U.S. Department of Housing and Urban Development Developers and Subrecipients: Differences, Procurement and Other Rules July 24, 2012 2:00 PM EDT Community Planning and Development
Purpose of Webinar To obtain an understanding of the differences between developer and subrecipient roles; Clarify the different rules that apply to developers and subrecipients, including selection process, procurement rules that apply to these entities, compensation; and Clarify some of the other rules related to NSP that apply to subrecipients and/or developers U.S. Department of Housing and Urban Development Community Planning and Development 2
Moderator Moderator and Panel Kent Buhl, KB Consulting Panelists Stan Fitterman, Florida Housing Coalition Hunter Kurtz, Dept. of Housing and Urban Development David Noguera, Dept. of Housing and Urban Development John Laswick, Dept. of Housing and Urban Development U.S. Department of Housing and Urban Development Community Planning and Development 3
Introduction To implement their Neighborhood Stabilization Program (NSP) program, grantees may work with: Developers Subrecipients Contractors Any combination of these entities Different HUD and OMB rules apply to these entities depending on the specific situation. U.S. Department of Housing and Urban Development Community Planning and Development 4
Definition of a Developer Developer: A for-profit or private nonprofit indi dividid ual or entity receiving i NSP assistance for the purpose of: Acquiring homes and residential properties to rehabilitate for use or resale for residential purposes. Constructing new housing in connection o with the redevelopment of demolished or vacant properties. Developers are program beneficiaries and thus distinct from subrecipients, grantee employees, and contractors. U.S. Department of Housing and Urban Development Community Planning and Development 5
What Developers elopers Do Developers are funded to complete a project Developers must have site control Developers must plan, obtain permits, and manage the project from start to finish U.S. Department of Housing and Urban Development Community Planning and Development 6
What Developers elopers Don t Do Developers cannot just serve as contractors Developers are not providing specific goods or services back to the grantee U.S. Department of Housing and Urban Development Community Planning and Development 7
Definition of A Subrecipient Subrecipient: A nonprofit or public agency that assists a grantee or another subrecipient to administer all, or a portion, of the NSP program. The term includes: any nonprofit organization (including a unit of general local government) awarded funds by a state. any land bank receiving NSP funds from a grantee or another subrecipient. U.S. Department of Housing and Urban Development Community Planning and Development 8
Definition of a Subrecipient Cont d 24 CFR 570.202(b)(1) limit its program beneficiaries to private individuals and entities. Therefore public non-profits such as housing authorities must be treated as subrecipients authorities must be treated as subrecipients. U.S. Department of Housing and Urban Development Community Planning and Development 9
More on Subrecipients Private nonprofits that are members of NSP2 consortia may only be designated as subrecipients. NSP2 nonprofit consortium members may designated as developers. U.S. Department of Housing and Urban Development Community Planning and Development 10
What Subrecipients Do In general, subrecipients act as an extension of the grantee and must follow all the same rules as grantees. U.S. Department of Housing and Urban Development Community Planning and Development 11
The Private Nonprofit as Subrecipient A private nonprofit can implement a portion of an NSP program where activities do not meet the definition of a developer. A common example is providing housing counseling. In these cases, the private nonprofit is treated as a subrecipient. If the private nonprofit is also acting as a developer, two separate agreements are required. U.S. Department of Housing and Urban Development Community Planning and Development 12
Who Can be What Entity Can be Developer? Can be Subrecipient? Pi Private For profit Yes No Private Nonprofit Yes Yes Private Nonprofit that is part of a NSP2 Consortium No Yes Public Non Profit (Housing or Redevelopment Authority) No Yes Public Entity (State or local government agency) No Yes U.S. Department of Housing and Urban Development Community Planning and Development 13
Selecting a Developer eloper Developers may be chosen by grantees or subrecipients based on qualifications. A competitive process is not required by the NSP Program. However, state or local laws may require a competitive procurement process to select a developer. If a procurement process is used, it does not turn the developer into a subrecipient. U.S. Department of Housing and Urban Development Community Planning and Development 14
Selecting a Developer eloper Cont d Grantees negotiate both a fee and the process with developers to cover the specified scope of work. Be sure that the scope is clear! Grantees (or subrecipients) must ensure that costs and developer fees are reasonable by underwriting projects. Underwriting includes: An evaluation of costs; An estimate of the project income and expenses; and Weighing the risks and rewards to determine appropriate fees. U.S. Department of Housing and Urban Development Community Planning and Development 15
