Section 5: Using HOME and CDBG for Comprehensive Neighborhood Revitalization

Using HOME and CDBG for Comprehensive Neighborhood Revitalization

For some declining neighborhoods, an investment of housing or economic development dollars alone will not be sufficient to make a sustainable improvement to the neighborhood. For these neighborhoods, the only viable option for creating a healthy neighborhood is to address a number of neighborhood challenges in a comprehensive way. This section explores how to use CDBG and HOME funds to tackle a broad range of neighborhood revitalization activities, including housing, commercial development, infrastructure, transportation, schools, and law enforcement.

Approaches to Neighborhood Revitalization

In many circumstances, an investment of CDBG or HOME funds can correct a single blighting influence, generate a certain number of affordable housing units, or create infrastructure to serve basic needs of a neighborhood or community. For declining neighborhoods, however, these types of single investments are not usually sufficient to turn the neighborhood around. For instance, a large investment in housing may attract new buyers or tenants initially, but without safe streets, viable schools, or a healthy commercial district nearby to support the residents, the interest in the neighborhood will not be sustained. Declining neighborhoods require comprehensive revitalization strategies that capitalize on the neighborhood’s assets and address its challenges.

Successful neighborhood revitalization initiatives start with a sound redevelopment plan. The planning process is used to bring the neighborhood’s stakeholders together, with the specific purpose of analyzing the market dynamics in the neighborhood, and identifying its assets and challenges. The planning process results in a vision of the neighborhood in the future that is shared by most stakeholders. Once the vision is clear, it can guide all subsequent decisions about redeveloping the neighborhood’s physical infrastructure (housing, commercial buildings, transportation, and other public infrastructure), and its service coordination and delivery. Many neighborhood revitalization activities will be eligible activities under either HOME or CDBG.

Planning Models for Urban Redevelopment

The redevelopment planning process usually results in a document or tool, such as a land use plan, that maps out what types of development (residential, commercial, industrial, open space) are appropriate for the neighborhood, and where that development will occur. In the past decade, new planning models have evolved that can help urban neighborhoods articulate a vision that promotes the best assets of the neighborhood, while controlling or minimizing the negative impacts of growth and development. These planning models define the principles that are incorporated into the design of the neighborhood. These concepts are compatible and share common features, although each emphasizes somewhat different goals.

• New Urbanism. New Urbanism is the most commonly known of the recent urban planning concepts. The concept evolved in the 1990s and draws on the positive features of neotraditional planning movement. New Urbanism emphasizes walkability, diversity, and quality of life. Walkable communities are dense, mixed-use neighborhoods that are interconnected by pedestrian walkways. Ideally, residents would be able to walk to most activities of daily living. The neighborhood would also be supported by a range of transportation options. New Urbanism promotes diverse neighborhoods with a mix of activities, and therefore land uses. At a minimum, this would include retail or commercial and residential uses. Residential housing would be designed and priced to serve a range of households and a mix of incomes. Finally, the design would promote quality of life, including quality architecture and urban design, to promote a sense of place; and design features would encourage neighborly interaction and sociability.
• Smart Growth. While New Urbanism focuses on maximizing the positive aspects of a traditional urban neighborhood, the smart growth movement evolved from the need to control the negative impacts of growth. Smart Growth typically refers to public policies that are implemented in order to use resources wisely and efficiently, and to control the negative aspects of growth in a neighborhood. Smart Growth is highly compatible with New Urbanism. It promotes energy efficiency, economic efficiency, and environmental protections and preservations. These principles result in planning and design features that include walkability in the neighborhood, and access to multiple transportation options; neighborhood schools; community reuse and revitalization; and preservation of farmland and open space.
• Transit-Oriented Development. Transit-Oriented Development also strives to mitigate the impact of sprawl and develop livable communities within urban cores. Public transit is one of the key ways to increase the walkability of a neighborhood. Increasing the investment in public transportation systems can help lower residential transportation costs. Transit-Oriented Development planning models emphasize concentrating development within a half-mile radius of bus and rail stations that have frequent service. This results in high density, mixed-use land uses, designed for pedestrian and bicycle traffic.

