Chapter 1: Conduct Threshold Eligibility Review

This chapter describes the initial steps the HOME Participating Jurisdiction (PJ) should take when it receives a request for HOME funding for a project that has (or expects to have) an allocation of Federal Low-Income Housing Tax Credits (LIHTCs). It highlights the key areas that a PJ should assess when undertaking a basic eligibility threshold review before proceeding to underwrite the project. Specifically, this chapter:

• Explains the general HOME Program rules
• Increase the supply of decent, affordable housing to low- and very low-income households
• Expand the capacity of nonprofit housing providers

Overview of the HOME Program

Created by the National Affordable Housing Act of 1990 (NAHA), HOME is the largest Federal block grant available to communities to create affordable housing. The intent of the HOME Program is to:

• Increase the supply of decent, affordable housing to low- and very low-income households
• Expand the capacity of nonprofit housing providers
• Strengthen the ability of state and local governments to provide housing
• Leverage private sector participation.

Every year, the U.S. Department of Housing and Urban Development (HUD) determines the amount of HOME funds that states and local governments — the PJs — are eligible to receive using a formula designed to reflect relative housing need. The HOME regulations may be found on HUD’s Office of Affordable Housing Programs website at https://www.hud.gov/program_offices/comm_planning/affordablehousing/programs/home/, and in the Code of Federal Regulations at 24 CFR Part 92.

HOME Program Partners

To ensure success in providing affordable housing opportunities, the HOME Program requires PJs to establish new partnerships and maintain existing partnerships. Partners play different roles at different times, depending upon the project or activity being undertaken with HOME funds.

Key program partners include:

• Participating Jurisdiction. A Participating Jurisdiction (PJ) is any state, local government, or consortium that has been designated by HUD to administer a HOME program.
• Community Housing Development Organization . A community housing development organization (CHDO) is a private, nonprofit organization that meets a series of qualifications prescribed in the HOME regulations at 24 CFR 92.2. Each PJ must use a minimum of 15 percent of its annual allocation for housing that is owned, developed, or sponsored by CHDOs. PJs evaluate organizations’ qualifications and designate them as CHDOs.
• Subrecipient. A subrecipient is a public agency or nonprofit organization selected by a PJ to administer all or a portion of its HOME program.
• Developers, owners, and sponsors. Developers , owners, and sponsors of housing developed with HOME funds may be for-profit or nonprofit entities. Developers are the entities responsible for putting the housing deal together. Owners are the entities that hold title to the property after rehabilitation, construction, or acquisition. Sponsors work with other organizations—such as other nonprofits—to assist them to develop and own housing. At project completion, sponsors turn over title to the property to the other organization.
• Private lenders. Most HOME projects leverage or involve other financing, from for-profit lenders or other entities such as foundations or community groups.
• Third-party contractors. Third-party contractors include a range of other entities that might work on the HOME program, such as architects, planners, construction managers, real estate agents, or consultants.

HOME-Eligible Program Activities

HOME funds can be used to support four general affordable, non-luxury housing activities:

• Homeowner Rehabilitation. HOME funds may be used to assist existing owner-occupants with the repair, rehabilitation, or reconstruction of their homes.
• Homebuyer activities. PJs may finance the acquisition and/or rehabilitation, or new construction of homes for homebuyers.
• Rental housing. Affordable rental housing may be acquired and/or rehabilitated, or constructed.
• Tenant-based rental assistance (TBRA). Financial assistance for rent, security deposits, and, under certain conditions, utility deposits may be provided to tenants. Assistance for utility deposits may only be provided in conjunction with a TBRA security deposit or monthly rental assistance program.

