Multifamily rental HOUSING

Creating Eligible Rental Projects

Tool #2

Description: This resource is intended for Community Development Block Grant Disaster Recovery (CDBG-DR) grantees developing, rehabilitating or relocating multifamily rental projects in response to a disaster. It contains a general discussion on determining the eligibility of rental projects with references to relevant rules and regulations, definitions, and more. Topic areas include property size, location, and elevation; relocation; low- and moderate-income benefit; leveraging; affordability and long-term viability; affordability periods; eligible uses for mixed-income projects; and funding types.

How to Adapt this Document: This guidance is not represented to be a complete resource, and CDBG-DR grantees must consider each project’s characteristics, reference any grantee-specific or project-specific requirements and adapt the guidance to their particular disaster recovery program.

Source of Document: This document was shaped from various CDBG-DR guidance documents and technical assistance tools used in the field by Training and Development Associates. It is not an official HUD document and has not been reviewed by HUD counsel. It is provided for informational purposes only.

U.S. Department of Housing and Urban Development

Community Planning and Development, Disaster Recovery and Special Issues Division

Eligible Rental Projects 1

Creating Eligible Rental Projects

In General

The Housing and Community Development Act of 1974, and the CDBG regulations, as modified by the Federal Register Notice(s) (FRN) applicable to the disaster, establish activities eligible for CDBG-DR funding. In regard to multifamily rental housing, the rehabilitation of damaged units, mitigation of units damaged and determined to be in environmentally sensitive areas (for example: 100 year flood plain), reconstruction of units, resiliency measures for damaged units, new construction of units and the relocation of units out of an environmentally sensitive area are generally eligible activities. All multifamily units must have actual damage or be a demonstrable response to an impact of the disaster.

The Modified Program Rule

The CDBG program rule requires 70 percent of CDBG grant funds to be expended in support of beneficiaries who have incomes at or below 80 percent of Area Median Income (“AMI”). A FRN applicable to the grantee’s disaster may reduce this requirement. Typically, a FRN will reduce the program rule so that 50 percent of the grant award must benefit persons with incomes at or below 80 percent of AMI[1].

The wide varieties of eligible rental housing activities coupled with the modified Program Rule provide the grantee with flexibility in design and implementation of multifamily disaster recovery programs.

Eligible Project Types

The range of eligible rental housing projects that can be completed under CDBG-DR is significant.

Table 1 provides a summary of the most common with the applicable rules:

Type / National Objective Applies / Environmental Review Applies / Compliance Period Applies[2] / Documented Damage/Impact Attributable to Event / Duplication of Benefits Applies
Repair of Damaged Units / √ / √ / √ / √ / √
Rehabilitation of Damaged Units / √ / √ / √ / √ / √
Demolition and Relocation of Units / √ / √ / √ / √ / √
New Construction of Units / √ / √ / √ / √ / √

Eligibility Requirements

As noted in Table 1, the eligibility requirements for multifamily property include:

National Objective

Each CDBG-DR assisted project must meet a national objective. Most often, a multifamily rental project will meet the low- and moderate-income (LMI) national objective. For a structure with two dwelling units, the LMI national objective requires at least one unit to be occupied (upon completion) by a LMI household (i.e., at or below 80% AMI). If the structure contains more than two dwelling units, at least 51% of the units must be occupied by a LMI household. Grantees may fund “mixed income” projects, but only to the extent of the owner’s willingness to apply national objective rules to all units assisted.

Environmental Review

All applicable Environmental Review Requirements must be met. These include State and or local environmental requirements. The most stringent environmental rule applies, whether Federal, State or Local.