The plan typically addresses how the physical redevelopment of the neighborhood will occur. It addresses the redevelopment of one or more of the following components of the built environment: housing, infrastructure (transportation, water and stormwater, and utilities), commercial district, and/or community facilities. In general, CDBG funds can be used to finance a wide range of these revitalization activities. HOME funds can be used only to fund the affordable housing component of a neighborhood revitalization initiative.

Housing Assistance

Previous sections provide detail on how HOME and CDBG can be used to support a range of affordable housing activities. When revitalizing a neighborhood, grantees and PJs need to determine what type of housing activities will best support revitalization goals.

Many revitalization strategies are based on the premise that an investment of public funds in a large-scale housing development activity will spur private investment. This can be an effective strategy because its visual impact is immediate and substantial. Large homeownership developments, in particular, have the added benefit of creating a pool of stakeholders in the neighborhood who will support continued redevelopment. In developed neighborhoods, however, land assembly can be difficult and costly, particularly if there are a number of households or businesses that must be relocated.

Investing public funds in substantial in-fill activity throughout a neighborhood can be a less-expensive, but equally effective strategy in neighborhoods where large parcels of land are not available for assembly, and where significant building infrastructure is occupied, and/or in sound condition. Undertaking an in-fill strategy does not have the same type of immediate, visual impact of a large-scale new construction project, but it can stabilize a community block-by-block. Combining a vacant structure rehabilitation or reconstruction program with a rehabilitation program for existing homeowners on targeted blocks can be an effective in-fill approach to revitalization. When undertaking an in-fill strategy, or for neighborhoods that have limited problems within the neighborhood, CDBG or HOME can be targeted to specific blocks, or even specific properties whose treatment will have a high impact on the overall appearance of the neighborhood.

Rental housing rehabilitation or development may play a role in revitalizing neighborhoods with certain housing markets. In neighborhoods with a high proportion of homeowner housing, and in neighborhoods with extremely high housing costs, rental housing can offer housing opportunities for households of all incomes. In neighborhoods with a high proportion of affordable rental housing, increasing the supply of this type of housing might not be appropriate.

Property Inspections and Code Enforcement

In addition to the development of additional units, grantees and PJs may want to address the condition of existing housing units in the target neighborhood.

CDBG can be used to administer a code enforcement program that involves inspecting properties in the target area for compliance with applicable codes and property standards. Under CDBG, code enforcement is a separate eligible activity, and code enforcement costs are not subject to the CDBG program’s 20 percent cap on planning and administrative expenses.

Eligible code enforcement costs under the CDBG Program (24 CFR 570.202(c)) include:

• Salaries and other expenses related to code enforcement activity; and
• Costs of legal proceedings related to code enforcement activity.

General code enforcement activities are not eligible under the HOME Program, although property inspections of HOME-assisted units are eligible costs. Every unit that is assisted with HOME funds must be inspected to ensure that it meets applicable codes and property standards upon completion. Property inspections can be charged either as an eligible planning and administrative cost (and subject to the PJ’s 10 percent cap on administrative expenses) or as a project soft cost.

Once a code violation in a unit is identified, HOME funds can be used to bring the unit up to code. CDBG funds cannot be used under code enforcement to correct property code violations (24 CFR 570.202(c)). Note, correcting violations may be eligible under CDBG as rehabilitation. Used together, CDBG and HOME can help fund community efforts to uncover and rectify residential property code violations and restore dilapidated housing as standard, affordable housing.

Infrastructure Development and Improvement

Adequate infrastructure (i.e., public improvements) is crucial to the successful revitalization of blighted and impoverished neighborhoods. Although infrastructure needs are sometimes taken for granted, they lay the foundation for the community’s growth and improvement. Redevelopment planning should include an assessment of whether or not infrastructure systems require upgrades. Basic infrastructure components include:

• Transportation system, including streets, highways, and bridges; parking; and sidewalks, to ensure that people and goods are able to get in and around the neighborhood with ease. The transportation system is critical to the neighborhood’s local economy;
• Water, wastewater, and stormwater systems to ensure that the neighborhood has a sufficient supply of clean water, as well as a system for the treatment of wastewater, and stormwater sewers to prevent flooding;
• Electric and other utilities;
• Streetlights to make the neighborhood attractive and safer; and
• Accessibility improvements required under the Americans with Disabilities Act.

Since its creation in 1974, CDBG has been used extensively to address infrastructure development needs in communities throughout the country. CDBG funds can be used by grantees and nonprofits for the acquisition, construction, reconstruction, installation, or repair of public infrastructure. The maintenance of public infrastructure is not an eligible expense.