Prohibited Activities and Costs

HOME funds may not be used to support the following activities and costs:

• Project reserve accounts. HOME funds may not be used to provide project reserve accounts (except for initial operating deficit reserves) or to pay for operating subsidies.
• Tenant-based rental assistance for certain purposes. HOME funds may not be used for certain mandated existing Housing Choice Voucher Program (formerly known as Section 8) uses, such as Housing Choice Voucher rent subsidies for troubled HUD-insured projects.
• Match for other Federal programs. HOME funds may not be used as the “nonfederal” match for other Federal programs except to match McKinney Act funds.
• Development, operations, or modernization of public housing. HOME funds cannot be used alone or in conjunction with HUD-funded public housing program funds (e.g., Public Housing capital programs such as Development, Comprehensive Improvements Assistance Program (CIAP), or Comprehensive Grant Program (CGP)) to acquire, rehabilitate, or construct public housing units.
• Double-dipping. During the first year after project completion, the PJ may commit additional funds to a project. After the first year, no additional HOME funds may be provided to a HOME-assisted project during the relevant period of affordability, with the following exceptions:
• PJs can renew tenant-based rental assistance to families.
• PJs may provide tenant-based rental assistance to families that will occupy housing previously assisted with HOME funds.
• PJs may assist a homebuyer with HOME funds to acquire a unit that was previously assisted with HOME funds.
• Acquisition of PJ-owned property. A PJ may not use HOME Program funds to reimburse itself for property in its inventory or property purchased for another purpose. However, in anticipation of a HOME project, a PJ may use HOME funds to:
• Acquire property
• Reimburse itself for property acquired with other funds, specifically for a HOME project.
• Project-based rental assistance. HOME funds may not be used for rental assistance if receipt of funds is tied to occupancy in a particular project. Funds from another source, such as a Housing Choice Voucher, may be used for this type of project-based assistance in a HOME-assisted unit. Further, HOME funds may be used for other eligible costs, such as rehabilitation, in units receiving project-based assistance from another source—for example, Housing Choice Voucher or state-funded project-based assistance.
• Pay for delinquent taxes, fees, or charges. HOME funds may not be used to pay delinquent taxes, fees, or charges on properties to be assisted with HOME funds.

HOME Project Requirements

The HOME Program is designed to provide affordable housing to low-income and very low- income families and individuals. Therefore, the program has some key restrictions that are designed to foster HUD’s commitment to long-term affordable housing, quality units, and reasonable costs. These key restrictions include:

• Income eligibility and verification
• Occupancy and rent requirements
• Subsidy limits
• Affordability periods
• Property standards.

Beneficiaries of HOME funds—homebuyers, homeowners, or tenants—must be low-income or very low-income. A“low-income household” has an annual gross income that does not exceed 80 percent of area median income (AMI), as adjusted by household size. A “very low-income household” has an annual gross income that does not exceed 50 percent of AMI, as adjusted by household size.

Occupancy and Rent Requirements

In projects assisted with HOME funds, the HOME-assisted units must meet the occupancy and rent requirements of the HOME Program. These requirements are explained in detail in Chapter 2.

Subsidy Limits

HOME establishes minimum and maximum amounts of HOME funds that may be invested in any project. The minimum amount of HOME funds is $1,000 multiplied by the number of HOME-assisted units in the project. The minimum relates only to the HOME funds, and not to any other funds that might be used for project costs.

The maximum per unit HOME subsidy limit varies by PJ. Annually, HUD determines the maximum amounts, which are based on HUD’s Section 221(d)(3) program limits for the metropolitan area. These limits are available at the HOME Program website at https://www.hud.gov/program_offices/comm_planning/affordablehousing/programs/home/.

Affordability Periods

To ensure that HOME investments yield affordable housing over the long term, HOME imposes rent and occupancy requirements for the duration of an affordability period. For homebuyer and rental projects, the length of the affordability period depends on the amount of HOME assistance to the project or buyer, and the nature of the activity funded. Throughout the affordability period, income-eligible households must occupy the HOME-assisted housing.