Compliance Period

CDBG-DR grantees are highly encouraged to ensure CDBG-DR assisted multifamily rental properties have units that remain affordable over a period of time. Oftentimes, grantees will place a lien on the property for a period equal to other equivalent debt. For example, a multifamily property with a 15-year public lender lien might also have a 15-year CDBG-DR lien. However, the grantee has wide discretion as long as policies are documented, meet Office of Management and Budget (OMB) cost reasonableness requirements, and are consistently applied. HUD has consistently encouraged grantees to utilize loans and liens in providing CDBG-DR funds to multifamily owners and developers to both support local affordability and to ensure the owner or developer does not receive an “inordinate profit”. (See Terms & Conditions)

Documented Damage/Impact Attributable to the Disaster

CDBG-DR appropriation laws require a direct relationship between the disaster and the multifamily project to be undertaken. In cases of damage, photographs, work write-ups and supporting documentation is acceptable. However, an impact attributable to the disaster can take on a number of forms. The most common form is an increased occupancy rate in multifamily housing, and/or a shortage of housing, caused by displaced homeowners entering the rental market at the same time that a portion of the multifamily market has been severely damaged or destroyed. The result is often a lack of suitable housing, accompanied by an increase in rents at all levels of the housing market. As rents rise, LMI households become increasingly rent burdened or priced out of the market. These impacts are directly attributable to the disaster and will be documented and described as an unmet need in the Action Plan.

Duplication of Benefits

A duplication of benefits analysis must be conducted for each project to ensure CDBG-DR funds do not duplicate funds provided from another source. The applicant and the grantee must document all sources of funds provided for the project—including (but not limited to):

1.  FEMA payments;

2.  Private Insurance Payments;

3.  Grants; and/or

4.  Any other source of funds dedicated to the multifamily housing project.

Preparedness and Mitigation

All CDBG-DR activities must respond to the impacts of the declared disaster. HUD strongly encourages grantees to incorporate preparedness and mitigation measures into all rebuilding activities, which helps to ensure that communities recover to be safer, stronger, and more resilient. For example, grantees are strongly encouraged to elevate properties located within a floodplain (even if not required by law or a FRN)[3]. Mitigation measures that are not incorporated into rebuilding activities may be more difficult to fund with CDBG-DR. However, FEMA offers five programs targeted at mitigation, known collectively as Hazard Mitigation Assistance. CDBG-DR can be utilized to leverage FEMA provided funds to the extent permitted by both programs[4]. Grantees should either encourage or require potential multifamily owners who sustained damage to property to register with FEMA during the applicable FEMA assessment period.

Eligible Entities

Rental housing properties may be owned or developed by the Grantee, individuals, non-profit organizations, for-profit organizations and Public Housing Authorities.

Eligible Properties

Eligible properties range from single structures to large complexes, including properties held by state housing authorities or public housing authorities.

Property Size

Rental strategies may be targeted at small rental properties (1-4 units) or large rental properties (5 or more units), or a combination of both.

Funding Considerations

CDBG-DR funds are limited and may not cover the entire cost of the damages caused to all multifamily housing affected by the disaster. The grantee will need to establish evaluative and underwriting criteria for rental housing applicants. The following are criteria that the grantee should include in funding considerations:

Affordability

Affordability is determined by each grantee, and may vary depending on the types of projects. The grantee may establish broad and flexible affordability requirements or tight and specific affordability requirements. Typically, the grantee’s Action Plan will include affordability requirements depending on a project’s size (i.e., the number of units). The grantee must determine the length of the compliance period, how compliance with affordability restrictions will be enforced, and how the developer or owner will be monitored during the compliance period.

Feasibility

The feasibility of any given multifamily project should be a primary consideration for the grantee. Feasibility is affected by a number of factors including damage, local codes, the property’s location, mitigation, and the financial viability of the property during the compliance period. For multifamily projects where mitigation is required, the costs of mitigation may significantly affect the overall cost of rehabilitation. In these instances, the grantee may determine the more cost effective approach is to build new units in area where mitigation will not be required rather than rehabilitate the existing units. Grantees should evaluate feasibility early in the assessment process in order to better assess effective options.

Leverage

HUD strongly encourages its grantees to leverage CDBG-DR funds to the greatest extent practical. For example, multifamily projects typically involve numerous revenue streams, and a grantee could require leveraging through its eligibility criteria. Other forms of assistance include housing bonds, FEMA funds, other State and local sources, and/or Low Income Housing Tax Credits. While leveraging can also be critical to the underwriting process (and the viability of a large project), HUD recognizes that it may not be feasible, or desirable, in all cases.

