May 12th, 2014 Dear Network Members & Allies, Our members have reported a number of emerging issues with the new HOME rules, so the Network hired legal consultants at Reno & Cavanaugh, PLLC to help provide clarifications on how the new rules affect community land trusts. With respect to one particular issue, the permissibility for CLTs to charge monthly ground lease payments on HOME-funded projects, the Network has already submitted a letter to HUD’s Office of Community Planning & Development (CPD) to seek clarification. We are awaiting their response and will share it with members as soon as we receive a response. You can also view related resources pertaining to the HOME program. Due to the urgency of HOME-related issues reported by our members, we have decided to immediately release drafted guidance prepared by Reno & Cavanaugh, which addresses eligible costs under the HOME program and potential work-around solutions for CLTs to cover their costs of stewardship. This document is a work-in-progress. Depending upon the outcomes of our communications with CPD, this guidance is likely to change in the future. Lastly, it is critical to acknowledge that interpretations of HOME rules may vary by legal counsel, administrators and practitioners. The Network’s sole intention with this drafted guidance is to provide the analytical interpretation of one law firm, Reno & Cavanaugh, PLLC, which has expertise in federally-funded affordable housing programs. The Network advises our members to seek additional guidance and interpretation specific to the challenges that your organization is facing with the HOME program. Sincerely,

Melora Hiller Executive Director View Related Resources http://cltnetwork.org/topics/federal-support-home-cdbg-fhlb-ahp-lihtc/

National Community Land Trust Network

PO Box 42255

Portland, Oregon 97242

503.493.1000 (p)

503.493.1004 (f)

www.cltnetwork.org

info@cltnetwork.org

{D0381157.DOC / 4 TN742-100} prepared by Reno & Cavanaugh, PLLC Page 1

SHORT ANSWER 1

QUESTION 1

LONG ANSWER 1

Member Guidance:

Stewardship Costs in HOME Program1 Draft Issued May 12, 2014

When my Community Land Trust (CLT) participates in the HOME Investment

Partnerships Program (HOME), can we charge developer fees, repair/reserve fees, or

“transaction fees” to our homebuyers?

Under the revised HOME regulations, CLTs serving as developers may charge a developer fee to

the HOME program. It’s less clear that CLTs or other participants may charge repair or reserve

fees to homeowners for deposit into an account controlled by the CLT. It appears that CLTs may

not charge transaction fees under the revised HOME regulations.

A. Developer fees: The revised HOME rule at 24 CFR 92.206(d)(2) confirms that the owner or

participating jurisdiction may charge developer fees. The “participating jurisdiction” is

generally the entity that receives the HOME funds from the U.S. Department of Housing and

Urban Development (HUD”), and is usually the state or a local government.2 HUD’s

comments to the final rule published in July 2013 likewise confirm that developer fees are

permissible under the HOME program.3 As with any cost under the HOME program, the

fees must meet all other applicable requirements such as cost reasonableness.

B. Repair/reserve fees. In the rental context, the revised HOME rule permits charges to a

replacement reserve for rental projects, and also allows HOME funds to be used to fund an

initial operating deficit reserve, which may include funds for scheduled payments to a

replacement reserve.4 The HOME regulations are silent as to whether such costs are

permissible in the homeownership context. However, other sections of the HOME

1 Please note that this memo is intended as a general summary of issues that may be of interest to community land

trusts. It is not a comprehensive description of all applicable HOME requirements. Readers should consult the

HOME statute, regulations and guidance and their own counsel as necessary to answer issue- or transaction-specific

questions. 2 24 CFR 92.2, “Participating Jurisdiction”.

3 78 Federal Register 44628 at 44642 (July 24, 2013), HOME Investment Partnerships Program: Improving

Performance and Accountability; Updating Property Standards. See 24 CFR 92.250(b) for one limit on developer

fees (ie, the profit must be “reasonable”). While HUD did not include developers in this list of entities that could not

charge such fees, HUD’s commentary suggests that this exclusion was an oversight and was not deliberate. 4 24 CFR 92.206(d)(5).