Property Standards

HOME-funded properties must meet certain minimum property standards:

• State and local standards. State and local codes and ordinances apply to any HOME-funded project regardless of whether the project involves acquisition, rehabilitation, or new construction.
• Model codes. ¹ For rehabilitation or new construction projects where there are not state or local building codes, the PJ must use one of the following three national model codes:
• Uniform Building Code (ICBO), National Building Code (BOCA), Standard Southern Building Code (SBCCI)
• Council of American Building Councils (CABO) one or two family code
• Minimum Property Standards (MPS) in 24 CFR 200.925 or 200.926.
• Housing quality standards. For acquisition-only projects, if there are no state or local codes or standards, the PJ must enforce Housing Choice Voucher Housing Quality Standards (previously Section 8 HQS).
• Rehabilitation standards. Each PJ must develop written rehabilitation standards to apply to all HOME-funded rehabilitation work. These standards are similar to work specifications, and generally describe the methods and materials to be used when performing rehabilitation activities.
• Uniform Federal Accessibility Standards. The UFAS standards apply to new construction and substantially altered rehabilitation, in accordance with Section 504 of the Rehabilitation Act of 1973.
• International Energy Conservation Code and Site and Neighborhood Standards , for new construction projects.

HOME Administrative Requirements

HOME imposes certain administrative requirements related to the eligibility of administrative and planning costs, match, and commitment and expenditure deadlines.

1 Since the promulgation of the HOME Program regulations, these code issuing agencies have merged to form the International Code Council (ICC). The model codes used for the HOME Program are no longer being updated. In their stead, the ICC has issued the International Building Code. HUD will consider whether changes to the HOME regulations incorporating the International Building Code are appropriate. The HOME Program website provides updated information on all HOME requirements. (See https://www.hud.gov/program_offices/comm_planning/affordablehousing/programs/home/. ) For more information about the International Building Code, see www.iccsafe.org.

Administrative and Planning Costs

Each PJ may use up to 10 percent of each year’s HOME allocation for reasonable administrative and planning costs. In addition, up to 10 percent of program income deposited in a PJ’s local HOME account during a program year may be used for administrative and planning costs. PJs, state recipients, and subrecipients may incur administrative and planning costs.

Match

The HOME Program requires that PJs contribute an amount equal to no less than 25 percent of the total HOME funds drawn down in a year for project costs as a permanent contribution to affordable housing. PJs incur a match obligation only for project funds, not for administrative, operating, or capacity-building expenditures. Although the obligation is incurred per dollar expended in the project, match credit can be invested in any HOME-eligible project, whether the project receives HOME funds or not. Match funds can be contributed in many different forms, including cash; value of waived taxes or fees; value of donated land or property; or donated goods, services, materials, or equipment.

Commitment and Expenditure Deadlines

The HOME Program encourages PJs to expend their affordable housing funds expeditiously by imposing two deadlines. HOME funds for a given program year must be committed to HOME projects within two years of signing the HOME Investment Partnerships Agreement. For CHDO set-aside funds, PJs must reserve funds for use by CHDOs within that 24-month period. In addition, generally HOME funds must be expended within five years of receipt of funds. FY 2012 HOME funds must be spent within four years, in accordance with the Consolidated and Further Continuing Appropriations Act of 2012 (P.L 112-55).

Overview of the LIHTC Program

Before considering a HOME funding request for a project that has, or is expected to have, LIHTCs, PJ staff should become familiar with what LIHTCs are and how the LIHTC program works.

What is a Low-Income Housing Tax Credit?

The U.S. Congress authorizes each state to allocate a certain number of Federal low-income housing tax credits (LIHTCs) and issue up to a specified amount of tax-exempt bond financing annually. The state’s allocation threshold is based on its population. Internal Revenue Service rules found at Section 42 of the Internal Revenue Code (IRC, or “the Code”) govern the LIHTC program. Each state establishes additional requirements and program priorities for the credits it administers.

The state reserves LIHTCs for approved affordable housing projects that meet certain affordability criteria for up to 30 years. These Federal tax credits are sold to investors as a way to raise cash equity for eligible affordable housing projects. In exchange for cash up-front, the investor receives a tax credit (dollar for dollar reduction in its Federal tax liability) each year for a period of ten years. The IRS enforces compliance with the LIHTC affordability restrictions for 15 years. The LIHTC compliance period is the 15-year period during which a project must continue to comply with the various LIHTC requirements to avoid any tax credit recapture. The compliance period begins with the first taxable year in the credit period. The extended use period is a date specified by either the LIHTC allocating agency or 15 years after the close of the compliance period. During this extended period, the use of the property is restricted to affordable low-income housing.

