U.S. Department of Housing and Urban Development

Rental Housing Compliance for the NSP Development &

Affordability Period

May 17, 2011

Speakers and Format • Speakers

– David Noguera, HUD

– Virginia Sardone, HUD

– Marsha Tonkovich, ICF

• 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 2

Agenda

• Presentation on key NSP rental compliance topics

• Approach to monitoring for rental compliance

• Open session to take your questions!

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Successful NSP-Assisted Rental Projects

• Owner/manager understand & comply with applicable programmatic regulations

• Project can repay loans • Project revenue covers operating costs over long

term • Attractive and well-maintained • Public agency/owner/manager know early

warnings & prevent problems from occurring

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Points In Rental Project Compliance Continuum • N SP has series of requirements related to rental

projects 1. Begins at program set-up & project selection

& continues during construction 2. Must meet requirements during affordability

period • Document compliance at each step • Grantee is required to demonstrate

subrecipient/developer/partner compliance [24 CFR

570.501(b), 24 CFR 85 Subpart J] 5

Section 1: Compliance During Set-Up & Development

Organizational  Structure

Policies  and  Procedures

Project  Eligibility

Underwriting

Written  Agreement

Eligible  &  Reasonable  Costs

National  Objectives

Property  Standards

Other  Federal  Requirements

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Organizational Structure • Grantee’s organizational structure should

enable it to: – Manage rental compliance workload,

including providing sufficient trained staff – Track, manage and document monitoring

process and results – Provide staff & partner development and

training

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Policies And Procedures • Grantees must have written policies and

procedures to guide staff & partners to ensure rental compliance: – Rental project selection criteria – Affordability, rents and income targeting – Income definition – Admissions and tenant selection – Lease provisions and occupancy rules – Affirmative marketing – Property standards and inspection protocols

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Eligible Rental Project Selection • Must document [FR-5255-N-01, FR-5447-N-01]:

– Eligible use A-E • Includes eligible activity type (i.e.

rehabilitation, acquisition, new construction) – Eligible land/unit type (foreclosed, abandoned,

vacant) – Tie to activities described in Action Plan – Location in Area of Greatest Need

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Project Underwriting • Many long term rental compliance issues rooted

in initial project underwriting • Must underwrite to ensure:

– Proper number of NSP-assisted units – Proper mix of tenant incomes – Sufficient cash flow to operate property and

maintain units

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Written Agreements • A written agreement MUST be executed before

NSP funds are disbursed [24 CFR 570.503]

• Need written agreement with: – Subrecipients – Owners, developers, and sponsors – Contractors performing services (i.e.,

competitively procured) – Beneficiaries of assistance – Any other entity receiving NSP assistance

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Written Agreements (cont) • Typical elements (varies by partner type) [24 CFR

570.503]: – Statement of work

– Budget

– Records and reports

– Program income (subrecipients)

– Affordability period restrictions

– Uniform administrative & other federal requirements

– Suspension/termination & reversion of assets

– Conditions for religious organizations 12

Eligible & Reasonable Costs • Must document compliance with two types of

requirements: – NSP (CDBG) eligible costs [FR-5255-N-01, FR-5447-N-01]

– OMB Cost Circulars [24 CFR 570.610]

• NSP eligible costs: – Document eligible hard and soft costs – Document activity delivery costs

• Do not need to tie to specific projects

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OMB Cost Circulars • A-87/A-122 Identifies allowable and unallowable

costs [OMB A-87, OMB A-122]:

– Some costs are never allowed • Examples of unallowable costs:

entertainment, alcohol, bad debts – Some costs are allowed but with certain

conditions – Some costs depend on the federal funding

source

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OMB Cost Circulars (cont) • Criteria for allowability [OMB A-87, OMB A-122]:

– Must be reasonable – Must be in accordance with GAAP – Must not be included under another federally

funded program – Must be adequately documented

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Source Documents • Eligible costs must be supported by source

documents [OMB A-87, OMB A-122]: – Explain basis of costs incurred – Actual dates of expenditure – Examples include cancelled checks, paid

bills, payroll, etc.

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National Objective • All NSP rental projects must document meeting

a national objective [FR-5255-N-01, FR-5447-N-01]: – Defined differently than CDBG – Low/moderate/middle income (LMMI) = 120%

of median • All rental housing must meet LMMH

– “Slum/blight” and “urgent need” national objectives not allowed

• Be sure to document if unit is counted toward LH25

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National Objective (cont) • LMMH – document [FR-5255-N-01, FR-5447-N-01, 24 CFR 570.208]:

– Single-unit structure must be occupied by LMMI household

– In a duplex, one unit occupied by an LMMI household

– If 3+ units = General rule - 51% of units occupied by LMMI households

– Alternative requirement: • Number of assisted units equal to proportion of total

development cost paid by NSP

• Example: if 10 unit total development cost = $1,000,000 and NSP funds are $400,000, must have 40% (4 units) occupied

by LMMI, rest can be upper income 18

LMMH Income Documentation • Annual income definitions, options [24 CFR 570.3]:

– Section 8 Annual Income (24 CFR Part 5) – Census Long Form – IRS 1040 Series (Long Form)

• Same definition must be used within programs or activities

• Income is that of all household members for upcoming 12-month period

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LMMH Income Documentation (cont) • Several options for documentation [24 CFR 570.506]:

– Full 3rd party documentation (e.g., an employer) – Evidence of qualification under another program at least

as restrictive as CDBG – Evidence that assisted person is homeless – Verifiable self-certification from assisted person

• WARNING on using this method: If self-certification determined to be incorrect or fraudulent, project may be ineligible

– Referral from state, county or local employment agency or other entity that agrees to determine income and maintain documentation for grantee

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Property Standards • NSP3 imposes mandatory safety, quality, and

habitability standards for new construction andrehabilitation [FR-5255-N-01, FR-5447-N-01]

– NSP1, NSP2, NSP3 must comply with local codes, laws, requirements

• NSP3 also mandatory green rehabilitation and new construction standards [FR-5447-N-01]

– Must meet Energy Star standards

• Grantee may impose additional requirements

• Establish inspection and work specifications procedures in order to ensure compliance

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Other Federal Requirements • S everal key other federal requirements may apply to NSP

projects – must document compliance when applicable [24

CFR 570 subpart K, FR-5255-N-01, FR-5447-N-01]: – Environmental review – URA and tenant protections – Davis Bacon labor standards – Lead based paint – Fair housing and equal opportunity, including Section 504

handicapped access requirements

• Applicability depends on project & entity

• NSP3 must also comply with vicinity hiring requirement 22

Section 2: Compliance During Affordability Period

Rents

Tenant  Income

Unit  Quality Sales  During  Affordability 

Period

Change  of  Use

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Rents • Grantee required to define affordable rents in its

Action Plan [24 CFR 570 subpart K, FR-5255-N-01]

– HOME is safe harbor – NSP rents must remain affordable for affordability

period – Grantee needs to share new rent limits with

owners, as published – Owner must document rents charged to NSP-

assisted units

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Tenant Income Eligibility • During affordability period, must ensure tenant income

eligibility – Check and document incomes of new tenant at unit

turn over • Unit originally occupied by household at 120% of

median, new tenant at < 120% of median • Unit originally occupied by household at 50% of

median, new tenant at 50% of median • Units could float so long as maintain proportion

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On-Going Unit Quality • No required NSP on-going property standard

– Many grantees elect to impose such standards

– May choose to defer to HOME standard [24 CFR 92.251]:

• Units must remain standard for affordability period • May elect to inspect units over time – HOME rule

[24 CFR 92.504]: Number of Units Inspection Required

1-4 Every 3 yrs

5-25 Every 2 yrs

26 or more Annually 26

Rental Property Sales During Affordability Period • If assisted project sold, must continue

occupant, rent, unit quality restrictions (ifapplied by grantee) for balance of affordability period – Record requirements as land covenant or

deed restriction – Include within written agreement with rental

owner – If project is foreclosed or sold without

restrictions, grantee must repay investment minus any PI earned to date 27

Change In Use • Applies to real property under the

grantee or subrecipient’s control acquired or improved with $25K or more of NSP [24 CFR 570.505]:

– Must notify citizens and receive comments on change and

– If changed, property use must: • Meet a national objective for five years after

close-out of the grant agreement, or • Must return $ at current fair market value

and treat as NSP program income

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Rental Compliance Self Monitoring • Important to ensure that rental projects meet

compliance requirements for affordability period

• If project is not compliant: – Not providing quality housing to eligible

households – Requires a lot of grantee oversight – May fail and NSP funds have to be repaid

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Enhanced Monitoring

• To be successful, projects must also be physically and financially viable - affects their ability to remain in compliance

• Can’t just monitor for compliance, must also monitor for viability

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Rental Compliance System • Effective rental project oversight requires

system of integrated steps – Each step affects and informs others

• Many grantees “compartmentalize” staff, tasks & processes, but … – Underwriting and monitoring staff should

confer about risk areas – Data from monitoring is critical to future

underwriting decisions

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Rental Compliance System (cont) Application Underwriting Grantee/Owner Process Selects Projects Agreement Reinforces NSP That Are Likely to Outlines Compliance Succeed Obligations Standards

Grantee Watches For Owner Periodically Troubled Projects and Reports to Grantee Intervenes Early

Grantee Monitors Each Project Owner Addresses For Compliance in Key Areas: Monitoring Findings Rents, Tenant Income

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Lessons Learned About Rental Compliance Systems

• Everyone (grantee, owner, property manager) must know relevant NSP rules

• Compliance is active & on-going process, not just annual monitoring

• System is feedback loop – information from one step is shared with others

• Successful grantees use tools such as risk assessments, periodic reports, financial analysis, standardized forms

• Long run success is based on smart up front decisions 33

Please Give Us Your Feedback

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

ompliance

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