{D0381157.DOC / 4 TN742-100} prepared by Reno & Cavanaugh, PLLC Page 2

regulations suggest that such fees are not permissible. For example, the revised HOME rule

prohibits participating jurisdictions, recipients, subrecipients and community housing

development organizations from charging servicing, origination “or other fees” for the

purpose of covering costs of administering the HOME program.5 HUD may conclude that a

repair or replacement reserve fee falls into this category of prohibited fees.6

It’s also worth noting that while HUD might be willing to consider the use of non-HOME

funds to be used to establish a replacement reserve in CLT projects, further review would be

required to determine whether HUD could allow HUD funds to be used for such purpose.

First, as explained above, such reserve costs could not be charged to the homeowner.

Additionally, as a general rule, all HUD funds must be expended within three days of being

drawn, and this rule is often viewed as prohibiting the use of HUD funds for funding reserves

unless specific statutory authority authorizes such reserve funding.

C. Transaction fees. As discussed in the context of repair or reserve fees, the HOME regulation

does not directly address these kinds of fees, and so the question is whether HUD would

characterize these fees as impermissible costs charged to individuals in violation of the

requirements of 24 CFR 92.214(b)(1), 24 CFR 92.504(c)(1)(xiii), 24 CFR 92.504(c)(2)(xi)

and 24 CFR 92.504(c)(3)(xi). While the answer is likely to vary depending on the project and

the reason for charging a transaction fee, as a general matter, it may be difficult to convince

HUD that these fees are permissible. For example, as discussed above, the revised HOME

rule prohibits participating jurisdictions, recipients, subrecipients, community housing

development organizations and developers from charging servicing, origination “or other

fees” for the purpose of covering costs of administering the HOME program.7 It is likely that

HUD would conclude that transaction fees would fall into this category of prohibited fees.

To the extent that these are third-party fees charged to the homeowner such as title costs,

recording fees, origination fees charged by other lenders, or attorney fees, however, the

HOME rule does permit payment of standard closing costs.8

It is also worth noting that the HOME program permits the participating jurisdiction to use

up to ten percent of its HOME funds to cover its administrative costs, and the participating

jurisdiction may authorize its subrecipients to expend a portion of these funds as well.9

Eligible administrative expenses include costs for overall program management,

coordination, monitoring and evaluation. In some situations, these costs may also be charged

as “direct” project costs rather than as administrative costs, in which case they would not be

5 24 CFR 92.214(b)(1).

6 In its comments to the revised HOME regulations, HUD noted that it did not agree that “it is appropriate to permit

ongoing monitoring fees to be charged to low-income homebuyers and homeowners” (78 Federal Register 44628 at

44642 (July 24, 2013), HOME Investment Partnerships Program: Improving Performance and Accountability;

Updating Property Standards. 7 24 CFR 92.214(b)(1). See 24 CFR 92.504(c)(3)(xi) for the requirement that developers not charge such fees.

8 24 CFR 92.206(d)(2).

9 24 CFR 92.207, first sentence.

{D0381157.DOC / 4 TN742-100} prepared by Reno & Cavanaugh, PLLC Page 3

SHORT ANSWER 2

LONG ANSWER 2

QUESTION 2

subject to the ten percent limit described above.10

However, as explained above, these costs

cannot be charged to or paid by the low-income households purchasing the housing. As a

result, CLTs serving as subrecipients may also want to negotiate the use of HOME funds to

directly cover some of their own stewardship costs when those costs are HOME-eligible

administrative costs under 24 CFR 92.207 or are otherwise eligible program costs.

If we conclude that we shouldn’t charge repair/reserve fees or transaction fees, what kind

of work-around solutions can you suggest to help our CLT recover some of its stewardship

costs?

The National Community Land Trust Network (NCLTN) is negotiating with HUD to confirm

that CLTs may charge ground lease fees, which may represent the best option for CLTs to

recover a portion of their stewardship costs. In the meantime, if the project’s financing can

support it, an additional mortgage in favor of the CLT may also provide an additional source of

financing. CLTs may also want to consider negotiating with their participating jurisdictions to

include favorable resale/recapture provisions and agreements about program income.

A. Ground lease fees. In the long-term, the most efficient way to recover transaction costs may

be to charge an increased ground lease fee. The NCLTN continues to work with HUD to

confirm the acceptability of this approach.