In general, HOME funds cannot be used to finance the development or maintenance of public infrastructure. However, it is an eligible HOME expense when it is needed to support HOME-assisted housing and the improvements to the project site are in keeping with improvements of surrounding, standard projects. Eligible infrastructure investments might include: connecting housing that is assisted with HOME funds to existing infrastructure (24 CFR 92.206(a)(3)); making utility connections from the property line to the adjacent street, including off-site connections; developing on-site roads, sewer, and water lines necessary to the development of the project; providing essential infrastructure improvements to on-site infrastructure. The project site is the property, owned by the project owner, upon which the project is located.

Economic Development

A vital urban neighborhood typically includes a healthy residential living environment, and a healthy commercial district. Neighborhoods rely on the commercial district to provide needed goods and services to support residents. CDBG grantees can undertake a range of activities to support neighborhood economic development.

CDBG can be used to provide assistance to create economic opportunities that primarily benefit low- and

moderate-income residents. Grantees have a great deal of flexibility in how to use program funds to meet this goal. Economic development activities that are eligible under CDBG (24 CFR 570.203 and 570.201(o)) include:

• Acquiring, constructing, reconstructing, rehabilitating, or installing commercial or industrial buildings, structures, and other real property equipment and improvements, including railroad spurs and similar extensions;
• Providing economic development services in connection with eligible economic development activities;
• Providing financial and/or technical assistance, advice, and business services to owners of microenterprises and persons developing microenterprises; and
• Training and technical assistance, or other support services to increase the capacity of recipients or subrecipients to carry out microenterprise activities.

Community Facilities and Public Services

Community facilities (i.e., public facilities) add to the quality of life for a community's residents. Integrating quality services to meet the needs of residents and businesses can generate opportunities for neighborhood residents to develop ties to other people in the community. These social benefits are often the basis of a “sense of community” that makes a neighborhood an attractive place to live. Community facilities that may be eligible for assistance under the CDBG program include senior and youth centers, child care facilities, parks and recreational facilities, community centers, fire stations, libraries, and health care facilities.

Revitalizing neighborhoods must be supported by a comprehensive strategy to deliver quality public services, and a sustainable quality of life. Community facilities often house important services to community members, which include the following CDBG-eligible public services:

• Employment and job training services;
• Crime prevention and community safety programs;
• Child care;
• Substance abuse treatment and counseling;
• Fair housing counseling;
• Energy conservation;
• Welfare services (other than direct income subsidy payments);
• Recreational services;
• Meals on wheels and other programs to promote nutrition; and
• Assisting private, for-profit businesses;
• Assisted living services.

In order to be eligible for CDBG funding, a public service must either be a new service or a quantifiable increase in the level of an existing service that has been provided with funds from the unit of general local government or the state. CDBG cannot be used to replace existing local or State funding for a public service. Grantees are capped on how much they can spend on public services (see Section 1). Given the importance of public services to community viability, grantees should evaluate public service activities to see if a particular service might qualify under a different CDBG eligible activity category.

Financing and Requirements for Neighborhood Revitalization

This section highlights the issues, rules, and considerations that arise when managing a neighborhood revitalization initiative. It describes the partners that will help make a revitalization program successful, identifies the financing considerations and opportunities that are present when using HOME and CDBG funds, and reviews the eligible costs applicable to these activities.

Partners

Successfully turning around a declining neighborhood will require more than an investment in the development in the neighborhood—it will require a change in how people perceive the neighborhood. Buyers, renters, new businesses, and customers will not be attracted to the neighborhood if they do not feel safe, if the community school is failing, and if public services are inadequate. Changing the perception of the neighborhood requires real change in the neighborhood, and widespread publicity about that change. In addition to the housing development partners identified in prior sections, the following partnerships will be important:

Business leaders. Businesses in the neighborhood, as well as in the surrounding community, will want to support the revitalization effort because its success will bring them new customers. Jurisdictions can call on business leaders to hire neighborhood residents, lend support to promote the commercial district, sponsor community and promotional events, and help attract new businesses to the neighborhood’s commercial district.

