resided in the property. If the owner sells the property before the end of the loan term, then he or she would only repay the amount not yet forgiven. For instance, if the jurisdiction loans $20,000 as a ten-year forgivable loan, then each year, $2,000 would be forgiven. If the owner sells the property in year five, he or she would repay $10,000 to the jurisdiction.
- Amortizing loans. These are loans that require a monthly payment by the homeowner. When participants are able to afford monthly payments, lending funds makes sense because funds that are repaid can be reinvested to assist other low-income households. Amortizing loans can be made as principal-only loans, or funds may be lent at below-market interest rates.
If the jurisdiction chooses to finance only a part of the rehabilitation cost, it may structure its loans to be used in combination with other financing. For example, the jurisdiction and a private lender could jointly loan the funds needed for rehabilitation. The homeowner would secure one loan from the private lender and a second loan (known as a “soft second”) from the jurisdiction, usually as a deferred payment loan or one at below-market interest rate. The amount of the soft second loan is often established as the difference between the cost of rehabilitation and the amount of private loan the homeowner is able to secure. This loan is subordinate to the private lender’s.
There are several other less common forms of financial assistance that may be used in homeowner rehabilitation programs. These forms include interest subsidies and loan guarantees. Both methods enable jurisdictions to use small amounts of Federal funds to leverage private money for rehabilitation.
- Interest subsidies. Interest subsidies, also referred to as interest reduction grants or interest rate buy-downs, are similar to principal reduction grants or loans except that the HOME or CDBG funds are used to “buy down” the interest rate to an affordable level. In this case, the HOME or CDBG subsidy is paid directly to the lender and not provided to the homeowner.
- Loan guarantees. Loan guarantees are another way to leverage HOME or CDBG funds for homeowner rehabilitation. A loan guarantee can be used as a credit enhancement when a borrower otherwise eligible for a private loan is denied because of a real or perceived risk factor. In these cases, the jurisdiction could provide a loan guarantee that would ensure payment to the lender, thereby making the loan acceptable. If the jurisdiction plans to use loan guarantees for a large number of loans, it can capitalize a loan guarantee account with HOME funds. The amount of HOME funds in such accounts must be based on a reasonable estimate of the default rate on the loans guaranteed, and may not exceed 20 percent of the total outstanding principal guaranteed.
CDBG cannot be used to capitalize a loan guarantee account but it can be used for individual loan guarantees. To do this, the grantee generally retains the funds in its line of credit, to be available in the event of default unless the grantee can justify a drawdown in advance of need because no financial institution will participate based only on a payment guarantee with no funds on deposit. Further, any amount deposited as a guarantee must be reasonable—that is, the minimum amount necessary to cover anticipated defaults.
Refinancing. On occasion, a jurisdiction finds it necessary to assist a homeowner to refinance existing debt in order for an assisted property to remain affordable to the homeowner, or in the case of multifamily housing, the tenant(s). HOME and CDBG can be used to cover the cost of refinancing existing debt.
HOME can be used when the refinancing is secured by housing that is being rehabilitated with HOME funds under the following conditions:
- When HOME funds are used to rehabilitate single family (1-to-4 unit) owner-occupied housing; and
- HOME funds are loaned for rehabilitation; and
- Refinancing allows the borrower’s overall housing costs to be reduced and the housing is made more affordable.
Loans for refinancing existing debt secured by the property to be rehabilitated are eligible under CDBG if the grantee determines that this type of assistance is necessary to achieve local community development objectives. As under HOME, this refinance must be part of a rehabilitation project, to make the rehabilitation affordable—CDBG does not permit refinance-only projects.
Refinancing eligible owner-occupants’ secured debt has several implications.
- Refinancing makes overall housing costs, including rehabilitation costs, affordable to the owner.
- Refinancing will reduce the amount of funds available to other applicants, thereby reducing the number of families that can be assisted.
Mr. and Mrs. Brown are seeking HOME funds to rehabilitate their home. They have an outstanding principal balance on their first mortgage of $40,000, at 10 percent interest, with a monthly payment of $386. The cost of rehabilitation is $15,000. The PJ is offering the rehabilitation loan at 3 percent for a 20-year term, with a monthly cost of $83.19. The monthly payments for both loans total $469.19. Because the Browns are on a fixed income, the increased mortgage cost would create a financial burden, requiring them to pay well above 30 percent of their monthly income for rent. Refinancing the first mortgage along with the rehabilitation costs using HOME funds would allow them to finance the total $55,000 debt at 3 percent interest for 20 years. This results in a monthly cost of $305.03, a savings of $164.16 per month, making the rehabilitation possible for the Browns and substantially lowering their monthly housing-related expenses.