There are two forms of Federal LIHTCs, known as9 percent and 4 percent tax credits. 9 percent tax credits, also referred to as “70 percent present value LIHTCs,” are available for new construction and rehabilitation. 4 percent tax credits, also referred to as “30 percent present value LIHTCs,” are available for existing housing or federally subsidized housing and are generally used in conjunction with tax-exempt bond financing. In an acquisition and substantial rehabilitation project; the 4 percent credit is applied to the acquisition of the existing buildings and the substantial rehabilitation qualifies for the 9 percent credits.

The LIHTC program has rent and occupancy standards that vary from those of the HOME Program. The requirements for rents and occupancy under both the HOME and LIHTC programs are detailed in Chapter 2.

State’s Role in the LIHTC Program

Each state allocating agency is required to issue a Qualified Allocation Plan (QAP) to document how it plans to make the tax credits and tax-exempt bond financing available to developers. The QAP is published annually. It contains vital information on the LIHTC program requirements and the state’s funding preferences, in terms of the types of projects and locations in which it wishes to invest. Further, it explains the funding process, and identifies application deadlines and when funding decisions (called reservations of credits) are made. Each state’s QAP typically contains separate sections discussing the allocation procedures and requirements for 9 percent LIHTCs and 4 percent LIHTCs.

Each state is required to conduct public hearings in the process of developing the QAP.

One key source of information for the PJ about the state allocating agency’s funding priorities is the state LIHTC Qualified Allocation Plan (QAP). When PJs know and understand the state’s LIHTC priorities, they can better target HOME funds to projects that are the most fundable. Local PJs may also wish to discuss rental housing priorities with state staff, through the formal public hearing process on the QAP, and through other informal opportunities that arise."

Typical LIHTC Ownership Structures

Virtually all LIHTC projects are developed as single-asset entities , meaning that the ownership entity has a single property in which all revenues, expenses, assets, and liabilities are accounted for together.

LIHTC projects are typically owned by one of the following two types of legal entities:

• Limited liability corporations (LLCs). Limited liability corporations are similar to partnerships. Typically one partner (or “member”) is designated as the “managing member” who makes most day-to-day decisions. The tax credit investor member(s) typically is not involved in day-to-day decision-making, but is involved in major decisions such as sales or refinancing.
• Limited partnerships. Limited partnerships are similar to LLCs, except that the manager is called the “general partner” and the investor(s) is called a “limited partner.” Some limited partnerships have more than one general partner, in which case one of the general partners is usually the managing general partner who makes most of the day-to-day decisions.

PJs should be aware of certain special conditions of ownership that apply if HOME CHDO set- aside funds are being used in an LIHTC project. If the CHDO is applying and the ownership structure is a limited partnership, the CHDO must be the managing general partner. If the ownership is an LLC, a HUD waiver is required to allow for this ownership structure and the CHDO must be the managing member of the LLC. Other ownership structures are possible in theory, but are rarely seen in practice.

Role of the LIHTC Investor

The state’s reservation of credits is not money from the state LIHTC allocating agency to the developer. Instead, the allocation gives the owner the right to sell the reservation of LIHTCs to an investor. The investor purchases the LIHTC allocation at a price determined by the market for the credits for which the investor receives a 99 percent plus interest in the LLC or limited partnership that will own the project. In exchange for the infusion of cash equity, the investor receives its 99 percent ownership share plus the annual tax credits (a dollar for dollar reduction against its Federal income tax liability) over the first ten years, followed by an additional five- year affordability requirement, even though no additional tax credits may be claimed in those years.

LIHTC Equity: “Syndicated” versus “Direct Investment”

Direct investment is the simplest form of LIHTC investment: a large corporation purchases the entire investor interest in the project. By contrast, in a syndicated transaction, the investor interest is purchased by a fund or investor pool composed of many investors. Syndicated transactions are organized by LIHTC syndicators, who recruit corporate investors, create investor funds / pools that appeal to a wide array of investors, and represent the investors for purposes of getting the project funded, completed, leased-up, and operated in accordance with all applicable compliance requirements.