B. Additional mortgage. If the project’s financing can support the additional debt, then a soft

mortgage or deed of trust may help your CLT recover some of its costs when the project is

transferred. Unlike many of the other fees described above, the HOME regulations describe

mortgages as a permissible encumbrance on the project. For example, to qualify as

“homeownership” housing, the ownership interest may be subject only to resale restrictions,

mortgages, deeds of trust or other liens or instruments securing debt on the property, or other

encumbrances that do not impair the “good and marketable nature of title” to the property.11

Because mortgages and deeds of trust are included within this list of permitted

encumbrances, a note and deed of trust or mortgage might be helpful here since HUD would

not have to approve an exception to the existing regulations. However, CLTs will need to

think through a number of issues before adopting this strategy, particularly with respect to

how the payment is capitalized and repaid over time. For example, the promissory note

10

24 CFR 92.207(b). 11

24 CFR 92.2.

{D0381157.DOC / 4 TN742-100} prepared by Reno & Cavanaugh, PLLC Page 4

might be due when the owner moved to a new home, or it could be forgiven under certain

circumstances defined by the CLT. Similarly, the CLT would need to determine the term

and amount of the promissory note given that the term of the homeowner’s tenure is

unknown. Furthermore, like all costs under the HOME program, the CLT would need to

show that the amounts included in the CLT’s mortgage were reasonable, actual project costs

that would otherwise be eligible in the HOME program.12

Third-party lenders may also

require the CLT to justify this mortgage amount as well.

C. Resale/recapture provisions.

1. Summary of how resale works. Under the terms of the HOME program, homeownership

units subject to “resale” requirements must be the homebuyer’s principal residence for

the entire affordability period, or must be sold to another income-eligible purchaser.13

Furthermore, the resale price must provide the original homebuyer with a “fair return” on

the original homebuyer’s investment, which includes both the homeowner’s initial

investment and any capital improvements.14

The resale requirements must also ensure

that the housing will remain affordable to a reasonable range of income-eligible

purchasers. The new HOME regulations require the participating jurisdiction to further

define “fair return on investment” and “affordability to a reasonable range of low-income

homebuyers” within the parameters described above, and to include these definitions in

their Consolidated Plans that are submitted to HUD. The participating jurisdiction must

also explain how it will make the housing affordable to a low-income homebuyer if the

resale price necessary to provide a fair return to the seller will not be affordable to the

subsequent low-income buyer.

Resale requirements may be imposed by deed restrictions, restrictive covenants or other

mechanisms.15

Likewise, the participating jurisdiction may use purchase options, rights

12

For example, the HOME regulations at 24 CFR 92.206(d) provides examples of eligible “reasonable and

necessary” soft costs that are incurred by the owner or participating jurisdiction. These costs must be associated

with the financing or development of the housing, and include things such as architectural, engineering, or related

fees, private lender fees, credit reports, title fees, building permits, attorney fees, and builder or developer fees.

Similarly, permissible hard costs are described at 24 CFR 92.206(a). While the HOME regulations do not directly

address the types of fees that may be included in CLT mortgages, it is probably reasonable to assume that fees that

could not be independently charged to homebuyers under the HOME program (transaction fees that cover on-going

project monitoring, fees to cover the CLT’s on-going administrative costs, etc.) are also ineligible for inclusion in

CLT mortgages. This conclusion is also suggested by 24 CFR 92.214(a)(9), which prohibits payment for any cost

not eligible under sections 24 CFR 92.206 through 24 CFR 92.209. 13

24 CFR 92.254(a)(5)(i). 14

The HOME regulations do not further explain how the “homeowner’s investment and any capital improvement”

must be valued, and HUD explicitly declined to do so in the changes to the HOME regulations (78 Federal Register

44628 at 44655 (July 24, 2013), HOME Investment Partnerships Program: Improving Performance and

Accountability; Updating Property Standards.). 15

24 CFR 92.254(a)(5)(i)(A).

{D0381157.DOC / 4 TN742-100} prepared by Reno & Cavanaugh, PLLC Page 5

of first refusal or other preemptive rights to purchase the housing before foreclosure to

preserve affordability.16

These requirements endure until the end of the affordability period, the duration of which

is based on the total amount of program funds invested in the housing. For example,