Community institutions, such as universities and colleges, hospitals, faith-based institutions. These institutions are not able to relocate easily, and often have a real stake in the success of the neighborhood. They can provide outreach to their constituents to promote changes in the neighborhood and market availability of housing and other opportunities generated as part of the revitalization plan.

Community residents, including civic associations, homeowner associations, and tenant associations. Resident participation in the community will be critical to its success. Involving new and existing residents, and creating opportunities for them to get to know one another and work together for the future of the neighborhood, can sometimes make the difference between sustaining revitalization efforts over the long-term, and seeing new redevelopment targeted by graffiti and other crime. Community residents should be involved early in the planning process and should continue to be involved in the actual implementation and evaluation of the revitalization effort.

Other state and local government agencies. Housing agencies will need to reach out to other agencies and work with them to improve the provision of other public services in the neighborhood. Two key areas are law enforcement and school districts, since crime and poor quality schools will deter most new buyers and businesses from investing in the neighborhood.

The media. Real work to redevelop the neighborhood’s housing stock, revitalize its commercial district, make its streets safer, and improve the quality of its schools will be for naught if the surrounding community is unaware of the real and positive changes occurring. Involving the media is key to publicizing the successes of the revitalization effort, in order to attract newcomers.

Note, some of the important partnerships in a neighborhood revitalization initiative are not formal ones, driven by program requirements. Nonetheless, these relationships should not be overlooked, as they can greatly enhance the revitalization effort.

Approaches to Financing

Two additional considerations should be made when determining the most strategic approach to using HOME and CDBG in combination to finance neighborhood revitalization. The Section 108 Loan Guarantee program provides CDBG grantees an opportunity to finance large-scale physical development projects over the course of more than one year. The availability of regulatory flexibility in neighborhoods that qualify as Neighborhood Revitalization Strategy Areas generates an opportunity for grantees to attract some households whose income exceeds the median area income to the neighborhood, among other things. Nothwithstanding the opportunities presented by these resources, for many communities and projects, the logical financial strategy, when approaching a neighborhood revitalization initiative, will be to invest HOME funds in the affordable housing component of the initiative and CDBG funds in the non-housing component. This section will review the eligible non-housing costs under CDBG.

Section 108 Loan Guarantees. Loan guarantees made through the Section 108 Program allow grantees to use their CDBG funds to undertake large projects that are often the cornerstone of revitalization efforts. Grantees can apply for loans up to five times the community’s current CDBG allocation to finance large-scale projects, typically economic development projects. The loans are financed through underwritten public offerings. HUD requires grantees to provide local collateral in addition to CDBG funds to secure the loan. The size of the Section 108 loan sends a signal to private economic interests that the project in question is worthy of investment, and as such serves as an important leveraging tool. The loan repayment period is up to 20 years.

In addition to (or in conjunction with) economic development, Section 108 loan funds can be used to finance:

• Acquisition of real property;
• Rehabilitation of publicly-owned real property (except for structures that are primarily for the general conduct of government);
• Housing rehabilitation that is CDBG-eligible;
• Construction, reconstruction, or installation of public facilities;
• Related relocation, clearance, and site improvements;
• Payment of interest on the guaranteed loan and issuance costs of public offerings;
• Debt service reserves; and
• Public works and site improvements in Colonias.

It is important for grantees to consider when Section 108 funds, rather than annual CDBG allocations, will be most appropriate to address economic development needs. In general, Section 108 funds are best used for large-scale development projects when other funding sources are not available, and when the project has a reasonably assured return on investment. Examples of large-scale economic development projects can include:

• Neighborhood shopping centers;
• Grocery stores;
• Development of a mixed-use retail and housing complexes;
• Industrial expansion; and
• Infrastructure development and improvement.

Community Development Financial Institutions and Neighborhood Revitalization Strategy Areas/Community Revitalization Strategy Areas. CDBG allows for regulatory flexibility regarding income targeting in order to allow grantees more expansive use of program funds in order to support neighborhood revitalization strategies. This flexibility is extended to both activities funded through both Community Development Financial Institutions (CDFIs) and Neighborhood Revitalization Strategy Areas (NRSAs) or Community Revitalization Strategy Areas (CRSAs) for States.

A CDFI is a community lender that is primarily dedicated to the promotion of community development, and that serves a specific investment area or targeted population. As lenders, CDFIs provide development services and equity investments or loans, and they maintain accountability to residents within the specified investment area. CDFIs were created under the Community Development Banking and Financial Institutions Act of 1994, and cannot be public agencies or institutions. Some typical CFDIs are community development banks, community development loan funds, microenterprise loan funds, or venture capital organizations.