The Developer e Agreement Once the fee and the process are finalized, the specifics are put into an agreement that is executed by both the developer and the grantee. This developer agreement is the primary legal document that developers and grantees rely upon. Developer agreements often serve as the basis for evaluating program expenditures during monitoring reviews. U.S. Department of Housing and Urban Development Community Planning and Development 16
The Developer Agreement Cont d Must be executed before NSP funds are committed. Examples of terms that have to be covered: Scope of work, period of performance, budget Eligible activities, expenses, target areas, developer fees and terms of NSP buyer financing 100% NSP financing, or leveraged financing? Federal state and local compliance requirements Simplify by reference to a policies/procedures manual. U.S. Department of Housing and Urban Development Community Planning and Development 17
The Developer e Fee Developers are compensated for their work through a developer fee. The developer fee includes a reasonable profit margin. The amount of the fee and when it is paid should be clearly described in the developer agreement. U.S. Department of Housing and Urban Development Community Planning and Development 18
Developers and Program Income Program Income Developers are not required to return excess revenues. However, HUD strongly encourages grantees to implement mechanisms which prevent undue enrichment. For example: providing NSP funds as loans on rental projects. U.S. Department of Housing and Urban Development Community Planning and Development 19
Developers elopers Selecting 3 rd Parties Developers do not need to procure their contractors and do not follow OMB Cost Principles. Grantees must ensure that the developer s costs are reasonable and have records to demonstrate how they made this determination. U.S. Department of Housing and Urban Development Community Planning and Development 20
3 rd Party Cost Reasonableness A grantee or subrecipient can require a developer to receive quotes from third parties to show that costs are reasonable. In lieu of quotes, a grantee or subrecipient can determine cost reasonableness by using published construction cost data specific to their market. The developer does not need to demonstrate that a competitive bid process took place. U.S. Department of Housing and Urban Development Community Planning and Development 21
Selecting a Subrecipient Subrecipients can also be designated by the NSP grantee without a procurement process, unless a procurement process is required by state or local law. A competitive process can be used but is not required (24 CFR 570.501(a)). U.S. Department of Housing and Urban Development Community Planning and Development 22
The Subrecipient Agreement A written agreement between a grantee and a subrecipient is required and at a minimum must contain: Statement of work Records and reports Program income Uniform administrative requirements Other program requirements Suspension and termination Reversion of assets U.S. Department of Housing and Urban Development Community Planning and Development 23
How Subrecipients Cover Costs Grantees and subrecipients may not earn a developer s fee. Grantees and subrecipients are compensated for the actual costs of carrying out eligible activities. Grantees and subrecipients compensation is limited to recovery of activity delivery costs, when applicable, and program administrative costs. U.S. Department of Housing and Urban Development Community Planning and Development 24
Activity it Delivery er Costs Charges for activity delivery are limited to costs incurred in carrying out a specific NSP-funded eligible activity. Examples of activity delivery costs are cited in the CDBG regulations and include engineering and design costs related to a specific activity. Staff and overhead costs directly related to carrying out activities are also eligible activity delivery costs. U.S. Department of Housing and Urban Development Community Planning and Development 25
Program Administrative Costs NSP regulations allow reasonable administrative costs and carrying charges related to the planning and execution of community development activities assisted in whole, or in part, with NSP funds. Program administrative costs incurred by the grantee and its subrecipients shall not exceed 10% of the NSP grant amount plus 10% of program income earned. U.S. Department of Housing and Urban Development Community Planning and Development 26
Administrative Costs Cont d Examples of program administrative costs include: Salaries of executive officers, Office space for program staff employed in carrying out the NSP program, Staff time spent developing policies and procedures for managing NSP activities, and Administrative services performed under third party contracts, such as general legal and audit services. U.S. Department of Housing and Urban Development Community Planning and Development 27