HUD has provided an example where a HOME loan of $15,000 was made to a

homebuyer, $5,000 in HOME downpayment assistance was provided to the homebuyer,

and $50,000 in HOME development assistance was provided to the developer.17

In

addition, the homebuyer purchased the unit for $155,000 but the home had a fair market

value of $160,000. In this instance, the HOME subsidy was deemed to be $70,000,

which included the $15,000 loan, the $5,000 downpayment assistance, and the $50,000

provided to the developer. This amount did not include the $5,000 attributable to the

excess of the fair market value over the purchase price (ie, $160,000-$155,000= $5,000).

As a result, the affordability period under HOME) is calculated only on the $70,000 of

HOME funds provided to the project. Based on the chart below, this project would

require an affordability period of 15 years, although a CLT could still separately impose

longer or additional restrictions as approved by the participating jurisdiction.

The HOME program’s minimum affordability requirements are as follows:18

Homeownership assistance

HOME amount per-unit

Minimum period of

affordability in years

Under $15,000 5

$15,000 to $40,000 10

Over $40,000 15

Strategy for use of resale provisions for CLTs. As explained above, the new HOME

regulations require the participating jurisdiction to define “fair return on investment” and

“affordability to a reasonable range of low-income homebuyers”, which offer CLTs an

opportunity to suggest their own definitions to the participating jurisdiction.

For example, if CLTs anticipate using resale restrictions, they may want to encourage the

participating jurisdiction to adopt a definition of “fair return on investment” that

acknowledges the ground lease structure adopted by the CLT, and that provides for

16

The HOME regulations only discuss the participating jurisdiction’s right to use these mechanisms to purchase the

housing before foreclosure. However, the regulations do not prohibit other parties such as developers or

subrecipients from also using such mechanisms to preserve affordability. 17

HUD, CPD, HOME and NSP: Creating Affordable Housing, Revitalizing Neighborhoods (undated) at page 32. 18

24 CFR 92.254(a)(4).

{D0381157.DOC / 4 TN742-100} prepared by Reno & Cavanaugh, PLLC Page 6

payment of a final ground lease fee or other fee if permitted by the participating

jurisdiction or HUD. Likewise, if CLTs want a “fair return” to be based on the

depreciated value of any improvements, they should work with the participating

jurisdiction to include this as well. Furthermore, while arguably already permitted under

the terms of the HOME program, CLTs may also want to encourage an explicit

recognition that any deeds of trust or mortgages held by the CLT must be repaid from the

sale proceeds before the homebuyer is entitled to any return on their investment. Finally,

in their written agreements, CLTs may also wish to request explicit acknowledgement

from their participating jurisdictions that the CLTs may increase the sales price of the

property between transactions as long as the new price continues to meet the HOME

program’s definition of affordability.19

It is important to note, however, that because the definitions of “fair return on

investment” and “affordability to a reasonable range of low-income homebuyers” must

be included in the participating jurisdiction’s Consolidated Plan,20

CLTs will want to

make sure that their proposed definitions are provided to the participating jurisdiction in a

timely fashion, and they will want to pursue the necessary advocacy and education to

ensure that these definitions are adopted. If CLTs are serving as subrecipients rather than

as developers, they may also want to ask that the written agreement between the CLT and

the participating jurisdiction allow the CLT to retain any program income generated by

this resale transaction, with the acknowledgement that such program income must be

used for HOME-eligible purposes.21

2. Summary of how recapture works. “Recapture” provisions ensure that the participating

jurisdiction recovers all or a portion of the funding assistance if the homebuyer sells the

home at any point during the affordability period.22

Unlike resale requirements, recapture

provisions allow the original homebuyer to sell the home to any willing and able buyer

during the affordability period, but the participating jurisdiction must recapture all or a

portion of the HOME funds subject to recapture at the point of sale.23

As discussed in

greater detail below, the subrecipient may also recapture these funds if permitted in the

written agreement between the participating jurisdiction and the subrecipient. 24

Additionally, however, under the new HOME rule, the participating jurisdiction also has

the discretion to allow a subsequent homebuyer to purchase the dwelling subject to the

