Understanding the HOME Investment Partnership Program P R O G R A M O P E R AT I O N S A Guide for Nonprofit Housing Developers
Launched in 1982 by Jim and Patty Ro u s e, The Enterprise Foundation is a national, nonprofit housing and community d e ve l o p- ment organization dedicated to bringing lasting i m p rove m e n t s to distressed communities. Copyright 1999, The Enterprise Foundation, Inc. All rights reserved. ISBN: 0-942901-49-5 No content from this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or any information storage and retrieval system, without permission from the Communications department of The Enterprise Foundation. However, you may photocopy any worksheets or sample pages that may be contained in this manual. This publication is designed to provide accurate and authoritative information on the subject covered. It is sold with the understanding that The Enterprise Foundation is not rendering legal, accounting or other project-specific advice. For expert assistance, contact a competent professional. COMMUNITY DEVELOPMENT LIBRARY This book is part of the Enterprise Community Development Library, an i n valuable re f e rence collection for nonprofit organizations dedicated to revitalizing and reconnecting neighborhoods to mainstream America. One of many resources available t h rough Enterprise, it offers industry - p roven information in simple, easy-toread formats. From planning to governance, fund raising to money management, and program operations to communications, the Community De ve l o p m e n t L i b r a ry will help your organization succeed. ADDITIONAL ENTERPRISE RESOURCES The Enterprise Foundation provides nonprofit organizations with expert consultation and training as well as an extensive collection of print and online tools. For more information, please visit our Web site at www.enterprisefoundation.org.
About This Manual What is the HOME Investment Partnership Program? The HOME Investment Partnership Program is a federally funded block grant to cities, counties and states. It is a primary source of funds used by nonprofit and other developers of homes and apartments for low-income households. Understanding the HOME Investment Partnership Program is designed for the staffs and boards of nonprofit organizations; city, county and state agencies; and technical assistants and partners of nonprofit housing organizations. This guide explains the parts of the HOME program most commonly used by nonprofit housing developers. It is not intended to comprehensively cover all aspects of HOME. The information and guidelines in this manual can help you start or improve housing development programs for low-income households. It should be used with the more detailed information and helpful documents available in The Enterprise Foundation s Developer Support System found on the Web at www.enterprisefoundation.org. This manual covers topics such as: Community Housing Development Organizations (CHDOs) Home-ownership assistance Affordability controls HOME rental assistance Using HOME for lease-purchase This manual is part of the Pro g ram Op e ra t i o n sseries within T h e En t e r p r i s e Fo u n d a t i o n s Community De velopment Library. T h e series provides detailed information on the housing-related pro g r a m s used most by nonprofit organizations. Other manuals in the series include information on: Table of Contents Introduction 2 Community Housing Development Organizations (CHDOs) 3 Uses of HOME Funds 5 Home-Ownership Assistance 7 HOME Rental Assistance 9 Single-family acquisition and rehabilitation Single-family subdivision new construction Single-family housing for infill Multifamily new construction Multifamily rental housing through renovation Scattered-site rental housing Home improvement programs Supportive housing 1
Introduction The HOME In vestment Pa rtnership Pro g r a m was created in 1990 as part of the Na t i o n a l A f f o rdable Housing Act. In fiscal year (FY) 1998, $1.5 billion was available nationally, and $1.6 billion was budgeted for FY99. Designed to be a flexible housing block grant to cities, counties and states, HOME has evo l ved into a densely regulated source of funds used by developers of housing for low-income households. HOME is a partnership among the federal government, state and local governments, and nonp rofit housing developers. HOME allow s communities to choose the mix of housing activities among rehabilitation and new cons t ruction for home ownership and rental deve l o p- ment, and tenant rental assistance that best meets local needs. This is a depart u re from past p rograms. HOME is not a categorical pro g r a m that gives federal grants for one specific type of a c t i v i t y. Instead, state and local governments are re q u i red to pre p a re a consolidated plan that assesses local housing needs and outlines the j u r i s d i c t i o n s plans to use HOME for the housing activities that best meet those needs. HOME