Assessing Sources and Uses

The Sources and Uses Statement shows all the funding sources available and all the proposed costs, or uses of the funds (the development budget). Exhibit 2-4 provides a sample, simplified Sources and Uses Statement.

Exhibit 2-4: Sample Sources and Uses Statement

Exhibit 2-4: Sample Sources and Uses Statement

The PJ should review the Sources and Uses Statement to determine three things:

  • The availability of all the sources to ensure that the Sources and Uses are in balance before construction proceeds.
  • Whether uses are cost-eligible, considering the restrictions on the uses.
  • Whether the timing of the availability of sources is adequate to meet uses, throughout the development and construction period.

Availability of Sources

First the PJ should assess whether the owner has firm commitments for all sources listed on the Sources and Uses Statement. A firm commitment would be a legal agreement or legally binding commitment letter from the source.

In many instances, HOME funds are committed to projects early, before other sources are invested. In some cases, other funders, such as private lenders, want to know that the public sources are “locked in” before the funder will commit to the project. It is acceptable for HOME to be the first source committed to the deal, but, the PJ should be careful in how and when it allows draws of HOME funds for these types of projects. If the PJ allows HOME funds to be used to acquire the land or begin the construction prior to having all of the other sources firmly committed, it runs the risk that the developer will be unable to raise sufficient resources to complete the units. If this occurs and the affordable housing is not completed, the PJ must repay the HOME funds back to HUD.

Cost Eligibility

The PJ should examine the Sources and Uses Statement to determine that: (1) there are sufficient sources of funds to pay all of the costs of the project, and (2) all of the costs of the project can be borne by sources for which they are eligible.

As noted above, the notion of “eligible cost” is different in HOME and LIHTC. The HOME rules identify specific costs as eligible and ineligible (found in 24 CFR 92.206 and 92.214, respectively). HOME funds cannot be used to pay any cost that is not eligible.

Timing of Sources, Including Equity Pay-In

For any project, the PJ must consider the cash flow into a project throughout construction. Generally, most uses need to be paid during the construction period. Typically, the LIHTC equity is paid to the developer in stages over the development period. The investor usually prefers to delay payment until stabilization, when the project has been completed, has been leased-up, has achieved its projected Net Operating Income (NOI), and when the investor has less risk regarding project completion. The developer, on the other hand, prefers to receive payment as early in the construction process as possible, offsetting the need to borrow funds (and pay interest costs) during construction. The tension between these two points of view results in a wide variety of pay-in structures.

Typical events in the pay-in schedule include:

  • Initial closing
  • 25 percent, 50 percent, 75 percent, and 100 percent construction completion
  • 100 percent of the units have been placed in service
  • Stabilization

The PJ should be aware that there is often a tradeoff between the price of the tax credits and the pay-in schedule. Investors are willing to pay more for credits when their pay-in schedule is late in the construction process and their risk is minimized. While the PJ might desire an earlier equity pay-in schedule to limit its own risk, this will likely decrease the price of the credits, which in turn may increase the need for HOME financing.

Due to these timing issues, typical HOME-LIHTC transactions need temporary financing to be able to pay construction costs before all of the permanent sources of funds have been received. The two most common forms of temporary financing are:

  • Construction loans, which usually are for the same principal amount as the permanent first mortgage, from a lender who specializes in managing the risks during the construction period.
  • Bridge loans, which most commonly bridge the timing gap between when LIHTC equity funds are needed (in order to pay construction and other development costs) and when the LIHTC investor has agreed to provide the funds.

Exhibit 2-5 illustrates how to project the timing of Sources and Uses over the development period. In this example, a construction loan has been added to the Funding Sources Summary in order to make sure there are sufficient sources to meet uses at each point during the development period.

Exhibit 2-5: Sample Sources and Uses Timing Illustration – Requiring a Construction Loan

Exhibit 2-5: Sample Sources and Uses Timing Illustration – Requiring a Construction Loan

Exhibit 2-5: Sample Sources and Uses Timing Illustration – Requiring a Construction Loan

Exhibit 2-5: Sample Sources and Uses Timing Illustration – Requiring a Construction Loan

Exhibit 2-5: Sample Sources and Uses Timing Illustration – Requiring a Construction Loan

Exhibit 2-5: Sample Sources and Uses Timing Illustration – Requiring a Construction Loan

The PJ must also consider how the pay-in schedule might impact the project’s ability to pay the ineligible costs of the project during construction. If HOME funds provide the bridge or construction loan, the proceeds of the HOME loan can only pay for eligible costs, even if the tax credit equity will take out the HOME financing upon completion. There must be sufficient other funds during the construction process to pay the cost of any ineligible items. For instance, consider a project that requires sewer development. This is not a HOME-eligible cost. The PJ must determine that the full cost of the sewer development can be carried by another source of funds (such as the private financing) during construction and permanent financing.

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