HOME affordability restrictions for the remainder of the affordability period if that

subsequent purchaser is low-income and no further HOME assistance is provided. If the

19

For affordability requirements, see, 24 CFR 92.254(a). While arguably already permissible under the HOME

regulations, formal acknowledgement of this right may help CLTs avoid disputes with the participating jurisdiction

or HUD in the future. 20

24 CFR 92.254(a)(5). 21

See discussion of program income below. 22

24 CFR 92.254(a)(5)(ii). 23

24 CFR 92.254(a)(5)(ii). 24

24 CFR 92.504(c)(2)(ii).

{D0381157.DOC / 4 TN742-100} prepared by Reno & Cavanaugh, PLLC Page 7

participating jurisdiction does not permit such modifications to its recapture provisions,

however, then “resale” restrictions may be the more viable option for many CLTs that

wish to participate in the HOME program.25

HUD provides a number of different options for structuring the recapture provisions, and

allows the participating jurisdiction to modify these recapture provisions based on market

conditions and program design, subject to HUD approval. For example, the participating

jurisdiction may (a) recapture the entire amount of the HOME investment from the

homeowner, (b) reduce the amount subject to recapture on a pro rata basis to account for

the time the homeowner has occupied the housing, (c) share the net proceeds with the

homeowner, or (d) allow the homeowner to fully recover the owner’s investment in the

home before the participating jurisdiction recaptures any of the funds.26

However, the

amount recaptured may not exceed the “net proceeds” of the sale, where net proceeds are

defined as the sales price minus the repayment of any superior, non-HOME loans.27

Under the HOME program’s recapture requirements, the period of affordability is based

on the amount of HOME assistance that enabled the homebuyer to purchase the unit.

This amount includes any HOME assistance that reduced the purchase price from fair

market value to an affordable price, but excludes the development subsidy paid to the

developer.28

In the example provided above, the total amount subject to recapture would

be $25,000, which includes the $15,000 loan to the homebuyer, the $5,000 in

downpayment assistance to the homebuyer, and the $5,000 attributable to the excess of

the fair market value over the purchase price (ie, $160,000-$155,000= $5,000).29

However, this amount would not include the $50,000 in development assistance provided

to the developer. Under the recapture requirements, this $25,000 amount would also be

the basis for determining the affordability period as well. The $25,000 would not be

deemed program income (discussed in greater detail below), but still must be expended

on future HOME projects.30

As discussed in the “resale” section of this memo, the HOME program’s minimum

affordability requirements are as follows:31

25

The HOME regulations discuss purchase options and rights of first refusal in the resale context, but are silent

about these instruments in the recapture context. As a result, it is not clear whether CLTs could require the

homeowners to sell the property back to the CLT at a restricted price under the recapture approach. 26

24 CFR 92.254(a)(5)(ii)(A)(1)-(4). 27

24 CFR 92.254(a)(5)(ii)(A). 28

24 CFR 92.254(a)(5)(ii)(A)(5). 29

HUD, CPD, HOME and NSP: Creating Affordable Housing, Revitalizing Neighborhoods (undated) at page 30. 30

24 CFR 92.503(c). 31

24 CFR 92.254(a)(4).

{D0381157.DOC / 4 TN742-100} prepared by Reno & Cavanaugh, PLLC Page 8

Homeownership assistance

HOME amount per-unit

Minimum period of

affordability in years

Under $15,000 5

$15,000 to $40,000 10

Over $40,000 15

In the example provided above, the affordability period for this recapture project would

be 10 years, rather than the 15 years under resale restrictions described in the prior

section.

Strategy for use of recapture provisions for CLTs. Many CLTs have found that they

cannot use recapture provisions and still maintain the long-term affordability of their

projects, since it is not clear that the HOME program permits resale limitations under the

recapture requirements. However, CLTs may wish to ask their participating jurisdictions

to approve alternative recapture approaches favored by the CLT. For example, some

CLTs may wish to propose a hybrid model under which resale restrictions continue to

apply to the housing, but upon the sale of the dwelling to another low-income purchaser,

the homeowner shares any appreciation or depreciation in the property with the CLT, as

the subrecipient. This approach combines elements of both resale and recapture

requirements, and as with all resale or recapture provisions, would require the

participating jurisdiction to include these provisions within its Consolidated Plan and to

request HUD approval of the proposal. Absent such approval, it may be difficult for

many CLTs to combine their existing resale restrictions with the HOME program’s

recapture requirements given the lack of limitation on resale price. For those CLTs that

do use recapture provisions, those CLTs serving as subrecipients will probably want their

written agreements with the participating jurisdiction to include a provision allowing the

CLT to retain any program income and recaptured funds received by the CLT for use for

future HOME-eligible purposes.