The entity that applies for HOME funding is typically the owner, developer, or sponsor of a project. Applicants for LIHTCs are generally referred to as “LIHTC project sponsors.” Under LIHTC, this would typically be either the owner or developer of the project. An LIHTC project sponsor is not the same as a sponsor under the HOME Program. Under HOME, a sponsor is a community housing development organization (CHDO) that works in partnership with another nonprofit to develop and manage a property in certain circumstances. Unless otherwise specified, this publication uses the term “owner” to refer to LIHTC project sponsors as well as developers and sponsors of HOME projects."

9 Percent and 4 Percent LIHTCs

In terms of the requirements and how the credit works, there is little difference between a 9 and 4 percent LIHTC. Simply put, the 9 percent LIHTC leverages more equity for a project than a 4 percent LIHTC, and is therefore usually more desirable. An award of 9 percent LIHTCs typically

generates sufficient investor equity proceeds to cover 50 to 90 percent of the cost to develop the LIHTC units; whereas, an award of 4 percent LIHTCs typically generates investor equity proceeds to cover only 20 to 40 percent of the cost to develop the LIHTC units.

The key differences between the two forms of Federal LIHTCs are summarized in Exhibit 1-1.

Competitive Allocation of 9 Percent LIHTCs

Because of the greater potential financial benefit of the 9 percent tax credit, these are in greater demand, and are therefore allocated competitively, according to the state allocating agency’s annual QAP. Typically, 9 percent LIHTC applications are received only once a year (although some larger states might have more than one funding “round” to allocate credits.) Most state allocating agencies use a point-scoring system to evaluate applications; this system is described in the QAP. Some states create a pool of potential LIHTCs that are reserved for particular types of projects (such as preservation projects in rural areas) or for particular types of sponsors (such as nonprofit sponsors or public housing authorities). Within each pool, the highest-scoring projects that meet all threshold requirements are selected to receive reservations of LIHTCs.

Tax-exempt bond financing cannot be used in conjunction with 9 percent LIHTCs.

Noncompetitive Allocation of 4 Percent LIHTCs

Because 4 percent credits are not in as high demand, most states accept LIHTC applications and issue reservations on a noncompetitive basis year-round. However, 4 percent LIHTC applications must still meet the state’s threshold requirements in order to be eligible to receive a reservation of tax-exempt bond authority. Tax-exempt bond financing must be used in conjunction with 4 percent LIHTCs. The associated tax-exempt bonds can be issued by any state or local agency that has the legal authority to issue bonds (for example, a state housing finance agency, a local public housing authority, or a local redevelopment agency).

For tax-exempt bond projects, there is an LIHTC requirement that at least 50 percent of the total development cost be financed with tax-exempt bonds. Typically, the required amount of tax- exempt bond financing is greater than the supportable first mortgage; in these situations, the required amount of tax-exempt bonds are issued at the start of construction. Then, at the end of the development period, some of the bonds are repaid (“redeemed”) so that the amount of the remaining bonds matches the first mortgage loan amount.

Exhibit 1-1: Summary of Key Differences in 9 and 4 Percent Tax Credits

How LIHTC Equity Is Calculated

The amount of LIHTC equity that can be secured for a project depends on a number of factors:

• Total development cost and how much of that cost is eligible under LIHTC
• Proportion of the project that will be LIHTC-assisted
• Type of LIHTC (9 or 4 percent)
• Price the LIHTC project sponsor is able to get for the credit.

Exhibit 1-2 illustrates the relationship of these variables and how the LIHTC equity is calculated.

Exhibit 1-2: Determining the LIHTC Equity

Total development cost. Total development cost is the total development budget (all costs necessary to produce a finished, occupied project).

Eligible basis. Eligible basis is the amount of the development cost that is LIHTC- eligible (excluding land and certain other costs that are not depreciable). This concept is discussed in more detail in Chapter 2.