Escrow Accounts. Some grantees have difficulty making timely payments to contractors from their CDBG accounts, discouraging private businesses from participating in CDBG rehabilitation activities. In order to address this difficulty, HUD permits CDBG grantees to use program funds to establish escrow accounts for the purpose of making timely payments to program participants. The use of escrow accounts is limited to loans and grants for the rehabilitation of primarily residential properties containing no more than four dwelling units (and accessory neighborhood- scale, non-residential space within the same structure, if any, such as a store front below a dwelling unit).
- The contract between the property owner and contractor must specifically provide for the use of an escrow account;
- Account funds are only used for residential rehabilitation activities;
- Account is limited to the amount expected to be disbursed within ten working days;
- Interest earned on the account is to be returned to HUD, at least quarterly; and
- Funds in the escrow account may only pay for actual costs of rehabilitation.
Note, there are no state CDBG requirements for escrow accounts. States may use the entitlement regulations as interpretive guidance.
Lump Sum Drawdowns.x CDBG grantees may draw funds from the letter of credit in a lump sum to establish a rehabilitation fund in one or more private financial institutions for the purpose of financing the rehabilitation of privately-owned properties. The fund may be used in conjunction with various rehabilitation financing techniques, including:
- Interest subsidies;
- Loan guarantees;
- Loan reserves; or
- Other HUD-approved uses that are consistent with the objectives of the CDBG program.
The fund may also be used for making grants, but only for the purpose of leveraging non-CDBG funds for the rehabilitation of the same property.
- Written agreement with financial institution(s), with a term lasting no longer than two years.
- Use of the deposited funds must begin within 45 days of the initial drawdown and deposit. Substantial disbursements must occur from the fund within 180 days of its establishment.
- The grantee is responsible for annual review of activity progress.
- The grantee shall terminate the written agreement(s) with financial institution(s) and return all unused funds to letter of credit in the event that there is a substantial failure on the part of the financial institution(s) to live up to the terms of the written agreement. The grantee must provide HUD and the institution(s) in question with written justification for these actions.
- All unused and unobligated funds shall be returned to the grantee’s letter of credit at the end of the term of the agreement, unless the grantee renews the agreement with the financial institution(s).
- When drawdown funds are used to provide a loan guarantee for private or other non-CDBG financed loans issued to finance rehabilitation activities, these are considered to be CDBG projects, and as such are subject to CDBG requirements.
- Program income (interest, loan repayments) earned through the drawdown account is to be used to finance other CDBG-eligible rehabilitation activities.
In general, there are three types of costs for homeowner programs:
- Activity costs;
- Program or activity delivery costs; and
- Home maintenance or other related housing counseling costs.
Activity Costs. Under HOME and CDBG, both the actual cost of rehabilitating the housing and related soft costs are eligible. Table 4-1 lays out the specific eligible costs under a homeowner rehabilitation program.
Table 4-1: Eligible Homeowner Rehabilitation Costs
* Note: Lead hazard reduction costs are not counted as hard costs for the purposes of determining the level of assistance under 24 CFR Part 35 (the Lead Safe Housing Rule).
The purchase of construction equipment is generally ineligible under both HOME and CDBG. However, the purchase of tools to be used as part of a “tool lending” rehabilitation program is eligible under CDBG. Compensation for the use of construction equipment through leasing, depreciation, or other use allowances (described in applicable OMB Circulars) is allowable, provided the activity is otherwise eligible.
CDBG also allows some specific types of other soft costs, including:
- Initial homeowner warranty premium;
- Hazard insurance premium (except when the assistance is in the form of a grant);
- Flood insurance premium; and
- Inspection and testing for lead-based paint.
Program or Activity Delivery Costs. Program or activity delivery costs are those jurisdiction or subrecipient costs necessary to delivering the homeowner program, such as inspections, specifications writing, underwriting, and other project costs, including loan servicing, that are incurred by the jurisdiction and are directly related to a specific project.
