Attachment 2-3: How to Determine the Home Cost Allocation
The approach to determining the cost allocation depends on whether or not the units in the project are comparable units, meaning similar in size, quality, and amenities. For example, if the HOME-assisted two bedroom units have the same square footage, features (e.g., refrigerators), and finishes (e.g., carpet) as the non-HOME-assisted two bedroom units, then these units are comparable. If the HOME-assisted units are smaller or have a lower quality of features or finishes than the non-HOME units, then the units are not comparable.
When the units that are HOME-assisted are not comparable to the non-HOME-assisted units, the PJ must determine cost allocation based on actual unit costs plus a fair share of common costs.
When the units are comparable, a pro-rata method of cost allocation can be used, or the actual cost method can be used.
- Pro-Rata Method of Cost Allocation. If all the units in a multi-unit project are comparable, the PJ may determine its “fair share” of costs based on the portion of units that are to be HOME-assisted. The percentage of the total HOME-eligible costs that may be paid by HOME is equal to the percentage of units that are HOME-assisted. In general, the cost allocation equation may be described as:
HOME UNITS = TOTAL UNITS
HOME INVESTMENT TOTAL ELIGIBLE DEVELOPMENT COSTS
It is important to note that this equation is based on total HOME-eligible costs, not all costs. If the project’s development budget includes ineligible items under HOME, such as swimming pools or luxury amenities, these costs must be subtracted before the percentage can be applied.
- Actual Cost Method of Cost Allocation. If all the units in a rental project are not comparable, or if the developer/PJ chooses to use this method, then the cost allocation is determined by assessing actual unit construction costs. In other words, the PJ or the architect/engineer must determine the specific and actual costs for the HOME units. This can be determined based upon the work write-up for these units. Once these unit costs are known, HOME can then pay for its “fair share” of the common costs such as the acquisition, eligible soft costs, or common areas such as lobbies, elevators, or roof.
The PJ must always ensure that the HOME investment does not exceed the 221(d)(3) limit. (In rental housing, units that are not comparable must always be fixed rather than floating units.)
In general, the cost allocation equation for units that are not comparable may be described as:
Total Eligible Costs + HOME UNIT SQUARE FOOT X Eligible Common Costs
for HOME Units TOTAL UNIT SQUARE FOOT
Note, for both methods of cost allocation, the total amount of eligible costs directly relates to the number of HOME-assisted units in the project. If the financing gap in a project is greater than the amount of funds that can be allocated to the project, the PJ can increase the number of HOME- assisted units in order to increase the total amount of HOME funds that can be invested. PJs should be aware that adding additional HOME units may affect (lower) the property’s rental income. This, in turn, could reduce the amount of first mortgage debt and increase the size of the funding gap.
If the PJ knows the total amount of investment it wants/needs to make in a project, Exhibit 2-17 illustrates the corollary principle of how to determine the minimum number of units that must be designated HOME-assisted.
Exhibit 2-17: Illustrations of Cost Allocation
For more information on cost allocation, see Allocating Costs and Identifying HOME-Assisted Units in Multifamily Projects , HUD Notice CPD-98-02, issued March 18, 1998. This Notice is available on the HOME Program website at https://www.hud.gov/program_offices/comm_planning/affordablehousing/programs/home/.
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