funds cannot be used for activities that are not a priority according to the consolidated plan. Nonprofit organizations can access HOME funds in three ways: As developers, for the development of rental, special needs and home-ownership housing As subrecipients, for operating HOME-funded housing rehabilitation, down-payment assistance or other housing programs As nonprofit housing organizations, for organizational operating assistance HOME funds are distributed by cities, counties and states. Nonprofits and other developers apply to their jurisdictions for funds. Jurisdictions follow HOME regulations (explained further in this manual) and local policies and procedures in making awards. Sixty percent of HOME funds are allocated to cities and 40 percent to states. The formula used to distribute the money is based on each j u r i s d i c t i o n s need for affordable housing for l ow-income families. The factors used in making these calculations include the local pove rt y rate, the cost of producing housing, the inadequacy of the housing supply, the amount of s u b s t a n d a rd housing and the number of low - income families living in housing likely to be in need of re h a b i l i t a t i o n. HOME funds require a local match of 25 percent from the participating jurisdiction (PJ) unless the PJ has severe fiscal distress. HOME match funds can be: Cash, but not from federal sources (including Low-Income Housing Tax Credit proceeds) The difference between market-rate loans and non-home below-market-rate loans to HOME projects Waived or deferred taxes or other charges, but not delinquent taxes or fees Waived or reduced fees and charges normally associated with real estate transactions or development The net value of donated assets, such as construction materials or real estate Used for infrastructure not funded with federal funds, which directly benefits HOMEfunded housing HOME funds used for predevelopment loans for CHDO projects, when the loan repayment is waived, are not required to be matched. HOME re q u i res all funds be committed to specific projects within 24 months of when the PJ signed a contract with the De p a rtment of Housing and Urban De velopment (HUD), and expended within 36 months after the funds are committed. 2
Community Housing Development Organizations (CHDOs) WHAT DOES HOME DO FOR CHDOS? The HOME program recognizes the importance of nonprofit organizations in developing housing for low-income people. Over the past decade, much of the low-income housing production in the United States has been done by nonprofit housing organizations. Nonprofit developers have expanded significantly both in production capacity and in sophistication. Nonprofit housing organizations can now be found in all 50 states, in urban and rural areas from Portland, Maine, to Portland, Ore. Although there is no precise count, it is estimated that there are 3,000 to 5,000 community-based nonprofits working to improve lowincome housing. Collectively, community-based nonprofits have built or renovated hundreds of thousands of homes and apartments for lowincome Americans. Community-based nonprofits are sensitive to the unique needs of their neighborhoods, and their sustained commitment to the community makes them especially suited to undertake community development activities. In general, nonprofits work in areas largely neglected or abandoned by the for-profit sector for various reasons, including the small scale of the housing development or declining real estate values. Nonprofits have a different set of incentives and can do the work few others are willing to do. For these reasons, the HOME program gives specific benefits to qualifying nonprofits. At least 15 percent of the PJ s HOME funds a re set aside for CHDO projects. Any of the 15 p e rcent set-aside funds not used for CHDO housing is re c a p t u red by HUD and used to fund CHDO housing in other jurisdictions. The set-aside re q u i rement in the law has been e xceeded in practice, with over 20 percent of HOME funds re s e rved to build afford a b l e housing developments by nonpro f i t s. Other HOME funds, including any portion of the remaining 85 percent that is not specifically allocated to CHDOs, can be available for CHDO projects, at the discretion of the PJ. CHDO set-aside funds must go into projects that are owned, developed or sponsore d by CHDOs. These will include jointly developed projects in which CHDOs have effective management control as general or co-general partner in partnerships or joint ventures. CHDO set-asides are not eligible for projects in which the CHDO acts as a subrecipient or contractor. Up to 10 percent of CHDO funds, or 1.5 percent of the total HOME funds available to a PJ, are available for loans for predevelopment costs, including project-specific site control and other pre-construction activities, or project-specific technical assistance. Technical assistance funded by HOME is ava i l- able to CHDOs through