As noted in the previous section, CDBG and HOME handle program delivery costs differently. Under CDBG, costs for delivery are covered under the project activity and are not counted toward the administrative cap.
Under HOME, this type of cost can be charged to the project when the cost is directly attributable to the specific project. The jurisdiction must track the costs to specific units and must include these costs within the maximum per unit subsidy limit. If the costs cannot be attributed to a specific project, they must be counted as administrative. As noted in the previous section, CDBG can pay for program delivery costs for HOME projects, including tasks such as energy auditing, work specifications, loan processing, or inspections. Since these are eligible costs under 24 CFR 570.201(k) as a housing service, they do not count toward the jurisdiction’s CDBG administrative cap.
Maintenance or Other Counseling. People often think of housing counseling as only being related to new homebuyers. However, counseling can be an important part of a homeowner rehabilitation program. In some instances, homeowners do not understand how to keep up their homes. Without proper maintenance, the benefits of the rehabilitation may be short-lived. Other homeowners may not be aware of key tips and techniques for budgeting and as a result they may find themselves unable to repay a rehabilitation loan.
Typical types of homeowner counseling include:
- Maintenance counseling. These courses focus on basic repairs and up-keep items such as changing furnace filters, regular maintenance of heating or septic systems, or weatherization tips; or
- Budgeting and finance. These courses assist the owner to manage his or her finances so that the bills get paid.
Homeowner counseling is generally an eligible cost under HOME, if the counseled homeowner resides in a HOME-assisted unit. If the homeowner does not end up receiving assistance, or if PJ records are not able to clearly assign these costs to individual units, the costs must be charged to administration.
Grantees have several options for how to set up counseling programs under CDBG. The three most common options are:
- HOME housing services. Grantees might use CDBG to pay for housing counseling related to a HOME homeowner rehabilitation program.
- Public service. Grantees can set up housing counseling programs as a public service activity. These costs will count towards the grantee’s 15 percent cap on public service expenditures.
- Program delivery for CDBG. Grantees can fund housing counseling as part of a CDBG-funded homeowner rehabilitation activity as a program delivery cost. Under this opti.on, the grantee offers housing-related counseling as part of its rehabilitation assistance program and the costs of the counseling are included in the cost of the program
Property and Rehabilitation Standards
As noted previously, HOME and CDBG differ in the application of property standards. CDBG does not mandate that units be brought up to code and does not apply a particular property standard. HUD recommends that CDBG grantees establish written property standards for units assisted with program funds to ensure that work is completed within local or state codes. Grantees are encouraged to develop guidelines for property standards and codes with CPD staff at the local HUD Field Office.
Under the HOME regulations, housing units assisted with HOME funds must meet all applicable state and local property standards, or other standards. In order to meet all applicable property standards, HOME requires that a PJ establish written rehabilitation standards for housing units that it rehabilitates with HOME. The written rehabilitation standards provide the means by which applicable property standards are met. A written rehabilitation standard defines the quality of the housing and the materials that will be used, such as specifying the type of nails to be used, the distribution of roofing tiles, or the grade of lumber to be used. Establishing such standards helps ensure that assisted units are of adequate workmanship, there is consistency among assisted rehabilitation jobs, and there is a common standard against which local contractors can base their bids.
Initial Owner Incomes
HOME and CDBG take somewhat different approaches to applicant income when it comes to rehabilitation. Under HOME, all households must be income eligible when the HOME rehabilitation assistance is provided. This means that all assisted households must be at or below 80 percent of the area median income, adjusted for household size.
With CDBG, depending on which national objective is being met, there are circumstances when each individual homeowner may or may not need to be low-income. When a homeowner rehabilitation program is undertaken to meet the low- or moderate-income housing national objective, every homeowner needs to be low- or moderate-income. In fact, no other low-and moderate-income national objective may be used for homeowner rehabilitation. Homeowner rehabilitation cannot be undertaken under the low- and moderate-income area benefit or limited clientele objectives. The statute is very clear that housing activities—if counted as a low- and moderate-income activity—must be undertaken under the housing national objective.
However, CDBG homeowner rehabilitation can be funded to meet a different national objective. For example, if the home is located in a designated blighted area, rehabilitation may be undertaken, regardless of the income of the owner, as long as it addresses conditions that contributed to the deterioration of the area. The CDBG rules stipulate that for residential rehabilitation under the area slum blight national objective, all code items must be undertaken before paying for less critical items.
