Effective Use of NSP2 Program Income

U.S. Department of Housing and Urban Development

Effective Use of NSP2 Program Income

September 18, 2012

HUD Community Planning and Development

Speakers • Speakers

– John Laswick, HUD – David Noguera, HUD – Hunter Kurtz, HUD – Les Warner, ICF

• Panelists – Phil Jones, ICF – Jeremey Newberg, Capital Access – Bill Perkins, Wisconsin Housing Partnership – Germán Reyes, Chicanos Por La Causa

2 U.S. Department of Housing and Urban Development • Community Planning and Development

Q and A Format • How to ask questions

– Change status in Live Meeting from green to purple – Press *1 to ask a question through Premiere Conference Provide Name and Organization If question already answered, press *2 to remove from

queue – Change status back to green after question answered – Can also ask question via Live Meeting


Agenda

• Presentation on key topics: – Brief recap: what is program income (PI)? – What happens to PI after close-out? – Using PI strategically

• Open session to take your questions!

• Per past attendee feedback, will do entire presentation & then take questions

• Quizzes, polls, panel discussions throughout


Poll: Approximately how much program income does your NSP program earn annually?

• More than $1 million • Between $500k and $1 million • Between $100k and $500k • Less than $100k • None yet but will we will the future • None • Don’t know


Definition of Program Income • PI = gross income received by the grantee or

subrecipient from the use of program funds:

– Proceeds from sale/lease of property acquired, rehabbed, redeveloped with NSP

– Principal and interest on NSP loans – Recapture of home sales under affordability

agreements – Interest on program income pending use – Repayments of liens placed on privately owned

property that was demolished using NSP money – Net operating income (NOI) from rental properties 6 U.S. Department of Housing and Urban Development • Community Planning and Development

Definition of Program Income (cont) • What isn’t PI (key categories)?

– Income in a single year to grantee and all subs not exceeding $25,000 in total

– Interest earned on funds held in revolving loan fund account (except for funds in approved lump-sum drawdown accounts) -- This interest is returned to HUD fortransmittal to U.S. Treasury

– Subrecipients’ proceeds from disposition of real property five years or more after grant close-out

– Funds earned and retained by entities that are not grantee or subrecipient (developers, owners, contractors, community-based development organizations (CBDOs))


What Happens To Program Income After The Grant Is Closed Out? • Closeout Notice is in Departmental clearance prior to publication --

Some issues remain that will affect this answer

• It is probably safest course of action to assume that NSP Program Income will operate AFTER closeout in a manner very similar to program income BEFORE closeout

• Keep in mind that closeout cannot occur until all funds have been spent and EVERY activity meets a national objective -- Generally this means having units occupied by LMMI persons and demonstrating compliance with the low-income set-aside


Quiz: Which of the following is NOT program income?

• Funds recaptured by a grantee due to a NSP homebuyer sale during the affordability period

• Pay-off of an NSP loan by a subrecipient to a NSP1 grantee 11 years after NSP close-out

• 50% of the funds back to a grantee that equally invested HOME & NSP in a rental rehab project

• Funds earned & retained by a landbank for NSP-acquired land sold during the 4th year after close-out

• Net rental income paid to a NSP-assisted developer

• Sales proceeds retained by a unit of local government funded with NSP by a state grantee


Quiz Answers: Which of the following is NOT program income?

• Funds recaptured by a grantee due to a NSP homebuyer sale during the affordability period

• Pay-off of an NSP loan by a subrecipient to a NSP1 grantee 11 years after NSP close-out

• 50% of the funds back to a grantee that equally invested HOME & NSP in a rental rehab project

• Funds earned & retained by a landbank for NSP-acquired land sold during the 4th year after close-out

• Net rental income paid to a NSP-assisted developer

• Sales proceeds retained by a unit of local government funded with NSP by a state grantee


Timing of Program Income

• PI is earned in perpetuity – Number of revolutions does not matter – Date of receipt does not matter – PI received

after close-out remains NSP PI (with previous exceptions)

• Low income 25% set-aside applies to PI at least until close-out. Post-closeout status is still under discussion.