nonprofit intermediaries such as The Enterprise Foundation and other organizations and as pro j e c t - s p e c i f i c assistance funded by the local jurisdiction. Operating support for CHDOs, funded by HOME, can come in three different ways. PJs can provide up to 5 percentof their total HOME allocation for operating support for CHDOs. These funds are in additionto the 15 percent set-aside for CHDO projects. PJs can provide up to 20 percent for their CHDO set-aside, or 3 percent of their total allocation, but not more than $150,000 over 24 months, for CHDO capacity building, including operating support. This can be done only within 24 months of the PJ s first participation in the HOME program. Technical assistance intermediaries can grant HOME funds to CHDOs for operating expenses. All HOME-funded operating support can be no morethan 50 percent of a CHDO s operating budget or $50,000, whichever is greater. 3
QUALIFYING AS A CHDO Organizations must meet all of the following criteria to have a CHDO designation: Organizations must have a nonprofit status such as 501(c)(3) or 501(c)(4). Organizations must have a demonstrated capacity for carrying out activities assisted with HOME funds. This demonstration of capacity can be satisfied by the experience of staff or consultants, as well as the experience of the organization as a whole. Organizations must have a one-year history of serving the community, though not necessarily with housing. This requirement can be satisfied with sponsorship by another organization. The purpose of the organization includes the provision of affordable, decent housing. The organization cannot be a religious organization. However, religious organizations may establish secular entities that would be eligible for HOME funds. The organization must comply with the other federal requirements for nonprofits that receive federal funds. These requirements include maintaining a drug-free workplace and having an accounting system that can report accurately on how federal funds were spent. The organization must maintain accountability to low-income community residents through board composition. It also must have a formal process for inviting participation by potential low-income program beneficiaries in design, site selection, development and management decisions affecting the CHDO s HOME-funded housing development through a project advisory committee or publicly announced forums. One-third of the board must be either residents of a low-income neighborhood (but not necessarily low-income persons themselves), low-income people who live within the CHDO s geographic boundaries or elected representatives of nonprofit organizations that represent low-income people. No more than one-third of the board can be public officials, appointed by government or appointed by a for-profit entity. 4
Uses of HOME Funds The HOME In vestment Pa rtnership Pro g r a m g i ves cities and states the ability to addre s s their unique needs for affordable housing. Each jurisdiction defines its own HOME program by taking advantage of local re s o u rc e s and conditions to develop affordable housing that meets local needs. Eligible uses of HOME funds are to finance those activities typically needed in developing affordable housing. These activities include: Acquisition, construction, site improvements and demolition. Relocation expenses, largely to comply with the Uniform Relocation Act. Reasonable administrative and planning costs of the PJ or subrecipients for no more than 10 percent of total HOME funds. PJs can charge many project-related costs to either administrative or project line items. Impact fees, levied on all projects by local or state jurisdictions. Project-related soft costs including financing costs, developer fees and developer overhead costs. An initial operating deficit reserve for newly constructed or substantially rehabilitated housing that can be used to pay project operating expenses, replacement reserves and debtservice shortfalls during the first 18 months of operations. Loan guarantees to leverage additional private funds to finance HOME-eligible projects. Refinancing of existing single-family owneroccupied housing debt when HOME funds are used in rehab and total housing payments are reduced. Housing counseling, but only the direct costs of counseling individuals who become owners or tenants of HOME-assisted housing. Activities specifically ineligible for HOME funds are listed below. HOME funds cannot be used as project reserve accounts, except for an initial reserve mentioned earlier. HOME funds cannot be used to modernize public housing units. HOME funds cannot be used to assist previously HOME-assisted units except: Within one year after project completion For tenant-based rental assistance To assist a first-time home buyer to acquire housing previously assisted with HOME funds HOME funds cannot be used as the nonfederal match for other federal programs. 5
