Tiffani C. Moore, Senior Affordable Housing Specialist

Office of Affordable Housing Programs

January 22, 2015

2013 HOME Program Final Rule: CHDO Clinic for HOME PJs

• CHDO provisions of 2013 HOME Final Rule

• Anticipated impact on CHDOs– Organizational shifts– Project pipeline planning

• Be on the lookout for further– Guidance and Rulemaking

Objectives

Slide 2

• First comprehensive update since 1996

• Changes throughout, but of most importance:– Timeliness—commitment, completion,

occupancy deadlines– Sustainability—project underwriting, emphasis

on capacity, property standards

• Generally effective for project commitments on/after August 23, 2013– Some delayed provisions, property standards

still pending

2013 HOME Final Rule

Slide 3

2013 HOME Rule CHDO Impacts

Slide 4

CHDO

Commitments Replace

Reservations

Definition: Independence

& Capacity

Own, Develop, Sponsor

Capacity Building

• Reservation (new definition): CHDO set-aside funds are reserved only when committed to a specific project –Non-project-specific reservations no

longer count toward CHDO set-aside requirements

• PJs must reserve CHDO set-aside to specific CHDO projects within 24 months

CHDO Reservations

Slide 5

Commitme

nts

• PJs may not commit HOME funds (and set up in IDIS) to a new construction or rehabilitation project until:– All necessary financing is secured– A budget and production schedule is

established– Underwriting and subsidy layering is

completed– Construction is expected to start within 12

months

• Dated signatures required on written agreement

CHDO Project Commitment

Slide 6

• A PJ can make a contingent award of HOME funds for a proposed project – Contingent on obtaining financing, completing

environmental review, etc.

• Contingent awards are NOT reservations or commitments– Do not satisfy PJ’s 24 month commitment

deadline

• PJs are advised that contingent awards should:• Have clear performance and cancellation

provisions• Not be open-ended promises

Contingent HOME Award

Slide 7

• PJ responses – More selective funding, key underwriting

concerns– Commitments will likely come later, will a

PJ offer contingent awards?– Impose shorter completion and interim

performance deadlines to allow for fall-back

– Conduct more oversight– Add detail to written agreements– Increase initial occupancy monitoring and

reporting

Implications

Slide 8

Slide 9

CHDO

Commitments Replace

Reservations

Definition: Independence & Capacity

Own, Develop, Sponsor

Capacity Building

• Each time a PJ commits funds to a specific CHDO project, it must certify that the nonprofit:–Meets CHDO definition (including the

staff capacity requirement)–Has capacity to fulfill specific role

(owner or developer/sponsor) it will assume for the project

• This is in addition to the underwriting and other conditions for a project commitment

CHDO Certification

Slide 10

• CHDO is expected to maintain CHDO status for the duration of the CHDO project– Includes affordability period for rental

housing

• PJ is expected to develop procedures to ensure CHDO status is maintained

Maintenance of CHDO Status

Slide 11

CHDO Checklist

Checklist Item Set-Aside Reservation

Pre-Development Loan

Operating Expenses

1. Legal Structure 2. Independence 3. LI Community

Accountability

4. Capacity * 5. Role 6. Pre-development costs 7. Operating expense eligible

*Exception: Can award funds to an organization without staff capacity only if the operating award will allow the organization to obtain staff capacity needed for project funding.

Independence

• CHDO independence from governmental & for-profit entities

Capacity

• CHDO staff capacity

Two Major Revisions to Definition

Slide 13

• Pre-2013 provisions about government entities still apply:– Government entity can create a CHDO, but

cannot appoint more than 1/3 of board (and they cannot appoint remaining 2/3)

– No CHDO can have more than 1/3 board members who are public officials or employees of a government entity

• Plus 2013 HOME Final Rule additions:– Government entities includes PJ, other

jurisdictions, public housing agencies, HFAs, redevelopment agencies, or tribes

– Officers/employees of a governmental entity may not serve as officers (CEO, COO, CFO, managers) or employees of any CHDO