D. Program income. Under the HOME program, “program income” means all gross income

received by the participating jurisdiction or a subrecipient, and which is directly generated

from the use of HOME funds. 32

When program income is generated by housing that is only

partially assisted with HOME funds, the funds defined as program income are prorated to

reflect the percentage of HOME funds used in the transaction. On the other hand, “program

income” does not include gross income from the use, rental or sale of real property received

32

24 CFR 92.2, “Program income”.

{D0381157.DOC / 4 TN742-100} prepared by Reno & Cavanaugh, PLLC Page 9

by the project owner, developer, or sponsor, unless the funds are paid by the project owner,

developer, or sponsor to the participating jurisdiction or subrecipient. 33

The recaptured funds

described above are also not included in the definition of program income, but still must be

spent for future HOME projects.34

Similarly, proceeds received by community housing

development organizations are also not included in the definition of program income.35

Unless otherwise specified in the written agreement between the participating jurisdiction

and the subrecipient, all program income must be returned to the participating jurisdiction to

be used for HOME-eligible purposes.36

This means that if a CLT is participating as a

subrecipient, any ground lease payments and homeowner mortgage payments to the CLT

must be treated as program income and returned to the participating jurisdiction.37

Likewise,

HOME funds paid to CLTs as part of the resale or recapture provisions described above must

also be returned to the participating jurisdiction unless otherwise provided in the written

agreement.38

Strategies for use of program income. As explained above, when CLTs participate in

HOME transactions as subrecipients, they must return any program income that they earn to

the participating jurisdiction. However, the HOME program allows the written agreement

between the participating jurisdiction and the subrecipient to provide that the subrecipient

may retain all program income to be used for additional HOME-eligible activities.39

As a

result, CLTs serving as subrecipients will want to carefully negotiate their written

agreements to ensure that they may retain all program income and recaptured funds for future

HOME-eligible activities. This negotiation should also explicitly provide that CLTs may use

up to ten percent of their program income to cover their administrative costs. As part of the

right to retain these funds, however, CLTs will also want to make sure that they have

accounting procedures in place to properly track the eligible expenditure of these funds.

As discussed in the other sections of this memo, the ability of CLTs to charge transaction

fees and other stewardship costs directly to homeowners may be limited in the HOME

program. However, as discussed in an earlier part of this memo, the HOME program also

permits the use of up to ten percent of a participating jurisdiction’s HOME funds to cover

administrative costs, and up to ten percent of program income may be used to cover these

33

24 CFR 92.2, “Program income”. 34

24 CFR 92.503(c). 35

For example, the definition of “Program income” at 24 CFR 92.2 provides that it is gross income received by a

participating jurisdiction or subrecipient, but no mention is made of funds received by a CHDO. Further discussion

can be found at HUD, CPD Notice 97-11, Guidance on Community Housing Development Organizations (CHDOs)

under the HOME Program. Please note, however, that this guidance was released long before HUD revised the

HOME rule and associated requirements for community housing development organizations in 2013. As a result,

this guidance should be used with caution. 36

24 CFR 92.503(a). 37

24 CFR 92.2, “program income”, subsection 2. 38

24 CFR 92.503(a). 39

24 CFR 92.504(c)(2)(ii).

{D0381157.DOC / 4 TN742-100} prepared by Reno & Cavanaugh, PLLC Page 10

ANSWER 3

QUESTION 3

expenses as well.40

This use of HOME funds to directly cover some administrative costs

may offer further incentives to CLTs to negotiate the right to use program income to cover

such costs.41

In addition, program income may also be used to directly subsidize future

HOME-eligible activities such as acquisition, rehabilitation and new construction as long as

those costs are not charged to the homeowner. Because program income can also be used for

the creation of new affordable housing, this may also represent a way for CLTs to secure

financing for their other projects, thus releasing some existing CLT resources to cover

internal costs.

