CDBG_-_Policies_-_Subsidy_Layering_Guidelines.pdf

CDBG/HOME/ADDI PROGRAM

POLICIES AND PROCEDURES MANUAL

SUBJECT: HOME SUBSIDY LAYERING GUIDELINES - RENTAL HOUSING

BACKGROUND

Subpart F of the HOME Investments Partnerships Program (24 CFR Part 92) states that, “Before committing funds to a project, the participating jurisdiction must evaluate the project in accordance with guidelines it has adopted for this purpose and will not invest any more HOME funds, in combination with other governmental assistance, than is necessary to provide affordable housing.” 24 CFR 92.250 b.

HUD Notice CPD 98-1 provides guidance to participating jurisdictions (PJs) in their development of those local guidelines.

DEFINITIONS

Governmental Assistance – Governmental assistance includes any loan, grant, (including Community Development Block Grant), guarantee, insurance, payment, rebate, subsidy, credit, tax benefit, or any other form of direct or indirect assistance from the Federal, State, or local government for use in, or in connection with, a specific housing project.

Maximum Per Unit Subsidy Limits – The amount of HOME funds that a PJ may invest on a per-unit basis in affordable housing may not exceed the per unit dollar limits established under section 221 (d) (3) of the National Housing Act for elevator type projects, involving nonprofit mortgagors that apply to the area in which the housing is located.

USE OF OTHER GUIDELINES

Dane County will rely upon the guidelines developed and evaluation conducted by other agencies when the following governmental assistance is being used: Low-Income Housing Tax Credits (LIHTC) and other projects funded by HUD’s Office of Housing.

DOCUMENTATION

All applicants will be required to submit:

1. Sources and Uses of Funds Statement

2. Development Budget

3. Certification of Federal Assistance

4. Proforma (project income and expense statement)

These are described further in the Project Evaluation section.

PROJECT EVALUATION

Before Dane County invests HOME funds in a project, it will assess if other governmental assistance has been, or is likely to be, made available to the project. In performing this evaluation, the County will consider the aggregate amount of assistance from HUD and other sources that is necessary to determine the project’s feasibility. These may include, but are not limited to, past rates of returns (in that area for that type of project) to owners, sponsors, investors; the long-term needs of the project and its tenants; and the usual and customary fees in the development of the project. The County will also take into consideration the income level of the population to be served, the level of rent restriction to be recorded against the property, and the time of duration of such restrictions.

Sources and Uses of Funds Statement

All applicants are required to submit a Sources and Uses of Funds Statement for the project.

This statement should be consistent with the project development budget and must list:

1. all proposed sources (both private and public) of funds and the dollar amount(s) for each respective source; and

2. all uses of funds (including acquisition costs, rehabilitation and/or construction costs, financing costs, and professional fees) associated with the project.

These may be submitted as part of Appendix B – Capital Budget in the Application for Funds.*

Sources of Funds Documentation

The County will identify the types of documentation necessary to verify the sources and uses of funds indicated in the statement. The listing of the documentation will be provided to the applicant so that the documentation may be submitted along with the Sources and Uses of Funds statement in the application for HOME funds.

Sources of funds documentation that may be requested include, but are not limited to: (1) commitment letters with all terms and conditions for all mortgages, grants, subordination agreements, bridge loans, investment tax credits (historical, low-income, if applicable) and (2) if the applicant is a partnership, a copy of the partnership agreement, which will indicate the cash contributions by the general partner(s) and/or limited partner(s).

Uses of Funds Documentation

Uses of funds documentation that may be requested include, but are not limited to:

1. Earnest money agreement, option or closing statement for land and/or building(s);

2. Construction cost estimate;

3. Construction contract or preliminary bid (s);

4. Agreements covering the various reserves which are capitalized at closing (to verify that the reserves cannot be withdrawn later as fees or distributions);

5. Appraisal (to substantiate the value of the land and the value of the property after rehabilitation or the structure being built);

6. If low-income housing tax credits are being utilized, documentation on the syndication costs (legal, accounting, tax opinion, etc.) for the organization/individual who will syndicate and sell the offering to ensure that the project can support the fees necessary to syndicate/fund the project. All assumptions in the offering should be verified in the supporting documentation.

7. Other documentation as needed to support all other costs specified in the Sources and Uses of Funds statement.

If the documentation is not adequate or does not support the costs as stated, the County may request additional documentation, a second opinion and/or reference from the appropriate source (i.e., another construction cost estimator, another architect or attorney), or may deny the project

HOME funding. It should be noted that for projects with property tax credits to be sold, the proceeds from the sale of these credits must be identified as a source of funding.