Independence from Governmental Entities

Slide 14

• Pre-2013 provisions for CHDO created by a for profit entity apply, for-profit creating CHDO:– Cannot have primary purpose of housing

development or management– Cannot appoint more than 1/3 of board; those

members cannot appoint remaining 2/3– CHDO must be free to contract w/any vendor

• Plus 2013 HOME Final Rule addition:– Officers and employees of the for profit that

created the CHDO cannot serve as officers or employees of the CHDO

Created by For-Profit Entity

Slide 15

• Staff counted toward capacity must be paid directly by and accountable to the CHDO– Cannot be contracted through/cost-allocated

from another entity• Usually, staff will be “employees” for tax purposes

– CHDO pays payroll/unemployment taxes and withholds from wages

– W-2 is definitive evidence of being “paid employee” for HOME purposes

• Absent W-2, PJ must review employment contract to assess CHDO’s level of control over when, where, and how work is done– Draft HOMEfire

Defining Paid Employee

Slide 16

• CHDOs must have paid staff w/ demonstrated capacity appropriate to CHDO’s role:–Use of consultants to demonstrate

capacity ONLY during the 1st year of funding as a CHDO• Role is primarily to train staff to build their

capacity

– Cannot meet capacity requirement with volunteers, donated staff, or board members

What is not paid staff?

Slide 17

• Staff can be full time or part-time, but PJ must determine whether capacity is sufficient, based on:– Role: owner, developer, sponsor– Size, scope, and complexity of project– Experience of employees in similar

projects• Core development skills and rental or

homebuyer-specific knowledge– Level of staff effort for pipeline and

project(s) (part-time vs. full time, number of staff)

Capacity Considerations

Slide 18

• Tie certification to project funding, determine how– To handle “full” and “updated” review for

CHDOs receiving multiple commitments (e.g. series of SF projects)

– To address ongoing CHDO status in rental monitoring

• Determine framework to evaluate staff capacity– Variation for own vs. develop vs. sponsor AND

homebuyer vs. rental

• Additional attention to board composition– Expanded definition of governmental entity,

need to document for all board members

Implications

Slide 19

Slide 20

CHDO

Commitments Replace Reservation

s

Definition: Independen

ce & Capacity

Own, Develop, Sponsor

Capacity Building

CHDO Checklist

Checklist Item Set-Aside Reservation

Pre-Development Loan

Operating Expenses

1. Legal Structure 2. Independence 3. LI Community

Accountability

4. Capacity * 5. Role 6. Pre-development costs 7. Operating expense eligible

*Exception: Can award funds to an organization without staff capacity only if the operating award will allow the organization to obtain staff capacity needed for project funding.

• Own, Develop, and Sponsor roles defined in §92.300(a)(2) - (6)– Previously in CPD-97-11

• Roles clarified/redefined, especially– Expands opportunities under “owned”– Clarifies Tax Credit and subsidiary projects

under “sponsored”

• CHDO must demonstrate capacity in relation to its “role”

Own, Develop, or Sponsor

Slide 22

• CHDO owns, rehabs or constructs, then sells property

• Written agreement with CHDO must include:– Actual sales price or method for determining it– Disposition of proceeds of sale (return to PJ or

permit CHDO to retain), and use of proceeds if CHDO will retain

• Not CHDO-specific, but all buyers must be underwritten, no more one-size fits all downpayment assistance

CHDO as Developer: Homebuyer

Slide 23

• CHDO acquires & acts as owner of rental housing – It does not have to develop housing

units– If development, CHDO hires and

oversees project manager or contracts with developer to perform rehab or construction

• CHDO must be owner in fee simple or have long-term ground lease during development and affordability period

CHDO as Owner: Rental

Slide 24

• CHDO itself owns and develops housing

• CHDO arranges financing and is in sole charge of construction or rehab

• CHDO must be owner in fee simple or have long-term ground lease during development and affordability period

CHDO as Developer: Rental

Slide 25

• CHDO develops rental housing on behalf of another non-profit and transfers title after completion– Conveyed at pre-determined time to

pre-identified non-profit– Other non-profit cannot be created by

governmental entity, but can be another CHDO

• If transfer does not happen, CHDO must maintain ownership for affordability period