Use of Program Income • Must use PI prior to drawing new NSP funds from

DRGR (first in, first out or FIFO) – PI cannot be held for specific projects – Can allow subrecipients to retain program income while

continuing to draw for other activities, subs

• PI must be used for NSP eligible uses meeting a national objective – Property must be abandoned, foreclosed, or vacant – Located in target area – Must also meet all applicable other federal requirements

(Davis Bacon, environmental, LBP etc) – 10% can be used for program administration and planning


Reporting & Tracking Program Income • Before close-out, must report PI receipt & use in DRGR

– Program income received = tracked in grantee’s quarterly reports on activity that generated it

– Program income disbursed = tracked in draw-down module on activity for which it was used

– Must separately track & document PI receipt & eligible use under each NSP program

• After close-out: – NSP PI must be included in grantee’s Con Plan/Action

Plan – Will report NSP PI use in IDIS and grantee’s CAPER/PER


NSP PI Opportunities & Responsibilities After Close-Out • Opportunities: Many grantees/subrecipients will

continue to receive PI after close-out – Can: – Continue to operate almost similar NSP eligible program – Use PI to set up new NSP eligible activities

• Responsibilities: Several tasks required after close-out – Tracking/re-use of PI – Monitoring of affordability period – Tracking of grantee/subrecipient-owned property re-use,

including landbanks


Poll: What’s your biggest concern about using PI after close-out?

• Needing to plan, track and report PI

• Using it for eligible activities that meet all the NSP rules

• Meeting the other federal requirements on PI (environmental, Davis Bacon, URA etc)

• Not having enough PI to pay for on-going admin responsibilities

• Monitoring the PI held by subrecipient or UGLG partners

• No worries – we have a long term PI plan


Strategic Decisions to Make About PI

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Where to locate projects, based on current market conditions?

What activity types?

How long will the program last?

Who will administer?

How to track/report?

What Activity Types? • All NSP eligible activities are possible with PI

– Homebuyer, rental under NSP1, NSP2, NSP3

– Public facilities (NSP1)

– Demolition

– Note: new acquisition for land banks is not expected to be allowed after close-out but can maintain/dispose of existing NSP properties in landbanks


Considerations When Selecting Activity Types • What are the needs in my community now? • What is the market saying? Ownership? Rentals? • Who does my community want to serve (income,

special needs populations etc)? • What other funding is available & what can NSP PI

do that they cannot? – NSP income targeting goes up to 120% but must be

used for foreclosed, abandoned, vacant properties

• How can I use NSP PI in combo with other funds to leverage impacts?


Panel Discussion: Rental Housing • NSP2 Grantee has long waiting lists at CD agency and PHA for

affordable rental housing – Needs are especially acute for service-enriched housing for

homeless, disabled & elderly persons • The grantee has established Westside as a target

neighborhood - it contains three types of available properties: – Numerous large, foreclosed single family homes – Dilapidated but occupied multifamily rental properties – A HOME/LIHTC project owned by a CHDO that is in default

• Grantee gets NSP2 PI, HOME and CDBG $$ but all resources are tight

• What might be some options for use of NSP PI? How would you leverage this with the other $$$?


Where to Locate Projects? • Must continue to locate NSP PI projects in “areas of greatest

need”

– Can change or expand from original NSP target areas

– Look at market factors: unit type, location, price

– Must describe in grantee’s Con Plan & back-up using available data

– NSP2 and NSP3 guideline about 20% impact in target areas ends after close-out but grantee should still consider outcomes

– Consider which neighborhoods continue to have high levels of foreclosed, abandoned, vacant units

– Need to make strategic decision about whether will go into the most difficult to serve areas or seek to leverage investment in existing target areas


Panel Discussion 2: Homebuyer Housing • Local market has begun to recover in many neighborhoods except

lowest income areas – Most available foreclosed units in moderate income areas are purchased

by investors – Foreclosed or abandoned homes are available in very low income

neighborhoods but construction costs far exceed values – Homebuyers have expressed concerns about buying in the very low

income areas • Local leaders have expressed a strong preference for homeownership

v. rental • Low income households cannot get financing and cannot afford to buy

a home in standard condition in the jurisdiction • Grantee predicts it will earn $2 million in NSP program income over

the next 5 years • Would you foster homeownership in the very low income

neighborhood? • How would you suggest the grantee use its program income?

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How Long Will The Program Last? • Key strategic decision is how long grantee wants to

continue to operate an NSP program using PI

– One school of thought: spend it quickly with deep subsidies provided as a grant and minimize on-going administrative burden

– Another approach: create a program design that earns PI in perpetuity, continuing to compound NSP impact

If on-going impact across several different activity types is desired, consider establishing one or more revolving funds (RF)

See Policy Alert from 8/20/12


Revolving Funds • Definition: Separate fund/account that generates

repayments for reuse for singular activity (hence revolving funds)

– Must describe in Action Plan

– RFs must actually revolve (not a parking lot)

• Activities funded by RF must be NSP eligible and meet national objective, other federal requirements – continued revolutions remain PI

• Can combine NSP1, NSP2, NSP3 in RF but must track PI and each activity must meet requirements of applicable (or all) programs

23

U.S. Department of Housing and Urban Development • Community Planning and Development

Revolving Funds (cont) • Cannot capitalize with DRGR draw but can deposit PI

from any NSP activity

• Why develop RF? “Sheltered” from FIFO rule – must be used for next similar activity but not other types of activities

• Must be in an interest bearing account

– Interest earned on fund remitted to HUD

– Interest paid by borrowers & loan repayments are program income

• Can be administered by grantee or subrecipient


Poll: Does your grantee have an existing RF (either NSP or CDBG)?