Certification of Federal Assistance

The County will obtain a formal certification from the applicant(s) concerning the governmental assistance provided or to be provided to a project. If no such governmental assistance is to be provided at the time of application or in the future, the applicant should certify to that fact. The applicant is to also certify that should other governmental assistance be sought in the future, the County will be notified promptly.

Review of Development Budget

The County will review the budget to ensure that the costs being funded by the HOME Program are eligible and the HOME funds per unit do not exceed the maximum per-unit subsidy limits.

In its review of the budget, the County will focus on the quality of the end project, construction costs, architectural and engineering fees, and consulting fees. The County will determine what costs are customary and necessary depending on the type of development activity. For example it will consider the demands of new construction as opposed to rehabilitation and senior housing as opposed to housing for large families. It will also determine if these costs are reasonable. The County’s determination of reasonableness will be based on all of the following factors:

1. Costs of comparable projects in Dane County;

2. The qualifications of the cost estimators for the various budget line items; and

3. Comparable costs published by recognized industry cost index services.

Proforma

Each applicant is required to submit a proforma (project income and expense statement) that includes achievable rent levels, market vacancies, and operating expenses. It must also specify the consequences of tax benefits, if any, and any other assumptions used in calculating the project cash flow to determine the reasonableness of the rate of return on the equity investment.

The proforma must represent the term of the HOME affordability requirements or the term of other affordability requirements as mandated by other funding sources if longer. The proforma should not exceed the anticipated useful life of the facility.

Rate of Return on Equity Investment

The County will examine the proforma to insure that case flow projections are reasonable in light of the present economic conditions, and are neither unduly conservative nor overly optimistic.

The County will examine the proforma to determine that the projected rates of return are reasonable and that the applicant(s) will not receive excessive profit or windfalls from the project, in part due to the financing (low-income housing tax credits, low interest loans, grants, tax abatements, etc.). The County will establish specific standards for reasonable rates of return on the invested equity based on the project.

In applying these concepts, there are two questions that the County must consider: 1) is the rental project owner-occupied and 2) is the owner-occupied unit being rehabilitated with Federal funds. If the answer to both questions is YES, the rental income for the owner’s unit (had the project not been owner-occupied) must be excluded from the income analysis of the proforma.

For example, in a four unit owner-occupied project, only the expected income of the three rental units are included in the income analysis. Similarly, expenses associated with the rehabilitated owner’s unit must also be excluded from the proforma. The exclusion of the income and expenses of the owner’s unit not only affects the net operating income and the cash on case analyses, but also influences the results of the proforma.

DETERMINATION

If the County determines that the total amount of HOME assistance and other governmental assistance exceeds the amount that the County determines is necessary to make the project feasible due to the unreasonableness of the costs and/or the projected rate of return, the County will consider several options:

1. Reduce the amount of HOME assistance through reducing the development budget accordingly or increasing the non-public funding of the project;

2. Make other adjustments to the project, such as lower the rents to be charged, reduce the term of the loan in order to lower the rate of return; or

3. Deny HOME assistance if the applicant refuses to make reasonable adjustments or to limit its return/costs.

APPLICABILITY

The concepts contained in all the above sections pertain to single-family rental housing of 1 to 4 units, as well as, multi-family rental housing.

/cdbg – policies – subsidy layering guidelines.doc Adopted by the CDBG Commission on 6.25.2009

APPENDIX B: CAPITAL BUDGET

Include the amount and source of all project funding.

TOTAL Amount Source/Terms** Amount Source/Terms** Amount Source/Terms**

ACQUISITION COSTS:

Acquisition Title Insurance/ Recording

Appraisal *Predevelopment/ feasibility// market study

Survey *Marketing Relocation Other:

CONSTRUCTION:

Construction Soils/Site Preparation Construction Manag, Landscaping, signage Construction Interest Permits; print plans Other:

FEES:

Architect Engineering *Accounting *Legal *Development Fee *Leasing Fee Other:

PROJECT CONTINGENCY

OTHER (specify)

TOTAL COSTS

If CDBG funds are used for items with an asterisk (*), the total cost of these items may not exceed 10% of the CDBG amount.

Each funding source and amount must be listed separately, i.e., Acquisition: $30,000 CDBG, $100,000 First Bank. Under source/terms, identify if this is a loan or grant and the terms.