OTHER HOME RULES Eligible forms of HOME subsidy include: equity, loans, grants, interest subsidies, tenantbased rental assistance and loan guarantees of no greater than 20 percent of the total outstanding principal amount guaranteed. The Davis-Bacon Act is triggered by 12 or more HOME-assisted units. Once triggered, Davis-Bacon applies to the entire project, not just HOME-assisted units. If HOME and CDBG are within the same p roject, the threshold for Da v i s - Bacon is eight units. Units rehabbed or purchased with HOME funds are required to comply with HUD Minimum Property Standards (MPS), one of three model codes, or a local code that ensures that HOME-assisted housing is decent, safe and sanitary. Assessment and possible abatement of leadbased paint will be required for all federally assisted units. A HUD environment review will be performed by HUD or the PJ. The maximum subsidy per unit from HOME is capped for each jurisdiction at 100 percent of the FHA 221(d)(3) limits. HUD has defined higher maximums for high cost are a s, which include almost all medium and large cities. The minimum HOME investment is $1,000 per unit. 6
Home-Ownership Assistance HOME funds can also be used to assist home b u yers with incomes below 80 percent of the are a s median income. Types of low-income home-buyer assistance include: Grant or deferred second mortgage loan for all or a portion of the down payment Grant to pay a portion of closing costs Subsidizing purchase prices with grants or deferred loans Interest subsidies to reduce carrying costs The following conditions apply: The housing must be single-family housing, defined as 1-4 family residence, condominium unit, cooperative unit, combination m a n u f a c t u red home and lot or manufacture d home lot. The housing must be the owner s principal residence. The purchase price of the property after rehabilitation must not exceed 95 percent of the median sales price for a home in that area. Affordability controls are required, which take the form of resale or recapture provisions. Affordability controls must be in place for the following time periods: Amount of HOME investment $15,000 per unit or less 5 years Required affordability term OPTIONS FOR AFFORDABILITY CONTROLS Option 1: Resale Resale of a HOME-assisted unit must be to a low-income household, enforced by deed restrictions, covenant or the PJ s right of first refusal, while providing the original HOME-assisted owner a fair return on investment. Enforcement mechanisms for resale restrictions are not required if the jurisdiction documents, through a market analysis, that a reasonable range of lowincome families will continue to qualify for mortgage financing to purchase the house. Option 2: Recapture The PJ can recapture the full HOME investment (direct assistance to a home buyer, but not including any development subsidy) from the net proceeds of sale, if available after the first mortgage and closing costs are paid from the proceeds of sale. These funds must then be used for any eligible HOME use. Within this option the PJ can choose to re d u c e the re c a p t u red amount based on the pro r a t e d time the home owner has owned and occupied the unit, measured against the re q u i red affordability period defined in the chart at left. If the net proceeds of sale do not permit full recapture of HOME funds and enable the home owner to recover the down payment and any capital improvements, the PJ may share the net proceeds with the home owner, or allow the home owner to recover down-payment and capital-improvement costs before recapturing HOME funds. $15,000-$40,000 per unit 10 years Greater than $40,000 per unit 15 years 7
LEASE-PURCHASE USING HOME FUNDS HOME funds may be used to acquire, construct or rehab a property to be leased to a potential home buyer under a lease-purchase program. Rules for using HOME funds within a leasepurchase program are: The potential home buyer (the lease-purc h a s e tenant) must have an income below 80 perc e n t of the locality s median, adjusted for family size. The lease period can be no longer than 36 months. A subsequent lease-purchase arrangement for the property after the expiration of the initial lease-term will not be permitted. Lease-purchase tenants cannot be evicted at the end of the 36-month lease period and replaced by a new lease-purchase tenant. After the expiration of the lease-purchase period, the property may be sold to another HOME-eligible home buyer. If no eligible home buyer is found, the property must be made available for rent in accordance with HOME rental requirements, including rental income targeting. HOME funds can be used to refinance secure d, existing debt on single-family ow n e r - o c c u p i e d s t ru c t u res when HOME funds are loaned for rehabilitation, but only when the re f i n a n c i n g l owers the ow n e r s overall housing costs. Resale restrictions are not re q u i red. Unless othe rwise restricted by the PJ, home owners re c e i v- ing HOME-funded re n ovation assistance are permitted to sell their homes as they wish. SINGLE-FAMILY REHABILITATION ASSISTANCE FOR OWNER-OCCUPANTS Many jurisdictions offer grant or re d u c e d - c o s t loan programs for low-income home owners to re n ovate their housing. The 15 percent CHDO set-aside cannot be used for these pro g r a m s. HOME rules for these programs are : Assistance is limited to low-income ow n e r - occupied pro p e rties used as principal re s i d e n c e s. The after-rehabilitation value of the house cannot exceed 95 percent of the median purchase price for a similar unit within the jurisdiction, as determined by HUD. 8