• Yes – NSP direct homeownership assistance • Yes – NSP rehab or construction assistance • Yes – other NSP assistance • Yes -- CDBG • No but we are considering it • No


Who Will Administer? • Many options for administering NSP PI over time:

– Grantee, subrecipient, PHA, contractor

– Regardless of administrator, grantee remains responsible for compliance

• Key NSP PI administrative tasks:

– Planning in annual Action Plan/Con Plan

– Tracking as PI is earned

– Managing accounts to address FIFO rules

– Reporting PI use

– Monitoring PI compliance with NSP rules


How to Track/Report PI? • Grantees need system for collecting, tracking, reporting PI over

time

– Particularly important if subrecipients get to keep PI

• Look to PI tracking systems developed for other CPD programs

– Many grantees have existing spreadsheets, approval forms, processes developed for CDBG or HOME

– Often tracking systems are tied to subrecipient funding requests – for example: grantee could enact a rule that subs cannot request or use funds until report PI status to grantee

– Until close-out, be certain tracking process builds in FIFO – net out PI before new draws – integrate with DRGR process

– After close-out, use PI to pay next eligible NSP bill unless have RF – integrate with IDIS reporting process


Strategic PI Example: Chicanos Por La Causa

• $137M Award

• All 5 Eligible Activities but highly concentrated on Rehab/Redevelopment of single and multifamily properties

– 13 Non Profit Consortium Members

– 15 distinct markets

• Approximately $40M of PI generated AND expended to date!

• Most PI as a result of SFR sales

• For several members, plan/outcomes predicated on generation – Part of Initial Strategy – Nearly 1000 single family units / another 1000 units of

MF/landbank/demolition


Strategic PI Example: Chicanos Por La Causa Maximizing PI is one of CPLC’s priorities: Why?

– Leverage

• PI viewed as means to leverage NSP2 Grant

• Recycling = Leverage

– $137M Grant => $200M community investment!

– As a result of $63M of recycled PI –> a CPLC National GOAL

– Additional $$ creates Capacity Building

– Maximize benefit to community

• Expenditure => Jobs!

• $90,000 expended in ARRA funds = 1 job is created or retained1

– Additional admin allowed 1According to the President's Council of Economic Advisors for every


Strategic PI Example: Chicanos Por La Causa CPLC National Strategy:

Realized early in NSP2 Program that development and direct subsidies were “ok”

– PI included in expenditure total -> great strategic decision by HUD. Does not create a disadvantage for grantees that generate PI

– Total recapture of TDC not required

– Focused on sales rather than on minimizing subsidy

80 cents in PI today better than $1 in one year

Consider holding costs and “opportunity” cost of PI 30 U.S. Department of Housing and Urban Development • Community Planning and Development


Strategic PI Example: Chicanos Por La Causa • CPLC “NSP2 Portal” provides tool to assist with draw requests and PI/FIFO requirements • After Closeout:

• PI key in propagating our NSP2 grant/benefit • Highly focused on leveraging PI

• i.e. Single Family acquisitions with 20% PI with private or foundation grants/loans on acquisition • Redevelopment of lots owned by consortium members • Purchase of MF distressed properties, stabilize, refinance

• Aggressively seeking to layer PI with other key funding sources upon disposition of properties

• i.e. WF Lift funds (example in AZ) • Minimize Direct Subsidy

Questions?

• How to ask questions – Change status in Live Meeting from green to purple – Press *1 to ask a question through Premiere

Conference Provide Name and Organization If question already answered, press *2 to remove

from queue – Change status back to green after question answered – Can also ask question via Live Meeting


Resources on Program Income

• Policy Alert on PI dated 7/13/11 • Policy Alert on RLF dated 8/20/12 • NSP 10/19/10 combined program notice • NSP AAQ & webinars (search on program

income) • CDBG regulations at 24 CFR 570.504


Please Give Us Your Feedback

• Answer a few short questions • Link: http://www.surveymonkey.com/s/NSP2PI

U.S. Department of Housing and Urban Development • Community Planning and Development 34 U.S. Department of Housing and Urban Development • Community Planning and Development

http://www.surveymonkey.com/s/NSP2PI

Effective Use of NSP2 Program Income

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