If the home itself is blighted (but not necessarily located in a blighted area), the spot slum/blight national objective may be used and the income of the owner would be irrelevant. In this instance, the rehabilitation would be limited to items that are a health and safety hazard to the public. It is important to note that this does not mean that the item is a hazard to the individual but rather to the public at large. So, if an individual homeowner needs a handicapped accessibility ramp, it is not eligible because it is not a public health hazard. If the façade of a home is imminently going to fall down, with the risk of striking pedestrians on the sidewalk, it would be a public safety issue. Note that historic preservation may also be undertaken under spot blight national objective and it is not subject to the rules regarding the type of rehabilitation that can be undertaken, but rather is limited to work determined to contribute to the conservation and preservation of the structure being assisted.
CDBG also provides regulatory flexibility to support of neighborhood revitalization strategies. This flexibility is extended to both activities funded through Community Development Financial Institutions (CDFIs) and Neighborhood Revitalization Strategy Areas (NRSAs) or Community Revitalization Strategy Areas (CRSAs).
CDFIs were created under the Community Development Banking and Financial Institutions Act of 1994. CDFIs are community lenders that:
- Are primarily dedicated to the promotion of community development;
- Serve an investment area or targeted population;
- Provide development services and equity investments or loans; and
- Maintain accountability to residents within the specified investment area; and
- Are not public agencies or institutions.
CDBG grantees also have the option to develop specific Neighborhood Revitalization Strategy Areas that target program resources or specific areas within the community. States may adopt CRSAs. Regulations authorizing the development of NRSAs and CRSAs were published by HUD on January 5, 1995, and require grantees to submit NRSAs or CRSAs as either part of an original Consolidated Plan submission, or as an amendment to a previously approved Consolidated Plan (see 24 CFR 91.505).
If a CFDI is working with CDBG in a targeted low- or moderate-income neighborhood or if the grantee has an adopted NRSA or CRSA, the grantee is allowed to add up all of the CDBG units for which funds are obligated in the area in a given program year, and treat them as a single structure. Then, 51 percent of these units must be occupied by households that are low- or moderate-income. This is called creating a “virtual project” and it allows the grantee to fund some homeowner rehabilitation and rental units (49 percent) that are occupied by households that are not low- or moderate-income. This can further a grantee’s goals for mixed-income development.
If the 51 percent test is met at the end of the program year, these activities are deemed to have met the low- and moderate-income housing national objective. Note, however, that only the portion of the costs that are used to assist low- or moderate-income persons can be counted toward the grantee’s required overall program goal of 70 percent expenditure on low- or moderate-income activities.
HOME PJs and CDBG entitlement grantees have the option to choose one of three accepted methods for calculating household income. States may choose one of the following definitions or their own income definition.
- Part 5 definition of income (24 CFR Part 5.609);
- Census long form definition of income; or
- IRS 1040 definition of income.
CDBG grantees that elect to use the Part 5 definition of income may exclude the value of a homeowner’s primary residence from any calculation of net family assets if the homeowner is receiving CDBG rehabilitation assistance.
Other Federal Requirements
There are a number of other Federal requirements that are applicable to homeowner rehabilitation programs. Jurisdictions are encouraged to review the applicable regulations and HUD guidance.
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- Review public works preconstruction contracts
- Monitor DIR contractor/subcontractor certified payrolls
- Audit labor classification for each worker employed
- Review DIR pre-DAS 140/142 submissions
- Review CAC training fund contributions form CAC-2
- Review DIR Fringe Benefits Statement PW-26
- Monitor DIR wage determinations
- Audit fringe benefits allowances
- Review DIR holiday payment requirements
- Audit DIR travel & subsistence requirements
- Caltrans Labor Compliance
- County of Sacramento Labor Compliance
- City of Los Angeles Labor Compliance
- Los Angeles Unified School District Labor Compliance
- Federal Davis-Bacon Project Monitoring
- Federal DBE Implementation & Review
- Federal FAA AIP Goal Setting
- DIR & Davis-Bacon Training
- DIR Civil Wage Penalty Review
- Local-Hire Review (e.g., San Francisco)
- Skilled and Trained Workforce
Give us a call to discuss your labor compliance requirements.
This email is intended for general information purposes only and should not be construed as legal advice
or legal opinions on any specific facts or circumstances.