HOME Rental Assistance HOME is targeted to low-income individuals and families. State and local governments have actually exceeded the income targeting requirements, serving more people with very low incomes than the federal law requires. Almost one-half of the occupied rental units built with HOME serve families with incomes below 30 percent of the median income. HOME rental assistance may fund the development of apartment units affordable to very low-income households, or tenant-based assistance that keeps rents affordable for eligible families wherever they rent. Three percent of HOME funds nationwide have been used for tenant-based rental assistance. However, when HOME funds are combined with federal or state project-based assistance, the rents may be set at the maximum rent allowable under the federal or state program as long as the tenant portion of the rents does not exceed HOME requirements. PROGRAM AND PROJECT TARGETING While HOME was created to provide affordable housing for low-income households, there are no requirements that households renting in HOME-assisted projects pay less than 30 percent of their income for rent. HOME income targeting requirements are: Ninety percent of HOME-funded rental units in any jurisdiction must assist families with incomes below 60 percent of the local median. The remaining 10 percent of HOME-funded rental units must assist families with incomes at or below 80 percent of the median. At least 20 percent of the units in each housing p roject containing five or more units must be occupied by and affordable to households with incomes at or below 50 percent of the local median. These levels are the l ow HOME re n t s. The remaining rents (including utility allowance) in the project cannot exceed the lesser of HUD-defined Fair Market Rents (FMR), or 30 percent of 65 percent of median income, with adjustments for the number of bedrooms in the unit. These levels are the high HOME rents. 9
RENTAL PROGRAM REQUIREMENTS Other rules for HOME-funded rental projects are : The owner must re-examine the income of each tenant household annually during the period of affordability. The maximum monthly rent, including the monthly utility allowances, must be recalculated by the owner annually and reviewed and approved by the participating jurisdiction. If family income increases above 80 percent of median, rents must increase to 30 percent of adjusted monthly income or the fair-market rent whichever is less unless Low- Income Housing Tax Credits are allocated to that unit. The local jurisdiction must conduct on-site reviews once within a three-year period for projects containing one to four units, once within a two-year period for projects containing five to 25 units, and annually for projects with more than 25 units. A rental project can be sponsored by a CHDO and receive set-aside funds if it is owned by the CHDO and sold during or after development to another nonprofit organization. Projects that receive HOME funds will be eligible for the 9 percent credit only if 40 percent (25 percent in New York City) or more of the residential units are occupied by individuals with incomes of 50 percent of the area median or less, and if HOME funds are provided as a loan, whether amortizing or non-amortizing. When tax credit and HOME funds are used in the same project, the rents for tenants recertified as being over income may remain controlled, rather than increase to the lesser of 30 percent of income or market rent as required in projects without tax credits. Low-Income Housing Tax Credits rules on affordability apply. If the proposed project is located in a census tract eligible for tax credits equal to 130 percent of basis, HOME funds must be provided as an amortizing or non-amortizing loan at an interest rate equal to or greater than the Applicable Federal Rate. COMBINING HOME AND LOW-INCOME HOUSING TAX CREDITS (LIHTC) Combining different sources of subsidy can be n e c e s s a ry in making rental units affordable to l ow- and ve ry low-income households. HOME and Low - Income Housing Ta x Credits are often used together. The re q u i rements for joint use of these two programs are : A subsidy-layering review is required when HOME funds are combined with tax credits or other federal subsidies in a project. This review establishes that no more federal assistance is used than is minimally required to make a proposed project feasible. The Internal Revenue Service treats HOME money as federal funds, and therefore recognizes only a 4 percent credit if HOME funds are included in the tax credit basis. 1 0