Finally, these program income requirements do not typically apply to CLTs serving as

community development housing organizations or developers, and so CLTs may also wish to

explore whether they should participate in the HOME program as developers rather than as

subrecipients.

Could you explain the difference between a developer, subrecipient and community

housing development organization (CHDO) under the HOME program? And what’s the

significance of these differences for a CLT?

A. Developer.

1. Definition: While the HOME regulations do not define a “developer”, HUD has

explained in other guidance that individuals, for-profit entities and nonprofits can

participate in the HOME program as owners, developers or sponsors of housing.42

As a

result, developers are often interpreted as for-profit or non-profit entities that participate

in the rehabilitation or construction of affordable housing within the HOME program.

2. Key considerations for CLTs: Developers are not subject to the program income

requirements described above.43

As a result, ground lease payments, mortgages and other

HOME-generated funds would not be deemed program income, and so are not subject to

further HOME requirements. However, because funds generated from resale or recapture

cannot be returned to a developer and must be returned to the participating jurisdiction or

40

24 CFR 92.207, first paragraph. 41

Participating jurisdictions are often reluctant to allow their subrecipients the right to cover their administrative

costs out of the ten percent of HOME funds available for such purposes since the participating jurisdiction often

believes that such funds are necessary to cover the participating jurisdiction’s own costs. Participating jurisdictions

are more likely to approve the use of program income for the subrecipient’s use when the participating jurisdiction

has already agreed to allow all program income to remain with the subrecipient. 42

See, e.g., HUD, Building HOME: A HOME Program Primer at page 1-5 (2008). Note that this guidance was

published before HUD revised the HOME rule in 2013, and so should be used with caution. 43

24 CFR 92.2, “Program Income”.

{D0381157.DOC / 4 TN742-100} prepared by Reno & Cavanaugh, PLLC Page 11

a subrecipient, CLTs serving as developers may lose access to that source of financing.44

While not specific to CLTs, it is also worth noting that developers may charge reasonable

developer fees, which may be another source of funds that CLTs can use to cover their

stewardship costs.

B. Subrecipient.

1. Definition. The HOME program defines a “subrecipient” as a public agency or nonprofit

organization selected by the participating jurisdiction to administer all or some of the

participating jurisdiction's HOME programs to produce affordable housing, provide

downpayment assistance, or provide tenant-based rental assistance. 45

A public agency or

nonprofit organization that receives HOME funds solely as a developer or owner of a

housing project is not a subrecipient.

2. Key considerations for CLTs. In addition to the administrative responsibilities

associated with serving as a subrecipient, CLTs in this role are required to return their

program income and recaptured funds to the participating jurisdiction unless they

negotiate a different outcome in their written agreements with the participating

jurisdiction. However, participating jurisdictions may allow subrecipients to retain

program income and resale or recapture proceeds (if provided in the written agreement),

which may offer some CLTs an incentive to serve as subrecipients. Finally, while not

specific to CLTs, it is also worth noting that subrecipients may recover some

administrative costs as permitted by the participating jurisdiction, but are not allowed to

charge developer fees.

C. Community housing development organization.

1. Definition. The HOME program’s requirements for entities that wish to qualify as

community housing development organizations are very involved, and are beyond the

scope of this memo. As a general matter, however, a CHDO must have 501(c)(3) status,

and its stated organizational purpose must include providing “decent, affordable housing

to low-income households.”46

A CHDO must serve a specific geographic area such as a

neighborhood, several neighborhoods or the entire community. Furthermore, the

44

Participating jurisdictions generally cannot agree to re-allocate program income to developers on a prospective

basis, and typically require developers to first submit competitive proposals for use of such funds. Before

committing HOME funds to a project, a participating jurisdictions must evaluate the project in accordance with the

participating jurisdiction’s guidelines for determining a reasonable level of return on the owner’s or developer’s

investment in a project. 24 CFR 92.250. The participating jurisdiction also may not invest more HOME funds than