Timeliness

CDBG-DR funds may require expenditure within a certain amount of time[5]. Regardless, multifamily housing often requires a significant lead time for feasibility, environmental requirements, architectural and engineering designs, and securing the financing. Thus, the development cycle for new construction averages two years. In cases where elevation is chosen, or where Public Housing projects must go through a disposition process, the redevelopment cycle can extend an additional year. For these reasons grantees should pay special attention to project scale, readiness to proceed, and developer/owner capacity. Where HUD does not require expenditure within a certain timeframe, the grantee should implement its own schedule.

Underwriting

The grantee will be required to underwrite each project to ensure the OMB standard of cost reasonableness is met. Underwriting should be based on fixed criteria with variations for special circumstances or conditions. The threshold requirements include all of the base eligibility requirements outlined above[6], all Federal cross cutting requirements, owner/developer capacity, plus financial feasibility and long term viability. Prior disaster recovery efforts suggest a grantee is successful utilizing a single “universal application” to establish threshold requirements. Once the threshold is met, a set of attachments can allow the grantee underwrite the specific project type.

Forms of Assistance

CDBG-DR permits all of the forms of assistance available in CDBG, including the use of grants, loans, loan guarantees, and interest rate subsidies. Grantees should be flexible in structuring CDBG-DR to meet the local conditions and need. For example, a twenty-unit project might have difficulty adding to an existing first mortgage at an 8 percent interest rate. To alleviate the situation, the grantee could act as first mortgage lender at a 4 percent rate, thereby increasing the borrower’s ability to repay. If additional funds are needed, the grantee could also offer a second mortgage of CDBG-DR funds as a cash flow loan, soft loan or grant. The grantee benefits by maintaining as much programmatic flexibility as possible.

Grants:

In CDBG-DR, grants are typically utilized in situations where:

·  There is little or no likelihood of repayment;

·  The rental housing cannot support any further debt and refinance is not an option; and

·  The subsidy amount is small.

The rehabilitation of small or large rental housing projects which cannot support further debt may require the grantee to provide all or a portion of the CDBG-DR assistance as a grant. For example, many small rental housing projects cannot support further debt. In other cases, minor costs of repair or rehabilitation (e.g., under $10,000) may create more of a cost-burden to the grantee if the assistance is structured as a loan. Before providing CDBG-DR funds in the form of a grant, a grantee should underwrite the project and utilize a forgiveness provision coupled with a balance due on sale clause during the compliance period (if any) to ensure the property is not “flipped” by the owner for a quick profit.

Loans: Soft Loan

Most grantees will provide CDBG-DR funds to a rental housing project in the form of a subordinated soft loan. Soft loans come in many different forms including:

·  Loans with no interest rate, interest payment or principal payment, where the principal is forgiven over time, also known as forgivable loans;

·  Loans with a principal payment only;

·  Loans with an interest payment only, with principal forgiven over a compliance period;

·  Loans with a due on sale clause, where repayment only occurs if the property is sold; and

·  Loans with an interest rate; accrued interest, and a due on sale clause.

The variations are endless. Soft loans may be tailored to a specific project or established through a basic set of criteria. The grantee should underwrite the project, consider local financial conditions (availability of funds), and the overall financial environment in designing project specific soft loans.

Loans: Amortized

The grantee can provide an amortized loan (either a first mortgage or subordinated mortgage) with a fixed interest rate and term with monthly payments. Amortized loans are often offered in situations where the current first mortgage debt is a small percentage of the net operating income, or there is no first mortgage debt. Alternatively, subordinated amortized mortgages are offered when the project will support debt in excess of the first mortgage. The grantee has discretion over the interest rate/term, and may tailor the loans to the rental housing project.

Loans: Cash Flow

In some cases, a project’s long term financial viability is dependent on low cash flow for an initial period, followed by a gradual increase in cash flow over time. These projects benefit from a cash flow loan. In a cash flow loan the owner/developer pays a portion of the residual cash flow (Income less expenses and debt = cash flow) to the grantee on an annual basis provided certain criteria are met. Cash flow loans are also utilized when the level of cash flow is uncertain and the rental housing project has rents targeting households at or below 50% of AMI.