AFFORDABLE USE RESTRICTIONS As with using HOME funds for home ow n e r s h i p, t h e re are time periods during which HOMEfunded rental projects must remain afford a b l e : If the activity and per unit HOME investment is rehabilitation or acquisition of existing housing using less than $15,000 of HOME funds using $15,000 to $40,000 of HOME funds using more than $40,000 of HOME funds new construction or acquisition of newly constructed housing then the minimum period of affordability is 5 years 10 years 15 years 20 years LEASING AND TENANT SELECTION In all HOME-funded rental projects, the property owner must follow these rules on leasing units to tenants: Adopt written tenant-selection policies that give reasonable consideration of federal preferences for households involuntarily displaced, living in substandard housing or paying more than 50 percent of their income for rent. Select tenants based on written chronological waiting lists. Provide lease terms of not less than one year. 1 1
TENANT-BASED RENTAL ASSISTANCE To be eligible for HOME funding, tenant-based rental assistance must be an essential element of a j u r i s d i c t i o n s consolidated plan and based on market conditions that establish its need and feasibility. The following conditions apply when using HOME funds for tenant-based rent assistance: Tenant-based assistance can be administered by the PJ, local public housing authority or other entity, which can make payments either to tenants or directly to landlords. PJs must include their costs to administer tenant-based assistance as eligible costs with the 10 percent allowed for administration. The PJ may establish a preference for individuals with special needs, including specific categories of disabilities such as persons with HIV/AIDS or chronic mental illness. At least 50 percent of tenants assisted must qualify for one of the federal preferences for households involuntarily displaced, living in substandard housing or paying more than 50 percent of their income for rent. Assistance is p o rtable by the tenant (usable in various rental situations), but the PJ can choose whether to restrict it within its boundaries or a l l ow tenants to go outside its jurisdiction. Recipients must be selected based upon written tenant-selection policies that establish that at least 50 percent of those assisted will qualify for federal preferences as involuntary displaced, living in substandard or overcrowded housing, or paying more than 50 percent of income for rent. Existing tenants in units designated for HOME-funded acquisition and/or rehabilitation may receive tenant-based assistance without requiring that the families meet the written tenant-selection policies and criteria. The term of the rental assistance contract may not exceed 24 months, but may be renewed. At least 90 percent of the families assisted must have incomes below 60 percent of the median income. As with other HOMEfunded rental programs, the remaining 10 percent of families must be at or below 80 percent of the median income. 1 2
THE ENTERPRISE FOUNDATION The Foundation s mission is to see that all lowincome people in the United States have access to fit and affordable housing and an opport u n i t y to move out of poverty and into the mainstream of American life. To achieve that mission, we strive to: Build a national community revitalization movement. Demonstrate what is possible in low-income communities. Communicate and advocate what works in community development. As the nation s leader in community d e ve l o p m e n t, Enterprise cultivates, collects and disseminates expertise and re s o u rces to help communities a c ross America successfully improve the quality of life for low-income people. A C K N O W L E D G M E N T S Author: Bill Batko, The Enterprise Foundation Contributors: Carter Cosgrove + Company, Ben Hecht, Catherine Hyde, MaryAnn Laing, Jay Marcus, Jane Usero SPECIAL THANKS Research and development of this manual was made possible by the National Community Development Initiative, which is a consortium of 15 major national corporations and foundations and the U.S. De p a rtment of Housing and Urban De velopment, and score s of public and private organizations. NCDI was created to support and sustain the efforts of community development organizations. FOR MORE INFORMATION The Enterprise Foundation 10227 Wincopin Circle, Suite 500 Columbia, Maryland 21044-3400 tel: 410.964.1230 fax: 410.964.1918 email: mail@enterprisefoundation.org For more information about The Enterprise Foundation or the Community Development Library, visit us at www.enterprisefoundation.org. To review our online community magazine, check out www.horizonmag.com.