Administrative costs v. Activity it Delivery er Two very helpful charts are included in the policy alert titled, Guidance on NSP Activity Delivery and Administrative Costs May 18, 2012 The charts provide two different approaches to evaluating whether a cost may be considered activity delivery or administrative: by tasks in the development process; by the functional role of the grantee/subrecipient staff person U.S. Department of Housing and Urban Development Community Planning and Development 28
Subrecipients and Program Income Program income is defined as gross revenues received by the grantee or subrecipient directly generated from the use of NSP funds. Subrecipients must either return program income to the grantee, or if the grantee wishes, subrecipients may keep program income to implement NSP-eligible activities. U.S. Department of Housing and Urban Development Community Planning and Development 29
Common Sources of Program Income Payments of principal and interest on loans made with NSP funds; Proceeds from the sale of properties acquired and/or improved with NSP funds; Recapture of NSP subsidies if an assisted home is sold before the end of the affordability period; U.S. Department of Housing and Urban Development Community Planning and Development 30
Sources of Program Income Cont d Interest earned on program income pendi ng its disposition; Gross income from the use or rental of real property constructed or improved with NSP funds, less the costs incidental to the generation of that income (i.e. operating costs). U.S. Department of Housing and Urban Development Community Planning and Development 31
Subrecipients Selecting 3 rd Parties To hire a contractor or to purchase goods and services, subrecipients, in contrast to developers, must follow CDBG procurement rules at 24CFR 570.611(b). 0611(b) Subrecipients must also follow OMB procurement rules: Part 84, A-122 for non-profit subrecipients Part 85, A-87 for public entity subrecipients U.S. Department of Housing and Urban Development Community Planning and Development 32
Summary of Procurement Requirements by Entity Entity May be selected without May select contractors or federal procurement other partners without process? procurement process? For profit Yes Yes Private Non Profit acting as Yes Yes developer Private Non Profit acting as Yes No subrecipient Public Non Profit Yes No (Housing/Redevelopment. Authority) Public Entity (State or local Yes No government agency) U.S. Department of Housing and Urban Development Community Planning and Development 33
Definition of a Contractor Contractor: An entity that supplies goods and services at an agreed-upon rate or price. When a grantee or subrecipient hires a contractor, the contractor must be procured pursuant to Part 85/84. For NSP, commonly a construction contractor Contractors cannot receive activity delivery costs. Contractors may charge actual hard and soft project costs and earn a reasonable overhead profit, as approved by the grantee in its contract. U.S. Department of Housing and Urban Development Community Planning and Development 34
Developer Summary Must be a private for-profit or private nonprofit. A public nonprofit cannot be a developer. A private nonprofit in an NSP2 consortium cannot be a developer. Must have site control, must plan, obtain permits and manage the project from start to finish. Do not have to follow federal procurement rules nor do they have to follow federal cost circulars. Earn a fee for their work. Excess revenue is not program income, but grantees must not allow undue enrichment. U.S. Department of Housing and Urban Development Community Planning and Development 35
Subrecipient Summary Are public nonprofits, no matter what they are doing, or are private nonprofits that are implementing parts of the NSP program. Federal procurement applies, as do cost circulars. Cannot earn developer fees, only activity delivery and program administrative fees. Excess revenue is program income and must be returned to grantee, or, with grantee s approval, kept and used for NSP eligible activities. U.S. Department of Housing and Urban Development Community Planning and Development 36
An Example An NSP grantee awards funds to their local Public Housing Authority (PHA) to acquire and rehab 33 units of rental housing. The PHA will have site control, will obtain permits and will manage the project from start to finish. Even though it is undertaking development, the PHA is a public nonprofit and therefore is a subrecipient. U.S. Department of Housing and Urban Development Community Planning and Development 37
Another Example A private nonprofit is funded to acquire, rehab and resell 35 single family homes. They will have site control, manage the development process, etc. The nonprofit will also provide homebuyer counseling to potential buyers. In this case, the private nonprofit is acting as both a developer and a subrecipient. As a result, two separate agreements are required, a developer agreement and a subrecipient agreement. U.S. Department of Housing and Urban Development Community Planning and Development 38
Yet Another Example A private nonprofit is a member of a NSP 2 consortium. They will be undertaking development, owning the site, managing the process from start to finish, obtaining permits, etc. Since they are part of a NSP 2 Consortium they cannot be a developer, regardless of the activities they are undertaking. U.S. Department of Housing and Urban Development Community Planning and Development 39
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