Applicable fraction. Applicable fraction represents the share of the property that is LIHTC-assisted. It is based on the lesser of either: (1) the number of tax credit units to the total number of units, or (2) the square footage of the tax credit units to the total square footage of the property. Many tax credit projects have 100 percent tax credit units, and these projects have an applicable fraction that is 100 percent. However, QAPs increasingly favor mixed-income projects that include some market-rate units; mixed-income projects have applicable fractions well below 100 percent.

Qualified basis. Qualified basis is eligible basis multiplied by the applicable fraction. In other words, the portion of eligible basis that is attributable to the LIHTC units.

Basis boost percentage. Basis boost percentage is usually 100 percent. However, projects located in HUD-designated qualified census tracts or difficult development areas can be allocated up to 30 percent additional LIHTCs, at the discretion of the state LIHTC allocating agency. (Note that the Housing and Economic Recovery Act of 2008 gave the states’ housing finance agencies the right to determine which areas in their states could be designated as difficult-to-develop areas.) If the full 30 percent addition is allocated, the basis boost percentage is 130 percent. Basis boost may not be applied to acquisition costs.

LIHTC percentage. The LIHTC percentage represents the amount of credits that will be generated by the qualified (and boosted) basis. The LIHTC percentage is published monthly by the IRS, and is historically lower than the 9% or 4% factor. However, for buildings placed in service through the end of 2013 the LIHTC percentage is fixed at exactly 9 percent for the 9 percent LIHTC program, in accordance with changes made by the Housing and Economic Recovery Act of 2008.

LIHTC period. The LIHTC period is the ten-year period over which the investor may claim the LIHTCs. This is also sometimes referred to as the “credit period.” This is not the same as the 15-year compliance period (the period during which the IRS can recapture the tax credits from the investor for noncompliance with the affordability restrictions.)

Total LIHTCs. Total LIHTCs equals the qualified basis multiplied by the LIHTC percentage multiplied by ten years. This is the total dollar amount of LIHTCs that the owner is expected to receive over the ten-year credit period.

Net syndication price. Net syndication price is the amount that the LIHTC investor pays for $1.00 of Federal income tax credit. Historically, the net syndication price typically ranged from 70 cents to 90 cents. (This means that the investor is willing to pay 70 to 90 cents today for every $1.00 of anticipated tax credit that it will receive later.) In the mid-2000s, the typical price rose above 90 cents, only to drop significantly beginning in 2008. At this publication, net syndication prices are volatile and are most often reported toward the low end of the historical range.

Net syndication proceeds. Net syndication proceeds are the total dollar amount that the LIHTC investor pays the LIHTC project sponsor. It is based on the total project credit amount multiplied by the net syndication price. In this example, the net syndication proceeds are sufficient to pay for 51 percent of total development cost.

Market Trends in LIHTC Equity Prices

Historically LIHTC prices have been stable and there has been an adequate market of potential LIHTC investors. As a result, developers had high confidence that an LIHTC reservation could readily be converted into LIHTC equity. However, financial upheaval in 2008 created significant stress in the LIHTC equity market, demonstrating that there can be unpredictability in this market.

In summary, many of the largest LIHTC investors lost confidence that the business environment would be profitable. Without anticipated profits, there would be no Federal income taxes; and without tax liability, there would be no need for credits. The market stopped purchasing LIHTCs. This has had two primary results:

• LIHTC prices became (and continue to be) unstable.
• Some LIHTC projects have been unable to find an investor—particularly those with less- experienced or less financially-sound developers, large projects (over 200 units), projects in rural areas, projects with especially complex financial and compliance structures, and projects in areas of or declining population.

Recent market trends dictate that the PJ understand that the demand for tax credits can change over time; one cannot assume there will always be a supply of investors. PJs should discuss this issue with the state allocating agency when making decisions about funding tax credit projects. In addition, PJ underwriters should consider the following:

• Currently, pre-2008 benchmarks for LIHTC equity prices are not reliable.
• Developers today are under pressure to propose projects that are less complex and that involve fewer risks, as compared to the types of projects that could readily find LIHTC investors prior to 2008.
• There is a greater need for flexibility, creativity, and professionalism by PJs in working with the state and with developers.