CHDO as Sponsor-RentalTurnkey to Other

Nonprofit

Slide 26

• Rental housing is “sponsored” by a CHDO if owned or developed by a:– For-profit or non-profit that is wholly-

owned subsidiary of the CHDO; or– If owned by an Limited Partnership (LP)

or Limited Liability Company (LLC), the CHDO or its wholly owned subsidiary must be the sole general partner (LP) or sole managing member (LLC)

CHDO as Sponsor: RentalCHDO Affiliate

Slide 27

• Written agreement must be signed by PJ and the entity that will own the project– Funds (loan) must be provided directly

to ownership entity

• If LP/LLC, documents must specify: – Removal of CHDO only permitted for

cause– CHDO must be replaced with another

CHDO

CHDO as Sponsor: RentalCHDO Affiliate (con’t)

Slide 28

• Owner role expands opportunity for CHDOs without “development” experience, some may be new CHDOs

• Re-examine turnkey sponsor role• Sponsor in LIHTC transactions– No more 51/49 joint ventures– No more grant to CHDO, loan to partnership

structures– New written agreement provisions re:

maintaining CHDO status, removal/replacement of CHDO

Implications

Slide 29

Slide 30

CHDO

Commitments Replace Reservation

s

Definition: Independen

ce & Capacity

Own, Develop, Sponsor

Capacity Building

CHDO Checklist

Checklist Item Set-Aside Reservation

Pre-Development Loan

Operating Expenses

1. Legal Structure 2. Independence 3. LI Community

Accountability

4. Capacity * 5. Role 6. Pre-development costs 7. Operating expense eligible

*Exception: Can award funds to an organization without staff capacity only if the operating award will allow the organization to obtain staff capacity needed for project funding.

• Predevelopment loans– Increased importance with enhanced

commitment requirement– Overcome liquidity issues impeding project

planning

• CHDO operating assistance– Program design issue: shifting from ongoing

“entitlement” to focus on building capacity– Available without “full certification” if

operating addresses “but for” capacity concerns

Optional CHDO Support

Slide 32

• Proceeds from sale of homebuyer development– PJ choice: RETURN as Program Income vs.

RETAIN as CHDO Proceeds• Written Agreement specifies use:– HOME-eligible activities• Could including operating support or non-

set-aside activities– “Other housing activities to benefit low-income

families”• Could include assistance to struggling

rental project, broad based counseling program, etc.

CHDO Proceeds

Slide 33

• CHDOs need:– Pipeline– Predictability

• Tell them:– What types of projects does your PJ want

(and what your PJ does not want)– Key underwriting requirements, esp.

market data– Skills framework

• Challenge communicating in shifting environment– Markets, funding levels, guidance

If a CHDO does not know what a PJ wants…

Slide 34

• Mutually dependent, but not equal–Set-aside alone cannot sustain a

CHDO–PJs wants / CHDO own vision

• Balancing “size” and focus–Expanding product portfolio–Expanding geographic footprint–Staying focused on “community”

Strategic challenges

Slide 35

• Evaluate the CHDO “pool,” does it need to be– Thinned or expanded

• Reconsider predevelopment, operating, proceeds– Focus on capacity needs

• Rebalance funding process– Competition vs. matchmaking

Implications

Slide 36

• Further HUD Guidance– Notices on CHDOs, Commitment,

Underwriting, etc.

• HOME accounting changes– FIFO– Cumulative deadline measurement (requires

rule making)

• Future rulemaking– Technical corrections, technical amendments– Homeownership counseling, cross-cutting

standards– Energy efficiency and resiliency– Broader HUD/USDA/Treasury alignment

efforts

Still to Come

Slide 37

Questions & Answers

Slide 38

• Anticipate some uncertainty• Communicate with your CHDOs• See hudexchange.info for more

information– Join the HOME Program listserv–www.hudexchange.info/mailinglist/

Reminders & Tips

Slide 39