A CDBG grantee can create a NRSA for the purpose of developing specific neighborhood revitalization strategies to target program resources if the area meets the demographic criteria to be so identified. 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).

The regulatory flexibility that has been extended to activities funded through either a CFDIxi or an NRSA/CRSA include:

• Area Benefit. Any job creation or job retention activities undertaken pursuant to an NRSA or CRSA strategy may meet the low- and moderate-income area benefit national objective requirements at 24 CFR 570.208(a)(1). This flexibility frees employers receiving CDBG assistance from tracking the income of employees or of those interviewed for a position. This administrative relief can facilitate the involvement of businesses in the job growth/job retention program.
• Housing. Housing activities for which CDBG funds are obligated during a program year may be considered a single structure for the purpose of applying the low- and moderate-income housing benefit criteria at 24 CFR 570.208(a)(3). If a grantee elects to use this option, it must document that at least 51 percent of all housing units are occupied by low- and moderate-income households.
• Economic Development. Economic development activities may be exempt from aggregate public benefit standards at 24 CFR 570.209(b), increasing flexibility for program design. However, such projects are still subject to the individual/project public benefit standards under the same section of the CDBG rule.
• Public Services Cap. CDBG grantees are required to limit the expenditure of program funds on public services to 15 percent of their annual allocations, plus the prior year’s program income; however, activities funded pursuant to a HUD-approved NRSA/CRSA and carried out by a Community Based Development Organization (CBDO) within the NRSA or CRSA neighborhood are exempt from this cap. This exemption allows grantees to provide higher levels of public services to dilapidated low-and moderate-income neighborhoods, including job training and job creation.

The regulatory flexibility extended to CFDI and NRSA/CRSA activities reflects HUD’s goal of assisting communities in their efforts to involve a wide range of community partners in addressing community revitalization needs and issues across the country. Working in partnership with a local CFDI or targeting assistance to a NRSA/CRSA can provide a grantee greater flexibility to address neighborhood housing and public service needs.

• Clearance, demolition, and removal of buildings and improvements, including the movement of a structure to another site;
• Provision of public services (not to exceed the 15 percent cap);
• Interim assistance to arrest the further physical deterioration of an area where further, permanent improvements will be made as soon as possible (e.g., sidewalk repair, refurbishment of public parks, special trash and debris removal services);
• Necessary costs to complete existing Federal Urban Renewal projects;
• Temporary and permanent relocation assistance to families, businesses, individuals, nonprofits, and farm operations, as required under 24 CFR 570.606(b) or(c), or determined by the grantee to be appropriate under 24 CFR 570.606(d);
• Payments to cover the loss of rental income suffered by housing owners whose property is held for temporary periods for households displaced and relocated as a result of program activities;
• Acquisition, construction, reconstruction, rehabilitation, or installation of distribution lines and facilities of a privately-owned utility;
• Special economic development;

Eligible Costs

Since HOME funds can be used only for affordable housing, CDBG is an ideal source for paying the non-housing components of a neighborhood revitalization initiative.xii Provided the activity meets a national objective, CDBG funds can be used for activities that support the broad range of community development and neighborhood revitalization activities that have been explored in this section, including:

• Acquisition of real property by the grantee or a nonprofit;
• Property disposition through sale, lease, or donation of any real property acquired with program funds;
• Acquisition, construction, reconstruction, rehabilitation, or installation of public facilities and improvements, with the exception of buildings used for the general conduct of government, as specified at 24 CFR 570.207(a);
• Microenterprise assistance;
• Provision of technical assistance to public or nonprofit entities to build the capacity of such entities to carry out neighborhood revitalization and economic development activities, so long as the activities proposed by such entities are eligible under the CDBG rule and can reasonably be expected to meet one of the national objectives; and
• Provision of assistance to institutions of higher learning if and when the grantee has determined that the institution in question has the capacity to carry out one or more eligible CDBG activities. (Note, public services carried out by institutions of higher education are subject to the public service cap.)

A description of all eligible administrative costs under both the HOME (24 CFR 92.207) and CDBG (24 CFR 570.206) programs is available in Section 1.