LIHTC Deadlines

There are three primary deadlines in the LIHTC program:

• Allocation and reallocation deadlines
• “Carryover” requirement
• Placed in service requirement.

Allocation and Reallocation

The state has two years to make an initial allocation (reservation) of LIHTCs. If a developer returns its LIHTC reservation, the state has two additional years to reallocate the LIHTCs to another project.

Carryover Requirement

Once the state makes an initial reservation of LIHTCs for a project, the developer must incur 10 percent of the reasonably expected eligible basis within 12 months of when the LIHTC reservation was made. This is called the carryover requirement. Although 10 percent must be spent, the expenditures need not be for basis-eligible items. Once this threshold is achieved, the developer receives a “carryover allocation” from the state; that is, the state allocates the remaining credits to the project. If the developer is unable to spend 10 percent of the reasonably expected eligible basis within 12 months, the project loses the credits and they are reallocated by the state to another project. (Note: the Housing and Economic Recovery Act of 2008 extended this expenditure deadline from six months.)

“Placed In Service” Requirement

The LIHTC program does not have a deadline for full expenditure of funds like the HOME Program, but it has a deadline for project occupancy, called “placed in service.” The state LIHTC allocating agency and the IRS track LIHTC projects at the building level. A new construction LIHTC building is placed in service when construction has been completed and when the first unit in the building is certified as suitable for occupancy under state or local law (see IRS Notice 88-116). Rehabilitated LIHTC buildings are considered to be placed in service at the close of any 24-month period – selected by the taxpayer – over which the rehabilitation expenditures are aggregated. LIHTC buildings must be placed in service no later than December 31 of the second year following the year of the LIHTC reservation. For example, a project that receives 2008 LIHTCs must be placed in service by December 31, 2010.

Preliminary Review of Project Applications for HOME-LIHTC Projects

Upon receipt of a specific HOME funding request for a project with LIHTCs or where LIHTCs are anticipated, the PJ should:

• Review the state’s QAP or consult with the state to understand its funding priorities and application process.
• Determine if the project is eligible for both HOME and LIHTC programs (eligibility screening).
• Understand the project timetable.

Coordination with the State Allocating Agency

When a PJ receives a viable funding application and considers investing HOME funds in a project that has or is likely to pursue an allocation of tax credits, it is extremely important that the PJ coordinate with the state allocating agency to:

• Identify the best projects to leverage both funding sources.
• Determine the appropriate level of each source of subsidy for the project.
• Share information on the allocating agency’s underwriting assumptions.
• Identify important milestones in the application, funding, and development process.
• Share information on housing quality and project viability upon completion.

Allocating agencies have certain rights to make decisions about projects, and it is important for the PJ to build a partnership with the allocating agency so that the allocating agency understands the PJ’s interests when these project decisions are made. Likewise, the state allocating agency might have funding preferences that the PJ does not share. For instance, the state might target a special needs population to meet a statewide housing need, but a particular jurisdiction might not have that need in its community.

Determination of Preliminary Project Eligibility

Before investing time and resources in reviewing a project proposal, the PJ must determine that the project is an eligible HOME-LIHTC project. Both the HOME PJ and the state allocating agency have a range of choices in how they administer their respective programs to meet their jurisdictions’ affordable housing needs, in terms of the eligible activities and housing types they fund and the housing partners they work with. In addition, both programs have clear requirements about who can be served and the long-term affordability of the housing that is financed.

Eligible Target Population

Key to both the HOME and LIHTCs program are the requirements that funds must be invested in housing that is occupied by income-eligible households. Each program defines income eligibility in slightly different ways, however. Therefore, the tenant of a unit that is designated as both a HOME- and LIHTC-assisted unit must meet the income requirements of both programs (that is, the most restrictive income requirement).