are necessary to provide quality affordable housing that is financially viable for a reasonable period. HUD requires

the participating jurisdiction to examine the project’s sources, uses and other information as part of this evaluation,

and a prospective commitment of program income to a developer typically will not allow the participating

jurisdiction to document that it has complied with this requirement. 45

24 CFR 92.2, “Subrecipient”. 46

24 CFR 92.2, “Community Housing Development Organization.”

{D0381157.DOC / 4 TN742-100} prepared by Reno & Cavanaugh, PLLC Page 12

organization must reserve at least one-third of its governing board's membership for

residents of low-income neighborhoods, other low-income community residents, or

elected representatives of low-income neighborhood organizations. The organization

must also have demonstrated capacity for carrying out housing projects assisted with

HOME funds, including having paid employees with housing development experience.

An organization that will own housing must also demonstrate capacity to act as owner of

a project. In addition, the organization must qualify as a CHDO on a project-by-project

basis.47

In addition to this definition, the HOME statute includes a second definition that may be

helpful to CLTs as well. While HUD has deleted all references to this provision from the

HOME regulations,48

the HOME statute provides that a CLT is a CHDO that meets

various requirements to qualify as a CHDO and that acquires parcels of land, held in

perpetuity, primarily for conveyance under long-term ground leases; transfers ownership

of any structural improvements located on such leased parcels to the lessees; and retains a

preemptive option to purchase any such structural improvement at a price determined by

formula that is designed to ensure that the improvement remains affordable to low- and

moderate-income families in perpetuity.49

The statute explicitly provides that CLTs are

not required to meet the requirements for CHDOs relating to demonstrated capacity or

history of serving the local community.

2. Key considerations for CLTs. First, all CLTs and other organizations must qualify as

CHDO for each transaction in which they wish to serve as a CHDO. This means that

CLTs should make sure that they have confirmed their participation as a CHDO in each

transaction that they wish to claim CHDO status. If not serving as a CHDO in a

particular project, a CLT can still serve as a subrecipient or developer as negotiated in

their written agreement with the participating jurisdiction.

Additionally, as noted above, proceeds received by CHDOs are not included within the

definition of “program income”, and so are not subject to the HOME program’s

restrictions on the use of program income.50

However, the participating jurisdiction still

must specify whether the CHDO must return the proceeds to the participating

47

24 CFR 92.300. 48

At the time, HUD noted that such removal was simply to avoid duplication in the regulations since this

requirement was already clearly described in the statute. 61 Federal Register 9036 (March 6, 1996), Office of the

Secretary; HOME Investment Partnerships Program: Streamlining Interim Rule. 49

42 USC 12773(f). 50

24 CFR 92.300(a)(6)(ii). See also, HUD, CPD Notice 97-11, Guidance on Community Housing Development

Organizations (CHDOs) under the HOME Program. Please note, however, that this guidance was released long

before HUD revised the HOME rule and associated requirements for community housing development organizations

in 2013. As a result, this guidance should be used with caution.

{D0381157.DOC / 4 TN742-100} prepared by Reno & Cavanaugh, PLLC Page 13

jurisdiction, or whether the CHDO may retain the proceeds without restriction.51

The

participating jurisdiction may also require the CHDO to use the proceeds for HOME

eligible activities or for other housing activities to benefit low-income families. As a

result, the treatment of CHDO proceeds is something that CLTs will want to carefully

negotiate in their written agreements with the participating jurisdiction. Additionally,

while not specific to CLTs, HUD also requires participating jurisdictions to set aside at

least fifteen percent of their HOME allocation for CHDOs, a portion of which funds may

be used to cover CHDO operating costs.52

CLTs that serve as CHDOs may benefit from

this additional source of financing as well. Finally, CLTs may wish to negotiate with

HUD to further streamline the CHDO qualification process for CLTs.

51

24 CFR 92.300(a)(6)(ii)(A). Note, however, that under 24 CFR 92.300(a)(6)(ii)(B), HOME funds that are

recaptured because the housing no longer meets the HOME affordability requirements under 24 CFR

92.254(a)(5)(ii) must still be used in accordance with the requirements of the HOME program. 52

24 CFR 92.300(a) and 24 CFR 92.208.