During the preliminary screening of the project, the PJ should determine, generally, that the project is designed to provide affordable housing to income-eligible households. Both HOME and LIHTC programs permit mixed-income projects. The project can serve a mix of income- eligible occupants and over-income occupants. During the financial underwriting of the project (discussed in Chapter 2), the PJ evaluates whether the developer is proposing an appropriate level of affordability. The specific income targeting requirements of both programs are explained further in Chapter 4.

Special Needs Housing

Both HOME and LIHTC can be targeted to income-eligible persons with special needs, provided certain conditions are met. These groups can be served in standard rental housing, or funds can be invested in group homes or single room occupancy (SRO) projects. HOME and LIHTC both have particular requirements for these types of projects; even more restrictive rules apply if tax- exempt bond financing is used. PJs should encourage owners of these housing types to retain expert attorneys and/or advisors to assist with developing special needs housing.

For more information about using LIHTC and HOME to finance special needs housing, see IRC

§42(i)(l)(3) and HUD Notice CPD 94-01, Using HOME Funds for Single Room Occupancy (SRO) and Group Housing, issued January 4, 1994. This HUD Notice is available online at https://www.hud.gov/program_offices/comm_planning/affordablehousing/programs/home/.

Other Project Eligibility Criteria

Exhibit 1-3 summarizes additional threshold criteria for a HOME-LIHTC project. These are the minimal criteria that must be met in order for a project to be eligible to be funded under both programs and to comply with both sets of program requirements.

Exhibit 1-3: Threshold Criteria for a HOME-LIHTC Project

Eligible Forms of HOME Investment

During the threshold review, the PJ should also determine that the requested form of assistance is an eligible form under the HOME Program. Eligible forms of assistance include: predevelopment financing, construction loans, permanent loans, bridge loans, interest subsidy, loan guarantee, or refinancing (in certain circumstances). For additional information on the ways that HOME funds can be provided, see 24 CFR 92.205(b).

Special Needs Housing

The PJ might receive a request for HOME funds for an LIHTC project either before the owner has applied for tax credits, or after the project has received a tax credit reservation.

Project Review Pre-LIHTC Award

If the PJ receives the application for HOME funds when the project is in the preliminary stage, the PJ is able to conduct only a preliminary review of the project since the owner has only sketch plans, has not received bids for the construction work, has not yet asked for or received any first mortgage commitment, and does not yet know how many tax credits might be awarded.

Accordingly, the limited availability of information limits the depth of the PJ’s initial review. Based on this preliminary review, the PJ can provide only a conditional commitment of funding

that makes HOME funding subject to certain conditions that must be met. PJs should talk to the state allocating agency about the HOME commitment being an “up to” award amount subject to the maximization of the LIHTC allocation, as HOME funds are meant to provide the gap in funding sources.

Since many states give preference to tax credit projects that have local support, a PJ’s conditional funding commitment can help a tax credit project application. In a conditional funding commitment, the PJ specifies in writing the all the terms and conditions that the owner needs to satisfy before the PJ makes a firm commitment to the project and enters into a written agreement with the owner, developer, or sponsor. This should include the condition that the project receives an allocation of LIHTCs.

Project Review Post-LIHTC Award

If the PJ receives the application after LIHTCs have been awarded to the project, the PJ will have considerable information about the project and will be able to do a more thorough review.

However, it must be sensitive to the fact that the LIHTC project sponsor must meet certain strict LIHTC deadlines in order to keep its reservation of funds: carryover requirements and placed in service requirements (discussed in Section 1.2 of this chapter). For HOME-LIHTC projects, this deadline can be a difficult one to meet if the funding application is received after the “clock has started ticking.”

LIHTC developers often plan to purchase the land in order to meet part of the initial 10 percent requirement for a carryover allocation. HOME rules prohibit the PJ and developer from incurring any project costs (including the purchase of land) until environmental clearance has been received. For some PJs, this is a time-consuming step in the development process. (See Chapter 3 for a more detailed discussion of the environmental clearance process.) Upon application of a funding request that already has LIHTCs, the PJ may want to consider initiating its environmental review process at the same time that it completes its project review (i.e., before a firm funding commitment is made).